Canada has lost a battle with Exxon Mobil Corp. and Murphy Oil Corp. before a NAFTA arbitration panel over whether the U.S. companies can be forced to boost their research-and-development spending in Newfoundland.
The two companies, involved in the Terra Nova and Hibernia oil projects off the shores of Newfoundland, sued Ottawa in 2007 under the North American free-trade agreement's long-controversial Chapter 11 provisions, which allow U.S. and Mexican investors in Canada to challenge government policies.
A panel of international arbitrators ruled 2-1, with the Canadian appointee dissenting, that research-spending rules imposed by Newfoundland's oil regulator in 2004 were "performance requirements" forbidden by NAFTA.
The decision, which was first reported on the New York-based website Investment Arbitration Reporter, has not been publicly released. The results were confirmed by an Exxon source.
The case is a win for oil companies in their tug-of-war over revenues with the government of Newfoundland and Labrador, which reached a high point under combative former premier Danny Williams.
But it also illustrates how Ottawa always ends up with the bill when provinces violate the terms of trade agreements that they didn't sign. In 2010, the federal government paid out $130-million to AbitibiBowater Inc. after Newfoundland expropriated the company's timber and water rights. Several other current NAFTA challenges involve provincial policies.
For compensation in this case, the oil companies had asked for $50-million, an amount the NAFTA panel did not give them. Instead, it asked for more information and is expected to issue another ruling with a monetary award.
The decision reportedly finds Ottawa in a continuous violation of NAFTA, meaning that every day the guidelines are in effect, the damages increase. But the federal-provincial regulator that imposed the rules insisted Friday they are not going anywhere until both of its government masters agree to change them.
"For now it's business as usual, and the guidelines will continue to apply," said Sean Kelly, a spokesman for the Canada-Newfoundland and Labrador Offshore Petroleum Board.
The board imposed the new research funding rules in 2004. Exxon and Murphy complained the move was a result of Newfoundland government pressure and that it required them to spend millions for research whether it was commercially justifiable or not. Money they did not spend had to be forked over to a special research fund.
The oil companies argued the measures were "far more restrictive" than the local research rules in place when NAFTA was adopted in 1994. Those rules were exempt from the treaty, but did not set any fixed amount.
In submissions to the NAFTA panel, the federal government accused the oil companies of trying to "break the rules of the game" and avoid spending on research and development in Newfoundland.
Federal government lawyers also argued that the oil companies had already lost their case in Canadian courts before launching their NAFTA challenge.
A spokeswoman for the federal Department of Foreign Affairs and International Trade said the government was disappointed and was still reviewing the decision. A spokeswoman for Newfoundland's Ministry of Natural Resources declined to comment. A spokesperson for Exxon did not respond with a comment before deadline.