Oil and gas regulation in Canada: overview

A Q&A guide to oil and gas regulation in Canada.

The Q&A gives a high level overview of the domestic oil and gas sector, rights to oil and gas, health safety and the environment, sale and trade in oil and gas, tax and enforcement of regulation. It covers transfer of rights; transportation by pipeline; environmental impact assessments; decommissioning; waste regulations and proposals for reform.

To compare answers across multiple jurisdictions, visit the energy and natural resources Oil and gas regulation Country Q&A tool.

This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.

Lewis Manning and Bernadita Tamura-O'Connor*, Lawson Lundell LLP
Contents

Domestic sector

1. What is the role of the domestic oil sector in your jurisdiction?

Domestic production

According to the National Energy Board (NEB), Canada is the fifth-largest producer of crude oil in the world and has the third largest proven reserves of crude oil. Of Canada's 171 billion barrels of proven recoverable reserves, 166.3 billion barrels are located in the oil sands of Alberta. About 5% of oil sands in Canada can be surface mined with the remainder accessible by in situ drilling methods. A further 4.7 billion barrels of Canadian oil are held in conventional, offshore, and unconventional tight oil formations. Within Canada's extensive oil industry, there are two main areas for production:

  • The Western Canada Sedimentary Basin.

  • The Eastern Canada offshore basins.

In 2015, the NEB reported that Canadian production reached 621,610 cubic meters per day or 3.9 million barrels per day. Of that production:

  • 135,573 cubic meters per day was light sweet crude.

  • 326,084 cubic meters per day was Alberta upgraded bitumen.

  • 295,502 cubic meters per day was heavy crude oil.

Increasingly, light sweet crude is produced by unconventional methods that combine horizontal drilling and hydraulic fracturing to access low permeability oil reserves. These new extraction methods have created opportunities for oil production on previously unsuitable land.

Oil imports/exports market

Canada produces more oil than it consumes. In 2015, the NEB reported Canada exported 484,000 cubic meters per day while importing 90,100 cubic meters per day for a net export of 393,900 cubic meters per day. 99% of Canadian crude oil exports were to the US. Canadian crude oil exports include conventional light, medium, and heavy oil along with upgraded and raw bitumen destined for refineries in the US.

Market diversity and access is a key consideration of the Canadian oil industry. The majority of crude oil exports rely on pipelines. However, other sources of transportation include rail, tanker ship, and truck. Due to approval delays for pipeline projects, transport of crude by rail has grown in importance. It is forecast that the growth of rail beyond 2018 will primarily depend on the availability of pipeline capacity.

The NEB regulates the export of crude oil from Canada. Exports of oil products are authorised through orders obtained from the NEB. The NEB monitors the market to ensure that Canadian requirements for oil and gas are met before surplus oil is exported. Exporters of oil and gas products are subject to reporting regulations requiring the submission of monthly reports to the NEB, including amount and type of oil being exported. No licence or NEB order is required for imports of oil into Canada.

Domestic market structure

Trade in oil is on the free market. In 1985, the Western Accord on oil and gas pricing and taxation between the federal government, Alberta, Saskatchewan, and British Columbia eliminated crude oil price controls and allowed for free trade. In addition, the introduction of the North American Free Trade Agreement ensured the free flow of oil from Canada to the US and encouraged investment in the Canadian energy market.

Government policy objectives

The creation of the NEB has been influential in shaping Canada's inter-provincial energy strategy in terms of oversight. However, the bulk of regulation remains provincial. Each province has distinct regulatory policies that affect the oil and gas industry. These policies include those addressing climate change and Aboriginal consultation. Government regulation and policies are currently undergoing change in response to public pressure to better prevent waste and protect the environment. In July 2015, the Council of the Federation of Premiers in Canada endorsed a Canadian Energy Strategy focusing on sustainable development.

In Alberta, the Responsible Energy Development Act is used to implement energy policy objectives and establishes the mandate of the Alberta Energy Regulator (AER), which is the single regulator for upstream oil, gas and oil sands development in the province and responsible for regulating energy resource developments from initial application to reclamation.

