Decision No. 427-W-2003

With Decision No. 534-W-2003

July 23, 2003

APPLICATION by PF Collins Customs Broker Ltd., on behalf of TGS-NOPEC Geophysical Company, pursuant to the Coasting Trade Act, S.C., 1992, c. 31, for a licence to use the "ZEPHYR I", a Panamanian seismic research vessel, to conduct a 2.5D non-exclusive seismic research and survey program in specific areas off the east coast of Canada, exclusively within the continental shelf zone, during the period commencing on May 1, 2003 and ending on December 31, 2003.

File No. W9125/P5/03-15

---

APPLICATION

Originally, PF Collins Customs Broker Ltd., on behalf of TGS-NOPEC Geophysical Company (hereinafter TGS-NOPEC), had applied to the Minister of National Revenue for licences to use the "ZEPHYR I" and the "ODIN EXPLORER" to perform 2.5D seismic research and survey activities off the east coast of Canada, exclusively within the continental shelf zone, during the period commencing on May 1, 2003 and ending on December 31, 2003. The matter was referred to the Canadian Transportation Agency (hereinafter the Agency) on March 11, 2003.

TGS-NOPEC was subsequently requested to clarify the areas of work and to indicate whether the activities are intended for exclusive or non-exclusive data acquisition. The Agency received confirmation that the seismic research and survey program was intended for non-exclusive data acquisition. The Agency also received a map showing the specific areas of work. The seven areas, identified as LS108, OB107, OB102, NF104, LC105, NS103 and OG106, are located along the coast of Labrador, off Newfoundland, and off Nova Scotia.

The Agency conducted a search of the relevant portion of the marine industry and notice of the application was given on March 18, 2003. A copy of the map showing the specific areas of work was appended to the notice of application.

Further to the notice of application, Geophysical Service Incorporated (hereinafter GSI) offered the use of its Canadian non-duty paid vessel, the "GSI ADMIRAL", to perform the proposed activities, stating that it is available during the period requested.

By Decision No. LET-W-92-2003 dated April 11, 2003, TGS-NOPEC was asked to provide clarifications and to substantiate a number of allegations that were contained in its letter dated March 25, 2003 commenting on GSI's offer of the "GSI ADMIRAL" for the proposed activities.

On April 22, 2003, TGS-NOPEC filed a reply providing only part of the information requested.

The application for the "ODIN EXPLORER" was withdrawn on April 24, 2003 as the vessel is being registered in Canada.

ISSUE

Pursuant to subsection 8(1) of the Coasting Trade Act, the issue to be addressed is whether there is a suitable Canadian vessel available to provide the proposed service or perform the activities described in the application.

LEGISLATION

Paragraph 4(1)(a) of the Coasting Trade Act provides as follows:

4.(1) Subject to section 7, on application therefor by a person resident in Canada acting on behalf of a foreign ship, the Minister of National Revenue shall issue a licence in respect of the foreign ship, where the Minister is satisfied that

(a) the Agency has determined that no Canadian ship or non-duty paid ship is suitable and available to provide the service or perform the activity described in the application.

Subsection 8(1) of the Coasting Trade Act provides as follows:

8.(1) In relation to an application for a licence, the Agency shall make the determinations referred to in paragraphs 4(1)(a) and (b) and 5(a) and (b).

POSITIONS OF THE PARTIES

TGS-NOPEC

The "ZEPHYR I" is a 2,833 gross registered tonnage, seismic research vessel said to be well equipped with on-board data acquisition and recording and navigational equipment designed to meet the exacting requirements of specialized research. It is powered with a 4,200 horsepower engine necessary to tow the required number of recording streamers; it has a large fuel capacity and water making capability allowing it to remain 60 days at sea with 60 persons on its board. It has a Spectra 2D integrated navigation system with 75-metre long streamers programmed for 12.5 group intervals, for a maximum streamer length of 8,025 metres, and a SYNTRAK-960-24 recording system.

