Canada's offshore Arctic drilling rules could "stifle" development since they do not provide incentives for companies to proceed with production after discovering oil, the government was told in a newly-released internal briefing note.
The advice was prepared for the government's point man on the issue, Aboriginal Affairs and Northern Development Minister Bernard Valcourt, before Imperial Oil Ltd lobbied him privately in June, seeking concessions on existing legislation.
The right-leaning Conservative government said in July it would review the legislation, known as the Canada Petroleum Resources Act.
To drill in the Canadian Arctic, companies need an exploratory licence, awarded with a fixed term. If they make a significant discovery, they can then get an indefinite licence, before seeking a production licence.
Valcourt's department told him in the briefing that the indefinite discovery licence "has the potential, however, to stifle activity with the absence of an incentive to do further work."
It also gave him options for changing the law to extend licences, while recommending a comprehensive review of existing rules led by an independent expert.
Companies are struggling to finance oil exploration in harsh Arctic conditions and meet new safety requirements introduced following BP's Deepwater Horizon disaster, said the briefing note released through Canada's access to information legislation.
The note said Imperial, its partners Exxon Mobil Corp , and BP Plc requested extensions on two existing licences last December, explaining that they needed more time to drill an exploratory well in the Beaufort Sea, a section of the Arctic Ocean that could hold more than 1.36 billion barrels of oil.
Environmentalists oppose extensions, saying it would cost public coffers hundreds of millions of dollars in lost deposits and prolong risky drilling projects. The government, facing a tight election in October, has said it wants to protect and promote development of offshore resources with safe and effective regulations.
The briefing note said that the Imperial consortium and Chevron Corp were both seeking changes to the law after collectively paying about C$500 million ($378.07 million) in deposits to obtain exploratory licences. While Imperial's licences will expire by 2020, Chevron's licence is due to expire in 2021.
The department said the independent review it recommended was "time-sensitive" and must be completed before 2016 so that the Imperial partnership has enough time to secure a drillship to proceed with exploration.
($1 = 1.3225 Canadian dollars)
(Reporting By Mike De Souza; Editing by Andrew Hay)