Current market trends

The Canadian oil and gas industry has recently struggled with price fluctuations and uncertainty. Oil sands, the largest source of Canadian oil, have high operating and supply costs that impact profit margins while oil prices are low. The NEB estimates that oil sands operations require oil prices of US$30 to US$35 per barrel to remain economic. To compensate for the ongoing weakness in oil prices, many Canadian oil producers have recently cut capital investments for proposed projects in high cost areas.

 
2. What is the role of the natural gas sector in your jurisdiction?

Domestic production

According to the NEB, Canada is the world's fifth-largest natural gas producer and accounts for approximately 5% of global production. Natural gas is abundant in Canada in both conventional and unconventional sources including tight gas, shale gas, and natural gas from coal. In 2014, shale gas production represented 4% of natural gas production and tight gas accounted for 47%. However, the NEB predicts tight and shale gas will make up 90% of Canada's natural gas production by 2035.

Western Canada is the primary natural gas producing region, contributing 98% of total Canadian natural gas production in 2014. However, there are also producing natural gas projects located offshore in eastern Canada and development opportunities in the Arctic. In 2015, Canada produced 15.0 billion cubic feet of natural gas per day. According to the NEB, Canada's net exports totalled 5.5 billion cubic feet per day.

Natural gas imports/exports

The Canadian natural gas market has been fully liberalised since gas pricing was deregulated in Canada in 1985. Investment is largely open and the commodity price is determined by supply and demand. The NEB regulates the export and import of natural gas in Canada, as well as inter-provincial movements of natural gas. Exports and imports must be authorised under long-term licences of up to 25 years or short-term orders. As with oil exports, the NEB monitors supply and demand to ensure that Canadian demand continues to be met.

In Alberta, the AER issues licences for the removal of natural gas from the province. These licences are issued under the Gas Resources Preservation Act and are designed to ensure that the province maintains a sufficient gas supply.

Canada's natural gas markets are heavily integrated with those in the US. Canada exports its surplus natural gas to the US and imports smaller amounts from the US into central Canada in return. Since 2007, Canadian natural gas exports have declined as American production has increased. Some areas of eastern Canada have found it to be more economical to import natural gas from nearby US production areas rather than transporting western Canadian gas across the country. The glut in production and excess capacity has led producers to invest in the potential of liquefied natural gas (LNG) exports to overseas consumers. There are currently several proposed LNG export facilities in Canada.

Domestic market structure

See Question 1.

Government policy objectives

Various broad federal and provincial policies affect the energy industry (see Question 1). The application of these policies is dependent on the geographical location of the natural gas and the specific type of development. Currently, the natural gas sector in Canada is concerned by a lack of regulatory certainty as new government climate change policies are developed. For example, the industry has recently reacted to reports that the province of Ontario may disincentivise the use of natural gas to heat homes. Beyond this, as with other resource-based industries, natural gas producers are concerned about market access. Natural gas producers require provincial and federal regulatory policies that allow infrastructure to be built to deliver natural gas to new markets to be served when and if LNG export facilities are built.

Current market trends

Gas prices in North America have declined rapidly as new sources have resulted in oversupply. According to Alberta Energy, in July 2008, natural gas in Alberta was valued at Can$9.84 per gigajoule (GJ) but has since plummeted to Can$0.94 per GJ in May 2016. The NEB reports that for the near future, the North American gas market will be oversupplied. If the market continues to be oversupplied, there is a risk that gas storage will reach capacity and deliverability will exceed demand, resulting in a shut-in to reduce supply in order to balance markets.

 
3. Are domestic energy requirements met by oil and gas production?

Oil requirements

Canada exports over 3 million barrels of crude oil per day, of which 99% is destined for the US. The vast majority of Canada's crude oil is exported by pipeline, with a small percentage exported by sea, truck and rail.

