The 2005 Offshore Arrangement
The 1985 Atlantic Accord promised to make the province the "principal beneficiary" of the offshore oil industry by allowing it to tax and collect royalties from petroleum resources as if it owned them, and by protecting these revenues from equalization reductions for a 12-year period after the first 15 million barrels of oil were recovered (this happened in 1999). The province received 90 per cent protection for the first five years of production, declining by 10 per cent in each subsequent year.
In April 1984, almost one year before the Accord's signing on 11 February 1985, then federal Minister of Energy, Mines and Resources Jean Chrétien voiced a widely held assumption that "provincial revenues from Hibernia might be large enough to make Newfoundland a 'have' province within five years of production." His prediction did not come true.
Problems with the 1985 Atlantic Accord
Oil was recovered at a slower pace than initial assessments predicted, which undermined the Accord's effectiveness. Hibernia produced relatively small revenues during the critical first few years of production, when the province lost the smallest amount of revenues to equalization. By 2003, it was estimated the province would receive a maximum of $600 million in total royalties from Hibernia when the Accord expired in 2011.
Critics in both the federal and provincial governments called for a restructuring of the agreement. The Standing Senate Committee on National Finance, chaired by Senator Lowell Murray, recommended in 2002 that the federal government re-evaluate how the Accord dealt with equalization payments. It advised the government to "increase the share of a province's entitlements that are protected when its non-renewable natural resource revenues increase. Furthermore, the Committee also believes that it is time to re-evaluate the relevant portions of the Atlantic Accords that deal with Equalization to determine if they have achieved the purpose for which they were intended."
The Newfoundland and Labrador Royal Commission on Renewing and Strengthening Our Place in Canada reported in 2003 that the Accord would not deliver its intended benefits to the province. Instead, Newfoundland and Labrador would receive only 20 to 25 per cent of total government revenues over the life of existing oil projects. The Commission recommended that "the federal and provincial governments enter into immediate discussions to revise the Atlantic Accord to ensure that the principal beneficiary objective is both honoured and achieved."
In a research paper submitted to the Commission, former federal cabinet minister and Accord signatory John Crosbie reported that the province was earning only 12 cents for every dollar of offshore revenue. "Once the 12-year offset payment period is over in 2011," he wrote, "Newfoundland will still be on equalization and will receive no further net revenue sharing under the Atlantic Accord."
The province entered into negotiations with Ottawa in February 2004 to modify the Accord, focusing solely on its treatment of equalization payments. Conservative Premier Danny Williams insisted on 100-per-cent protection from equalization reductions, while Liberal Prime Minister Paul Martin tried to reduce federal losses by imposing conditions and ceilings on how much the province could earn. Williams argued a cap on earnings would cost the province billions of dollars in lost revenue.
The negotiations were confrontational and lasted for months. Williams walked out of a first ministers' meeting on 26 October 2004 to protest Ottawa's offer on the Accord. He accused Martin of breaking an election promise made the previous June to eliminate oil-related equalization clawbacks for an eight-year period. Martin said his offer had always included a cap on how much the province could earn.
Williams sparked national controversy on 23 December 2004 when he ordered Canadian flags removed from provincial buildings following another unsuccessful meeting with Martin. He announced the flags would stay down until an agreement was reached, but then raised them on 10 January 2005, saying "our problem is not with the people of the country. It's with the prime minister, it's with the leader of the country."
New Deal Reached
By then, Martin was under pressure to resolve the offshore dispute. The federal Liberals were damaged by a national sponsorship scandal that involved allegations of criminal corruption and misuse of public funds. Reduced to a minority government in the June 2004 election, they faced the threat of a non-confidence vote and an ensuing election in 2005. Martin was eager to secure three swing ridings in Newfoundland (St. John's North, St. John's South, and Bonavista-Exploits) and prevent further controversy.
On 28 January 2005, Martin, Williams, and Nova Scotia Premier John Hamm reached a joint deal on all east coast offshore developments after 10 hours of negotiations. The new arrangement guaranteed 100 per cent protection from equalization reductions for eight years, from 2004-05 to 2011-12. If, at the end of that period, either province is still receiving equalization payments, it can extend the deal for another eight years; if not, it will receive transitional payments for two more years.
The arrangement was welcomed as a success in Newfoundland and Labrador. It guaranteed the province a minimum of $2.6 billion by the time it expired, including a $2-billion prepayment from Ottawa in 2005. As a result, the province attained 'have' status in 2008 and paid into the equalization program for the first time in its history. By 2010, oil royalties from the Hibernia, Terra Nova, and White Rose fields accounted for more than a third of government revenue and were projected to reach $2.2 billion in the 2010-11 fiscal year.