TGS-NOPEC wants to acquire over 30,000 kilometres of data and claims that the acquisition of this data and the timing for the data acquisition are critical for companies evaluating their expiring leasehold interests, as well as companies preparing for upcoming offshore lease sales. TGS-NOPEC claims that GSI cannot consider it possible to collect the data needed for the survey program planned for two vessels while using only one vessel. It also claims that last year, using the "GSI ADMIRAL", TGS-NOPEC endured unsatisfactory production and much higher than normal costs. This is why two vessels are needed this year instead of one.

TGS-NOPEC does not refute the fact that the "GSI ADMIRAL" has equipment and technology equal to or superior to those of the "ZEPHYR I", but it claims that equipment is only a part of the fundamentals required to conduct high-quality, geophysical activities efficiently and cost effectively. In its experience, the "GSI ADMIRAL" was 40 percent less productive than the "ZEPHYR I" was last season, and 50 percent more expensive.

In response to GSI's statement that the "GSI ADMIRAL" is a Canadian flagged and Canadian crewed vessel, TGS-NOPEC stresses the fact that it employs and contracts numerous local support and supply entities in Canada.

TGS-NOPEC identifies the critical issues as timing and costs, and emphasizes that the use of imported vessels will not only satisfy the needs of TGS-NOPEC, but also those of at least 8 oil companies who are depending on the data collected to continue their exploration efforts.

The Agency requested that TGS-NOPEC provide it with specific, additional information to identify the work involved and to substantiate a number of allegations. In its reply to Decision No. LET-W-92-2003, TGS-NOPEC informed the Agency that much of the information requested would not be provided because of confidentiality and potential competitive issues.

With respect to the Agency's request for the exact breakdown of how many kilometres will be surveyed in each of the areas identified as LS108, OB107, OB102, NF104, LC105, NS103 and OG106, TGS-NOPEC replied that the surveys cover 15,604 kilometres and represent work carried over from last year. The originally unidentified NS109 survey program is claimed to be the new 15,000-kilometre survey proposed to be conducted with the use of the "ODIN EXPLORER", which program is critical to Kerr-McGee Offshore Canada Ltd. (hereinafter Kerr-McGee).

Although TGS-NOPEC was requested to provide detailed information in support of its statements that it is attempting to acquire the unfinished program for Pan Canadian, British Petroleum, Norsk Hydro, Shell and EnCana, as well as new programs for these companies and Kerr-McGee et al., and that this year's program is critical for companies evaluating their leasehold, it did not provide the requested information, claiming that it was confidential. In fact, TGS-NOPEC only referred to the letter filed by Kerr-McGee in support of the application, a Canadian company that claims to be wishing to purchase a product: seismic data of high quality, delivered on time and at a fair price. In its letter of support, Kerr-McGee states that: "If the program does not begin this spring, it will not be completed on time to allow us to evaluate our licences prior to their expiration".

With respect to the request for a full explanation as to why timing is critical for each specified area, TGS-NOPEC submitted that the proposed survey in area NS109 is critical for Kerr-McGee, and for another confidential partner; that the OB107 and OB102 surveys are affected by the Newfoundland land sales; and that the NS103 survey is crucial because of a planned 3D survey program for the year 2004.

With respect to its allegation that the sole use of the "GSI ADMIRAL" cannot allow the acquisition of the data planned to be collected with the use of two vessels, as the average production rate is set at 100 kilometres daily, TGS-NOPEC submitted that it would take 300 days to acquire the required data with the sole use of GSI's vessel and that the season in eastern Canada ranges from 165 to 180 days. This issue is however moot as the application now deals with the importation of only one vessel, namely the "ZEPHYR I". Notwithstanding this, TGS-NOPEC stated that the data acquired with the "GSI ADMIRAL" only averaged 61 kilometres a day during the 2002 season.