Natural gas requirements

In 2015, the NEB reported that Canada exported 76.0 billion cubic meters and imported 19.6 billion cubic meters of natural gas, leaving total net natural gas exports of 56.3 billion cubic meters. In 2015, Canada imported a small quantity of LNG, of which 85% came from Trinidad and Tobago and 15% from Spain.

 
4. Are there specific government policies to encourage the exploration and production of unconventional gas or oil?

There are currently no specific federal or territorial policies encouraging exploration and production of unconventional oil and gas. However, the federal government has established a number of collaborative activities to address environmental and health concerns for developing mineral resources. For example, the Program of Energy Research and Development is an interdepartmental programme which funds sustainable energy research and development.

The provincial governments have been more active in developing policies and regulatory frameworks to encourage the exploration and production of unconventional oil and gas. In Alberta, the provincial government has implemented the Shale Gas New Well Royalty Rate of 5% to encourage new exploration, development and production. The royalty was designed to accelerate achieving commercial natural gas production from shale deposits. Provinces have also regulated geographic restrictions on exploration. Restricted areas are often near aquifers or residential areas. In Alberta, the Exploration Regulation 284/2006 identifies prohibited areas and restrictions on the conduct of geophysical exploration.

 

Regulation

Regulatory bodies

5. Who regulates the extraction of oil and gas?

Oil

The regulation of the extraction of oil and gas varies depending on the jurisdiction and nature of the development. Federal regulatory bodies include the:

  • NEB, which regulates inter-provincial and international trade and commerce, including the import, export and transport of natural resources.

  • Canadian Environmental Assessment Agency, which provides environmental assessments in support of sustainable development for specific projects that trigger federal environmental assessments.

  • Department of Fisheries and Oceans, which delivers programmes and services including monitoring pollution in waterways and conducting environmental assessments.

The Fisheries Act, Migratory Bird Convention Act, Species at Risk Act and the Navigation Protection Act regulate the impact on fish, migratory birds, endangered species and waterways, respectively.

Regulatory authority over oil and gas production and environmental protection within provincial boundaries lies primarily with provincial governments, and each province has its own environmental laws. However, the NEB regulates "frontier areas" in Canada, defined by the Canada Oil and Gas Operations Act to include:

  • The Northwest Territories, Nunavut and Sable Island.

  • Submarine areas not within a province in the internal waters of Canada.

  • The territorial sea or continental shelf of Canada.

In Alberta, the AER is the single regulator for upstream oil, gas and oil sands in the province. The Alberta Surface Rights Board is the independent adjudicative tribunal established by the provincial Crown to manage conflicts over surface access rights when an owner of mineral rights is unable to negotiate land access required to produce oil and gas.

The federal government has a separate regulatory regime for health and safety, including legislation such as the:

  • Food and Drugs Act.

  • Canada Consumer Product Safety Act.

  • Nuclear Safety and Control Act.

  • Radiation Emitting Devices Act.

  • Hazardous Products Act.

  • Controlled Products Regulations.

In addition, the provinces and territories contain separate regulatory regimes governing health and safety.

See box, The regulatory authorities.

Natural gas

See above, Oil.

The regulatory regime

6. What is the regulatory regime for onshore and offshore oil and gas exploration and production?

For onshore production, see Question 5.

For offshore production, the relevant federal legislation includes the:

  • National Energy Board Act.

  • Energy Safety and Security Act.

  • Canada Oil and Gas Operations Act.

  • Canada Petroleum Resources Act.

  • Canada-Newfoundland Atlantic Accord Implementation Act.

  • Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act.

The legislation addresses:

  • The lease of federally owned oil and gas rights on defined "frontier lands" to oil and gas companies.

  • Development of oil and gas in marine areas controlled by the federal government.

  • Implementation of agreements between the federal and provincial governments relating to offshore petroleum resources.

 

Rights to oil and gas

Ownership

7. How are rights to oil and gas held?

Ownership of oil resources in Canada is split between:

  • The provincial Crown.

  • The federal Crown.

  • Private freehold ownership.

  • First Nations.

