The new Alberta and federal governments: Regulatory implications for the oil and gas sector

18 minute read
01 December 2015

1. Introduction

The new Alberta and federal governments have announced ambitious law reform plans. Details are few at this early stage, but it is clear that the plans will have many regulatory implications for the oil and gas sector. This update reviews four key sets of proposals, namely those respecting environmental assessment (EA), climate change, environmental protection standards and financial policy.

2. Environmental Assessment

While falling short of a 'first principles' overhaul, the federal government intends to target several key components of the current federal EA system (discussed below in Parts 2.1-2.5). The new Alberta government has been largely silent on whether its EA legislation should be amended and has not made any prominent responses to the federal EA principles; the province may be taking a wait-and-see approach to determine how proposed new federal rules might affect provincial activities.

2.1 Evidence-Based Decision-Making

The new federal government promises that EA will be based on "science, facts, and evidence". This theme appears to respond to environmental group and other criticisms that the previous Conservative government politicized and undermined the integrity of EA processes. To fashion a more "robust" EA, the new federal government will presumably review procedural and evidentiary rules found in the two primary statutes (the Canadian Environmental Assessment Act (CEAA) and the National Energy Board Act (NEBA)) and will likely enhance the role of federal scientists in EAs. Project proponents and intervenors alike should therefore expect a higher degree of scrutiny in federal EA processes.

What is less clear is whether the federal government will leave intact certain NEBA opportunities for political decision-making. Especially problematic for many environmental groups and members of the public are the 2012 amendments to the NEBA. Those changes imposed time limits on the review by the NEB of complete facility applications and removed the final public interest vetting and decision concerning major federally regulated oil and gas projects such as Northern Gateway and Energy East to the federal Cabinet (a political body with broad discretion to trump, ignore or modify recommendations flowing from NEB and EA processes).

2.2 Broader EA "Factors"

The CEAA currently prescribes certain factors relevant to both a project's direct impacts (eg. river crossings by a pipeline) and those which are more indirect and further afield (eg. "cumulative effects" of a project "in combination" with others). The new federal government intends to add two factors:

  • "Upstream Impacts". Environmental and Aboriginal groups have long criticized EA decisions to not consider "upstream impacts". These criticisms, for example, have been directed at the NEB's announced intention - quite in accordance with the bounds of its current authority - respecting the Energy East Project, that it "will not consider matters related to upstream activities associated with the development of oil sands, or the downstream and end use of the oil transported by the Project". The government appears to accept this critique, but has yet to take the all-important step of defining "upstream impacts". Doing so will raise policy questions. For example, if a reviewable project is a pipeline, should the subject "upstream impacts" include some or all of the potentially countless upstream activities involved in manufacturing pipeline infrastructure and producing oil destined for the pipeline? And, how should upstream impacts be considered if a pipeline proponent (as is often the case) has not yet lined up contracts with upstream parties?
  • "Greenhouse Gas Emissions". The new government intends to require consideration of "greenhouse gas emissions resulting from the projects being assessed". This too responds to environmental group concerns; a recent subject of strong criticism was NEB Ruling 25 respecting the Trans Mountain Pipeline expansion project, which refused to consider oilsands emissions as part of the EA.. And, as was the case for "upstream impacts", enacting the "greenhouse gas emission" factor poses definitional challenges: for example, should this factor be limited narrowly to the pipeline construction and operation or more broadly to emissions resulting from oilsands production?

2.3 "Fair" EA

Another prominent federal proposal is to create a "fair" EA process. If environmental and Aboriginal group criticisms are any indication, the new government will need to consider at least the following fairness issues as it revamps EA legislation:

  • EA Timelines. The new government has not indicated whether it will retain one of the most criticized procedural features of NEBA and CEAA, namely the EA timelines introduced by the federal Conservative government in 2012 (eg. 18 months for pipeline projects).
  • Opportunities to Express Views. The Liberal government promises to allow "Canadians to express their views". This promise appears to echo widespread concern that EA processes do not provide effective opportunities for articulating objections to a proposed project. The inescapable fact is that major oil and gas projects can trigger numerous requests to make submissions in EA hearings (hundreds in the case of the Northern Gateway). Accordingly, the new government will need to consider how to allocate hearing times and panel resources which are fair to both the public and the proponent.