Pursuant to Decision No. LET-W-92-2003, TGS-NOPEC was requested to provide statistics and performance reports to substantiate its claim that it experienced unsatisfactory production from the use of the "GSI ADMIRAL" last year. The statistics indicate an average daily production of 61.19 kilometres over a period of 155 days, with a 27-day weather related downtime, with the use of the "GSI ADMIRAL", while production using the "ZEPHYR I" averaged 78 kilometres of surveying activities a day over a period of 177 days, with a 66-day weather related downtime. TGS-NOPEC claims that the "GSI ADMIRAL" is the least productive vessel it has used in Canada. Although specifically requested to provide full details, this is the extent of the information that TGS-NOPEC provided with respect to cost and productivity associated with the operations of these vessels last year to substantiate the claim that the use of the "GSI ADMIRAL" was not efficient and cost effective.

With respect to GSI's assertion that TGS-NOPEC imposed almost impossible quality specifications, TGS-NOPEC replied that the same quality control has been in place for several years, that GSI had agreed to it in the contract, and that these specifications are not "normally relaxed". TGS-NOPEC did not disclose the terms of its contracts, despite the Agency's request for this information.

GSI

GSI offers the use of the "GSI ADMIRAL", a 3545 gross registered tonnage vessel outfitted in 1998 with 2D and 3D seismic data acquisition equipment. This vessel has a 4,800 brake horsepower main engine and is equipped with the latest generation of seismic installations, and it is capable of deploying up to four 6 kilometres of streamers over a range of spreads of 0.48 kilometre, and up to 9,000 metres of streamers in 2D. GSI submits that TGS-NOPEC has admitted that the "GSI ADMIRAL" equipment is equal or superior to that of the foreign vessel proposed to be used. GSI also submits that TGS-NOPEC is seeking to acquire data directly over GSI's coverage in 1998; that TGS-NOPEC acquired data in 1999 that significantly duplicated GSI's coverage, using inferior equipment and vessel; that in 2002, TGS-NOPEC hired GSI to record data for them in the Laurentian and Scotia shelf areas, imposing almost impossible quality specifications on GSI that were not imposed on other vessels employed by TGS-NOPEC.

GSI stresses that it employs 90 Canadians on a permanent basis while TGS-NOPEC is only a data broker. Also, GSI states that it had put its vessel into a dry dock in Halifax, and that its air gun system was completely overhauled to enhance quality, reliability and production for the 2003 season. With respect to the oil companies, GSI claims that it has been providing them with high quality, exclusive and non-exclusive seismic data at low cost, that it intends to continue to offer such services, and that it can perform the proposed activities.

GSI also commented on TGS-NOPEC's reply to Decision No. LET-92-W-2003. GSI noted discrepancies with the list of companies identified by TGS-NOPEC for which it was attempting to acquire data, namely EnCana, Pan Canadian, and it suspects that the only firm commitment is with Kerr-McGee, as oil companies holding interests have retained the services of GSI. Moreover, GSI claims that TGS-NOPEC and Kerr-McGee have another agenda, as evidenced by the offer of surveys from Kerr-McGee to the industry, and that if they were looking for drilling sites, they would cover smaller areas with concentrated 2D or even 3D surveys.

With respect to the announced Newfoundland land sale, GSI submits that there is approximately 20,000 kilometres of seismic data covering the OB107 and OB102 areas.

GSI agrees that a daily production of 100 kilometres is expected for normal activities with 70 kilometres average line lengths, and that it has achieved this, or better, on all previous and subsequent surveys conducted in Atlantic Canada, except for the TGS-NOPEC program. With respect to the activities it conducted last year pursuant to the contract signed with TGS-NOPEC, GSI calculated a 53-day technical downtime, which represents 34 percent of the time worked. GSI points out that in the context of surveying activities it conducted immediately following those carried out for TGS-NOPEC, GSI reported a 0 and a 12 percent downtime.