The extent of private ownership largely depends on the time that the land was settled. Before 1887, the government did not reserve mines and minerals in the granting of land, whereas since 1887 the government's usual practice is to reserve mineral rights. In Alberta, the province owns approximately 81% of the mineral rights. The federal government owns 9% of the mineral rights, which includes most Indian reserves and national parks. The final 10% is held privately under freehold ownership. In areas of Canada which were settled earlier, such as southern Manitoba, up to 80% of mine and mineral rights are privately owned.

In Canada, mines and minerals are severable from other land rights. In many cases, surface rights owners do not also own the mines and minerals below the surface. The proportion of oil and gas interests which are held privately or by the government varies by province. To prevent waste of oil and gas resources under this regime, provinces have legislation designed to encourage efficient extraction. In Alberta, the Oil and Gas Conservation Act creates a licencing regime for oil and gas wells that imposes certain spacing requirements between wells.

The federal government owns most mines and minerals on Indian reserves. Indian Oil and Gas Canada is responsible for managing and regulating oil and gas resources on First Nation reserve lands across Canada. The revenue generated is held in trust for First Nations due to the Crown's fiduciary obligations to First Nations and the Crown's obligations under the Indian Oil and Gas Act. Exceptions to this ownership are those First Nation groups with settled land claims. If a land claim has been settled, a First Nations group may have freehold ownership of mines and minerals without management being conducted by the federal government. In 2014, an Aboriginal group was able to successfully assert title to land. In Tsilhqot'in Nation v British Columbia, 2014 SCC 44, Canada's highest court held that Aboriginal title was established in an area of interior British Columbia by demonstrating continuous and exclusive occupation prior to sovereignty.

Generally, oil and gas rights are subject to the law of capture, which means that the first person to "capture" the resource owns the resource. While the law of capture is the starting point, each province controls the ability of producers to extract hydrocarbons in a responsible manner that ensures conservation and prevents waste of oil and gas resources.

Nature of oil and gas rights

8. What are the key features of the leases, licences or concessions which are issued under the regulatory regime?

Lease/licence/concession term

Oil and gas exploration and production rights are typically conveyed by a private contract, such as a lease. Depending on the owner of the lands, the rights are granted as either a freehold or Crown lease agreement.

A freehold lease is granted on privately held lands. Although various lease forms are used within the industry, in 1988, the Canadian Association of Petroleum Landmen introduced the first standard oil and gas lease. A standard form lease agreement grants a primary term of three to five years during which the lessee can explore and start drilling in exchange for the payment of a royalty to the lessor. If the lessee fails to perform its obligation to drill during the primary term, the lease may expire. If the lessee drills within the primary term, the lease can extend indefinitely as long as there is production or deemed production.

For Crown lands, the Crown issues a licence or lease for petroleum rights, natural gas rights or both. These rights can be issued on request or through a bid process. In Alberta, the initial term for a licence varies based on geographic location. The initial term is:

  • Two years in the Plains Region.

  • Four years in Northern Regions.

  • Five years in the Foothills region.

A Crown lease is granted for this initial term and on application can be extended for an indefinite period as long as there is either continuous production or it is productive (capable of‎ producing in economic quantities). Under a Crown licence, once a well has been drilled, the mineral rights granted can be extended for an intermediate term of five years. During the intermediate term, licensees have similar rights and obligations to lessees under the primary term of a Crown lease.

Fees

An oil and gas lease or licence includes rental payments and royalty payments. The standard freehold royalty clause provides that a certain percentage of production is payable to the lessor. In Alberta, royalty rates for Crown leases are based on a sliding scale. This policy encourages development and innovation because the payments are not typically substantial until the project is profitable.

Liability

Freehold and Crown leases or licences do not have specific liability associated with them. However, the applicable common law, oil and gas regulatory regime, environmental legislation and surface leases impose certain liabilities on the parties.

Restrictions

Licensees and lessees are restricted to taking only what has been granted to them in relation to the substance and zone under the terms of the lease or licence.