2.4 More Aboriginal Involvement in EA

The new federal government intends to "enhance the engagement of Aboriginal groups in reviewing and monitoring major resource development projects"; similar intentions have been voiced by the new provincial government. The development of these strategies will undoubtedly evolve and will be informed by the following factors, amongst others:

  • Consultations. More detail about such enhanced participation will presumably emerge from current and imminent consultations contemplated by these governments and Aboriginal group leaders.
  • "Free, Prior Informed Consent". Both governments have promised to implement the United Nations Declaration on the Rights of Indigenous Peoples; this declaration includes an Aboriginal "free, prior informed consent" (FPIC) right. The previous federal Conservative government ratified the Declaration but viewed FPIC as non-binding "aspirational" guidance. Many Aboriginal groups disagree and view FPIC as a veto power which can be exercised in EA and other fora. The commitments to implement FPIC heighten Aboriginal expectations but at the same time raise complex legal questions not addressed by the UN Declaration or in governmental endorsements of this international instrument. For example, how will FPIC be reconciled with the many Supreme Court of Canada and other judicial rulings that Aboriginal groups do not have a general veto respecting natural resource projects? And, would the Crown be able to use the "justifiable infringement" principle entrenched in Canadian Aboriginal title law to off-set FPIC?
  • Litigation. The federal and provincial Aboriginal participation strategies will likely also be informed by judicial guidance from the many pending cases about Aboriginal involvement in EA. The most prominent cases are the 18 which were recently heard by the Federal Court of Appeal respecting Enbridge Northern Gateway (currently reserved, likely for several months). These and other cases attack many conventional EA laws and policies on constitutional grounds; the final judicial say will likely rest with the Supreme Court of Canada, likely not within two years.

2.5 Federal EA Transition Rules

A vitally important issue is how current project EAs will be affected by the contemplated changes discussed above. The message is mixed. Early in her tenure, Minister of Environment and Climate Change McKenna announced that projects "initiated under the original system will continue on that path" (emphasis added). Shortly thereafter, however, her office announced that there would be a "transition strategy for projects currently under review to provide some certainty to industry through this change process" (emphasis added). What this "transition strategy" means for the TransMountain and other current projects now remains to be determined. The transition strategy will need to determine which projects are in fact "under review". For example, will the old rules, the transition strategy, or the new rules apply to projects such as Energy East, whose EA application has been filed but has not yet been deemed "adequate" (a precondition to a review)?

Irrespective of how the "transition strategy" is drafted, it should be noted that even approved projects can be trumped in a de facto way by subsequent government decisions. A potential example may be the new government's announced intention to implement a moratorium on crude oil tanker traffic on the BC North Coast, which could render Northern Gateway's Cabinet approval moot.

3. Climate Change

3.1 Immediate Priority for Both Governments

Both levels of government have paid priority attention to climate change, which is not surprising given the December 2015 Paris Conference on Climate Change.

3.2 The Federal Process to Develop a Pan-Canadian Approach

One of the earliest Liberal government announcements was that it would collaborate with provinces to develop a 'pan-Canadian' framework that accommodates diverse provincial strategies. Such accommodation is likely a practical imperative as most provinces have in recent years committed to specific yet highly diverse measures (eg. carbon tax, cap and trade, intensity-based emission reductions) to reduce GHG emissions.

The federal government intends to consult with the provinces to develop the new pan-Canadian climate change framework by February 2016. This framework will presumably take stock of how the collective efforts of Canadian governments can satisfy possible international obligations flowing from the Paris Conference.

3.3 The More Prescriptive Alberta Approach

Alberta's recent (November 23, 2015) "Climate Plan" is arguably the most prescriptive of the various recently announced provincial strategies. The Plan features the following:

  • Carbon Tax. Intended for implementation by 2017, the economy-wide carbon tax is set to have both provincial and national implications. The details of Alberta's plan will unfold in the coming months, but certain rates have already been announced (eg. beginning in 2017, the tax will be set at $20 per tonne, rising to $30 in 2018 and followed by a 2% above inflation rate thereafter, resulting in an increase of gasoline prices by roughly 7% by 2018 and an annual increase in heating and transportation costs per household by $300-$600). The Alberta government anticipates using these new revenues to fund renewable technology, green infrastructure and transit.
  • Oilsands Carbon Emissions. The Plan encompasses a 100-megatonne cap on carbon emissions from the oilsands, which notably still allows the industry room to grow as the oilsands currently emit roughly 70-megatonnes annually.
  • Methane Emissions. Under the Plan, Alberta expects to reduce methane emissions from oil and gas operations by 45% by 2025. Alberta plans to reach this reduction by applying new emissions design standards to new Alberta facilities and developing a 5-year voluntary Joint Initiative on Methane Reduction and Verification. The joint initiative will include Alberta industry, environmental groups, and Indigenous communities.
  • Renewable Power and Phase Out of Coal. Coal has traditionally been Alberta's most reliable, low-cost source of electricity. The Plan features a phase out of coal-fired power in the next 15 years. The Plan also promises to offer incentives for renewal power generation. To do so, Alberta proposes to replace two-thirds of the existing coal-based electricity with renewable energy (leaving one-third to be produced by natural gas). The 2030 goal is for renewable sources to ultimately account for one-third of Alberta's total operating capacity.