GSI submits that it conducted work last year with the use of a vessel that had just been employed by TGS-NOPEC, and it stresses the fact that such vessel had an inoperable tail buoy global positioning system. This being said, GSI adds that when it worked for TGS-NOPEC last year with the use of the "GSI ADMIRAL", it had to shut down operations every time contact with the tail buoy was lost, which, according to GSI, caused unnecessary downtime. GSI indicates that it was also required to shut down operations when an air gun was found to be inoperable at the start of a line. GSI maintains that the "GSI ADMIRAL" could be operated with approximately half of its source capacity and still comply with the data acquisition specifications of the "ZEPHYR I".

With respect to the Agency's question to TGS-NOPEC as to whether penalty clauses were imposed and/or enforced, GSI indicated that it was not paid for data collection where it was unable to meet TGS-NOPEC's quality specifications, and that GSI's costs exceeded the revenue associated to the survey program conducted for TGS-NOPEC.

INTERVENTIONS IN SUPPORT OF THE APPLICATION

Kerr-McGee

On March 26, 2003, Kerr-McGee filed an intervention in support of the application. In its intervention, Kerr-McGee explains its position as holder of seven licences for exploration offshore Nova Scotia, adding that seismic surveys are important tools to identify drilling prospects, and that it is concerned that delay or denial of this application could have a negative impact on its ability to fulfill its work commitment in Nova Scotia.

Puddister Trading Company Limited

On April 9, 2003, Puddister Trading Company Limited filed an intervention in support of the application, in which it states that its Canadian vessels were used in the past, and that it hopes that they would be used as chase vessels with the foreign vessels proposed to be used by TGS-NOPEC in the case at hand.

GSI'S REPLY TO KERR-McGEE

In its reply to Kerr-McGee dated March 31, 2003, GSI submits that the intent of the Coasting Trade Act is to protect the interests of operators of Canadian vessels when there is a suitable Canadian vessel available. It also relates its past work history with Kerr-McGee, and provides commercial information of a 24,000-kilometre data acquisition program it proposed last fall to companies involved in offshore. It also submitted a Kerr-McGee proposal titled 2D Seismic Data Alternatives for a 15,000-kilometre survey program covering the same area.

ANALYSIS AND FINDINGS

Paragraph 4(1)(a) and subsection 8(1) of the Coasting Trade Act require the Agency to determine whether vessels offered by Canadian operators are suitable and available to provide the service or perform the activity described in a coasting trade licence application. In making this determination with respect to the case at hand, the Agency has considered the application, the offer and the subsequent pleadings filed with the Agency, including TGS-NOPEC's reply to the Agency's request for information, the interventions filed in support of the application, and GSI's comments.

The Agency notes that the availability of the vessel offered by GSI was not contested. As for the pleadings received which related to the proposed importation of two foreign vessels, TGS-NOPEC claimed that GSI could not consider it possible to acquire the data planned to be collected with the use of two vessels with the use of only one vessel, namely the "GSI ADMIRAL". However, as the Agency is now considering the application for the proposed importation of only one vessel, the "ZEPHYR I", this argument is no longer relevant.

On the matter of suitability, TGS-NOPEC agreed that the "GSI ADMIRAL" has adequate equipment to carry out the proposed work, but it claimed that performance and costs are key elements in the case at hand. The Agency notes that, in the pleadings, TGS-NOPEC raised a serious issue as to whether the Canadian vessel was suitable from a commercial or financial perspective. In particular, TGS-NOPEC presented arguments to the effect that the "GSI ADMIRAL" was significantly less efficient than the foreign vessel it wishes to use, the "ZEPHYR I". TGS-NOPEC submitted that last year's production with the use of the "GSI ADMIRAL" averaged 61 kilometres of surveying per day and that production with the use of the "ZEPHYR I" averaged 78 kilometres of surveying per day, while normal production is 100 kilometres of surveying per day. TGS-NOPEC indicated that the use of the "GSI ADMIRAL" for this year's surveying program would render it uneconomical, and that the proposed program is urgently needed by the Canadian oil and gas industry.