 
9. How are such leases, licences or concessions awarded?

Freehold leases are privately negotiated contracts. In contrast, Crown leases are acquired by public auction in which either the province designates the lands to be auctioned or an individual requests that certain parcels be put up for auction. The oil and gas rights are then leased to the highest bidder. The Crown retains title and only auctions the rights to exploit those minerals.

Transfer of rights

10. How are oil and gas rights transferred?

Transfer of rights

Generally, oil and gas rights in Canada are leased rather than sold. But, oil and gas rights that are subject to freehold ownership, like other real property rights, can be sold outright. As is the case for real property, the transfer must be in writing.

If subject to a current lease, oil and gas rights can be assigned in most cases. Freehold leases can generally be transferred by assignment by the lessee to a third party, with notice to the lessor. A Crown lease can be transferred in whole or as an undivided part of the interest in a Crown disposition.

Restrictions on transfer

The owner of freehold mines and minerals can generally dispose of their rights under any negotiated terms or conditions. If the rights are leased, restrictions on transfer are governed by the specific contractual rights agreed to under the oil and gas lease. Generally, Crown leases are freely assignable.

The Investment Canada Act includes restrictions on the sale of oil and gas rights and oil and gas companies to foreign investors. Under the Act, a foreign non-World Trade Organization (WTO) investor has their investment subject to review if it is a direct investment of over Can$5 million or an indirect transaction of over Can$50 million. In addition, large WTO country transactions can be reviewable. In 2016, the threshold for review of WTO investments is Can$600 million for the private sector and Can$375 million for a state-owned enterprise (SOE). SOEs are those that are owned, controlled or influenced, directly or indirectly, by a foreign government. The Minister applies the principles in the Investment Canada Act to determine whether a reviewable acquisition of control by a non-Canadian SOE is of net benefit to Canada. Under the Act, the burden of proof is on foreign investors to demonstrate to the satisfaction of the Minister that proposed investments are likely to be of net benefit to Canada. Failure to meet certain standards can result in the transaction being denied.

 

Tax

11. What payments are payable by oil and gas interest holders to the government?

In Canada, resident corporations are taxed on a worldwide income, subject to certain credits. Non-resident corporations are generally subject to tax only on Canadian-sourced business income. Payments received from oil and gas production are taxed as income both federally and provincially. Expenses incurred in exploring, developing or acquiring oil and gas properties can be deducted from income. These deductions are accomplished through tax pools available under the federal Income Tax Act. The tax pools are:

  • Canadian Exploration Expense (CEE).

  • Canadian Development Expense (CDE).

  • Canadian Oil and Gas Property Expense (COGPE).

The relationship between the CDE and COGPE is such that if the COGPE pool becomes negative, the CDE pool is reduced by the negative COGPE amount. If the CDE amount then becomes negative, the negative amount is added back to taxable income. Each province has a further tax regime which can include a freehold mineral tax, lease rentals and royalties.

Joint ventures

Joint ventures are common in the Canadian oil and gas industry, and are typically structured well by well or property by property. Joint ventures cannot report income using a separate fiscal period. The corporate participants must report their share of the joint venture income up to their own year-end. In certain circumstances, participants of a qualifying joint venture can elect to have the operator prepare all Harmonized Sales Tax and Goods and Services Tax returns for the joint venture operations. This simplifies accounting for joint venture participants.

 
12. Does the government derive any other economic benefits from oil and gas exploration and production?

The economic benefits of oil and gas production in Canada are subject to negotiation between the parties. Outside of the income tax regime and royalty structure, the government does not derive additional direct economic benefits from oil and gas exploration and production.

 
13. What taxes and duties apply on import and export of oil and gas?

All goods imported into Canada are subject to a current 5% goods and services tax imposed by the federal government, in addition to applicable duties. In addition, with the exception of Alberta and the territories, Canadian provinces impose their own sales tax on goods and services. The combined federal and provincial sales tax rates range between 10% to 15%, depending on the individual provincial rate. Under the North American Free Trade Agreement, many goods imported from the US and Mexico are exempt from duties.