4. Stricter Environmental Standards

4.1 Ottawa

The Liberal election platform frequently highlighted that, since 2012, the federal Conservative government's 2012 legislative amendments reduced protection to the environment and human health. After the new government took office, the Prime Minister's mandate letters to various ministers confirmed that the 2012 amendments and other identified weaknesses in federal legislation should be addressed. The intentions are broadly stated, but they appear to promise widespread changes. The following are notable for the oil and gas sector:

  • Endangered Species Recovery Plans. The Minister of Environment is instructed to respond "quickly to the advice of scientists" and complete "robust species-at-risk recovery plans in a timely way."
  • Stricter Clean Air Standards. The Minister of Environment's mandate is to work with provinces and territories to set stronger air quality standards, monitor emissions and provide incentives for clean technology.
  • West Coast Tanker Ban. The Minister of Fisheries' mandate includes formalizing a moratorium on "crude oil" tanker traffic on BC's North Coast (effectively dooming the Enbridge Northern Gateway project). The ban pertains only to "crude oil", seemingly leaving the door open to tankers carrying refined oil "products" and LNG.
  • Review Conservative Changes to the Fisheries Act and Navigable Waters Protection Act. The new Prime Minister has instructed several ministers to "review the previous government's changes to these two Acts, restore lost protections, and incorporate modern safeguards".

4.2 Alberta

Alberta's new government is also ramping up environmental requirements, but to a lesser degree. Two of the most likely NDP government changes pertain to:

  • Directive 74. Following the initiative of the previous Prentice government, the new Notley government intends to replace Directive 74, which has been a key regulatory instrument governing tailing ponds at oilsands operations.
  • Gas Drilling in Urban Areas. The new government has promised to ban gas drilling in urban areas. Notably, this ban will not cover oil as originally proposed in NDP election materials.

5. Financial Policy

Both Ottawa and Alberta intend to use two types of financial instruments to effect environmental change in the oil and gas sector, as discussed below.

5.1 Government Investment in Green/Clean Technology and Infrastructure

As part of their goal to encourage environmentally friendly development, the new federal government is expected to invest $100 million more each year into clean technology producers and $200 million more each year to support the innovation and use of clean technologies in the oil and gas sector. The new government also promised to invest $20 billion over the next 10 years in green infrastructure, and also see such investments as economic development tools.

The new Alberta government is also committing to green technology and infrastructure. For example, it will invest $5 million per year in a new green loan program to support green upgrades to homes and businesses. The new government also intends to generally diversify Alberta's economy by shifting its focus on wind and solar projects, phasing out coal powered electricity generation, and cutting costly carbon capture and storage experiments.

5.2 Royalties and Taxes

A key provincial financial initiative that will affect the energy sector is the royalty review. The Royalty Review Panel, established soon after the new provincial government took power, is scheduled to render its analysis of different scenarios and possible recommendations by the end of 2015.

The federal Canadian Exploration Expense (CEE) tax benefit has for some time allowed corporations to deduct 100% of their expenses incurred for the purpose of determining the existence, location, extent or quality of a mineral resource or an accumulation of petroleum or natural gas in Canada. In addition to the expenses associated with the physical exploration, eligible expenses can include the cost of certain environmental studies and community consultations. CEE has been a fundamental consideration in oilsands development. The Liberal platform criticized CEE as a significant subsidy for the oil and gas sector. If the new government follows up on campaign promises, it would alter CEE as follows: successful exploration results will no longer qualify while the cost of unsuccessful results will still be able to be deducted.

6. Conclusions

Many of the new directions - while perhaps politically attractive - raise complex legal and pragmatic issues. In fact, there appear to be some inherent contradictions that will need careful attention. For example, the seemingly unconditional support by both governments for FPIC will need to considered - and perhaps limited or reconciled - with the far more nuanced judicial principles of Aboriginal law that have evolved over the past decades (caselaw which has generally not embraced a veto power, with the possible exception of proven Aboriginal title lands).

Given the ambitious reform plans discussed above, one may reasonably question if there will be any federal-provincial efforts to coordinate their many needed laws, policies and programs. It is probably too early to predict if and how such coordination might unfold. But early indications, especially on the climate change front, suggest a willingness to work together. Aside from climate change, arguably the next most significant matter that will require coordination is EA.

Both governments will likely need some time to consider the potentially controversial and complex nature of their proposed changes. Not surprisingly, neither government has announced a comprehensive schedule of law reform, but it is reasonable to expect that both will rely heavily on stakeholder consultations. This will be a rare opportunity for broad stakeholder input and advice on what could be a fundamental re-shaping of regulatory law and policy in the oil and gas sector.

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