In previous decisions relating to applications under to the Coasting Trade Act, the Agency has often considered arguments presented by the applicant to the effect that the Canadian vessel offered was unsuitable, as its use would be prohibitive from a commercial or financial perspective. When considering such arguments, the Agency always bears in mind certain relevant factors.

First, the Agency keeps in mind that the purpose of the Coasting Trade Act is clearly protectionist. In Decision No. 500-W-2002, the Agency reviewed statements made by the Minister of Transport at the tabling of the Coasting Trade Act before Parliament and expressed the opinion that: "[...] the purpose of the Coasting Trade Act is to protect the Canadian marine industry and that paragraph 4(1)(a) exists only as a necessary exception to this general purpose".

Another factor that the Agency bears in mind when evaluating financial and commercial arguments is that it is not sufficient to simply claim that the use of the Canadian vessel offered would be more expensive than the use of the proposed foreign vessel. The Agency recognizes that the use of a Canadian ship is often more expensive, sometimes significantly so, due to the higher taxes and various costs, such as labour, that are imposed on Canadian vessels. Accordingly, in evaluating commercial or financial arguments, the Agency has required the party making such claim to demonstrate that the use of the Canadian vessel offered would cause a severe commercial and financial harm.

Finally, the Agency also considers that the burden of proving that the use of the Canadian vessel offered would have a severe impact falls on the applicant who is making this claim. It is up to the applicant to present a prima facie case that the Canadian vessel offered is either unsuitable or unavailable in order to justify further investigation by the Agency. Once the applicant brings such prima facie evidence, the Agency then takes a practical approach as to the burden of proof. The Agency requires the party that is in possession of the relevant information to produce it in order to prove or disprove the allegations made by the applicant. In a case like the present one, where the applicant is arguing that the use of the Canadian vessel offered would impose an unacceptable financial burden on it, it is up to the applicant to provide the financial information that would prove these allegations.

In the case at hand, at the close of the written pleadings, the Agency determined that TGS-NOPEC raised an important issue with respect to the relative efficiency of the Canadian vessel offered, but that TGS-NOPEC's comments on that issue, as well as GSI's reply, consisted almost entirely of unsubstantiated assertions. Therefore, the Agency decided that further investigation was warranted. The Agency, in its Decision No. LET-W-92-2003 dated April 11, 2003, requested specific information from TGS-NOPEC, partly in order to clarify certain issues relating to the application, but mainly in order to obtain evidence from the party that bears the burden of proof to support its position concerning the cost and efficiency of the "GSI ADMIRAL".

In its reply, TGS-NOPEC did not provide specific detailed evidence concerning the previous operations of the "GSI ADMIRAL" and the "ZEPHYR I" that would allow the Agency to objectively evaluate the allegations made by TGS-NOPEC. Instead, the Agency received further unsubstantiated assertions from TGS-NOPEC. In particular, to show the relative inefficiency of the "GSI ADMIRAL", TGS-NOPEC relied almost exclusively on a graph that it claimed showed that the "GSI ADMIRAL" was the most inefficient vessel that it had ever used. Such a graph cannot be said to constitute evidence on its own. The specific information that was used in the production of the graph must be both provided to the Agency and substantiated with documentary or other evidence. TGS-NOPEC also chose not to provide information that it considered confidential, although the Agency had informed it of the process for filing information under a claim of confidentiality. The Agency therefore finds that TGS-NOPEC has failed to establish that the "GSI ADMIRAL" is financially or commercially unsuitable for the proposed surveying activities.

CONCLUSION

Based on the above findings, the Agency determines that there is a suitable Canadian non-duty paid vessel available to perform the activities described in the application.

This determination takes effect on May 7, 2003, the date on which it was communicated by Decision No. LET-W-106-2003 to the Minister of National Revenue for any necessary action as provided for in the Coasting Trade Act.