 

Transportation by pipeline

14. What regulatory requirements apply to the construction and operation of oil and gas pipelines?

Oil pipelines

A licence from the appropriate provincial regulator must be obtained to construct and operate a pipeline. The federal regulator NEB has jurisdiction if the pipeline crosses provincial or international boundaries. The appropriate surface rights must be obtained from either the Crown or freehold owner. In Alberta, the Surface Rights Act ensures that pipeline companies have a right to access lands to construct a pipeline. If an agreement cannot be freely negotiated, the AER may become involved to facilitate alternative dispute resolution. Ultimately, a right-of-entry order can be issued by the Surface Rights Board if the terms and compensation are deemed appropriate.

Under the National Energy Board Act, the NEB is delegated the power to ensure that pipeline tolls are just and reasonable. The NEB accomplishes this by monitoring pipeline tolls and addressing formal complaints. If a tariff is deemed unreasonable by the board it can be disallowed.

Gas pipelines

See above, Oil pipelines.

 
15. Is there a system of third party access to pipelines and other infrastructure?

Federally (NEB) regulated oil pipelines operate as common carriers in Canada and as such are generally under a duty to receive, transport, and deliver all oil tendered to them, subject to capacity limits. If needed, the NEB can order an oil pipeline to expand its facilities to meet a demonstrated need for additional capacity. Federally regulated gas pipelines are generally considered to be contract carriers which distinguishes them from oil pipelines that are common carriers. Gas transmission contracts (tariffs and terms and conditions of access) are set by the NEB though regulation. While access to gas transmission is generally by agreement, the NEB can nevertheless direct a gas pipeline to provide available capacity to a party.

Owners of a pipeline gathering and transportation systems can grant access to third parties and charge a fee under a negotiated agreement. Standard industry agreements that set out costs and general terms of access are the norm, but there are exceptions.

In Alberta, if parties cannot agree on access, an application can be made to the AER for access rights to infrastructure that does not cross Alberta's borders. Under the Oil and Gas Conservation Act, the AER can order any oil and gas pipeline owner to operate as a common carrier so that a producer can access existing pipeline capacity. There are basic general requirements that must be met to obtain access, including that:

  • Producible reserves must be available for transportation through an existing pipeline.

  • There must be a reasonable expectation of a market for the oil or gas to be transported by the pipeline.

  • The applicant was unable to negotiate a reasonable arrangement with the pipeline or processing facility owner.

  • The proposed access is the only feasible way to economically transport the oil or gas, it avoids an unnecessary duplication of facilities or is clearly environmentally superior.

In Alberta, certain gas pipelines fall under the jurisdiction of the Alberta Utilities Commission (AUC), which has the authority to regulate rates and terms and conditions of access associated with such pipelines.

 

Health, safety and the environment

Health and safety

16. What is the health and safety regime for oil and gas exploration and extraction, and transportation by pipeline?

All workplaces in Canada are subject to legislation governing occupational health and safety. Federally, the Canada Labour Code outlines health and safety requirements for employees and includes the Oil and Gas Occupational Safety and Health Regulations specific to the industry. However, Federal jurisdiction over employees is limited and the code only applies to certain aspects of oil and gas production, such as inter-provincial and international transport. In addition, employees in the oil and gas sector are generally subject to provincial labour laws. In Alberta, workers are protected by the Occupational Health and Safety Act and accompanying Occupational Health and Safety Code. This legislation includes specific sections governing the oil and gas industry.

The Canadian Standards Association includes comprehensive standards for pipeline construction, operation, and maintenance. Accidents and incidents for rail and pipeline are investigated by the federal Transportation Safety Board. In the provinces, regulatory bodies with specific mandates and responsibilities regulate pipelines that do not cross provincial or international boundaries. In Alberta, the AER has issued directives which include requirements relating to:

  • Pipeline spills.

  • Noise control.

  • Setbacks.

  • Compliance assurance.

  • Emergency preparedness.

  • Reporting.

  • Measurement.

For offshore oil, statutes such as the Canada Oil and Gas Operations Act, Canada Shipping Act and Marine Liability Act regulate exploration, production, processing and transport of oil and gas in federal marine areas.

Environmental impact assessments (EIAs)

17. Is an EIA required before extracting or processing onshore or offshore oil and gas?

Depending on the jurisdictional and environmental nature of the oil and gas project, either a provincial, federal, or both a provincial and federal environmental assessment may be required. Under federal legislation, an environmental assessment may be required under the Canadian Environmental Assessment Act 2012 (CEAA). Automatic assessment under this legislation is required only for certain designated projects and is otherwise at the Minister's discretion. Designated projects include:

  • Exploratory wells.

  • Drilling programmes.

  • Oil and gas pipelines.

  • Offshore projects.

The NEB has jurisdiction over environmental assessments for inter-provincial and international pipelines. Under the CEAA, federal requirements can be substituted with a provincial assessment to prevent regulatory overlap.

In Alberta, the AER is responsible for environmental assessments related to energy resource activities, while Alberta Environment and Parks (AEP) is responsible for the environmental assessment process related to non-energy resource activities. The determination of whether a provincial environmental impact assessment is required is based on whether the activity is mandatory, exempt, or discretionary under the Environmental Protection and Enhancement Act and its regulations.

 
18. What are the different stages of the EIA?

Federal environmental assessment involves dialogue between the regulator, the proponent of the project, and the public. The first stage of the assessment requires the submission of a project description that outlines the designated project, followed by a 20-day public comment period. Within 45 days of the public comment period the Canadian Environmental Assessment Agency determines whether an assessment is required. If an assessment is required, the agency issues guidelines for the proponent to guide the completion of an environmental impact statement. On completion of this statement, public discussion resumes and the agency prepares a draft environmental assessment report. This report gives the agency's position on the potential environmental effects, mitigation measures in place, and any remaining environmental effects.

After one more comment period, this draft is finalised and submitted to the Minister who makes the final determination on whether the project is likely to cause significant adverse environmental effects. If so, the Governor in Council determines whether that damage is justifiable. The final decision may be accompanied by enforceable conditions. An assessment is completed within 365 days, with a maximum of two years until the final decision on the project is made.

In Alberta, the proponent must prepare proposed Terms of Reference as well as a First Nations Consultation Plan if the project could affect First Nation rights. Based on these documents, as well as input from the public and other government agencies, the Director issues Terms of Reference that frame the Environmental Impact Assessment Report. Using these guidelines, a report is submitted by the proponent, which informs the final decision. The final decision is based on a determination of whether the proposed project is in the public interest. If approved, a project often has conditions accompanying its approval. In 2014, assessments took an average of 75.6 weeks to be completed.

Environmental permits

19. Is there a permit regime for environmental damage or emissions produced during the extraction or processing of oil and gas?

Each province has its own regime for permits relating to environmental damage and emissions. Generally, environmental approvals are required if any substance is released which could have an adverse impact on the environment. Permits for most activities are governed by provinces and issued by a provincial regulator. In Alberta, the Environmental Protection and Enhancement Act is administered by Directors that are responsible for particular administrative regions. All oil and gas activities receive such approval through the AER. The extent of approval required depends on the specific activity and environmental impact. Alberta's Climate Change and Emissions Management Act gives the province the power to implement programmes to reduce emissions. In 2015, it was announced that under a new climate leadership plan a wider breadth of carbon emissions would become subject to a carbon tax. Large emitters are already subject to emissions limits under the Specified Gas Emitters Regulation.

Federally, additional approvals may also be required in addition to approvals under the Canadian Environmental Assessment Act 2012. For instance, the Canadian Environmental Protection Act 1999 creates regulations limiting a wide range of activities, chemicals and emissions.

Environmental concerns

20. Are there any specific government policies and/or incentives aimed at meeting the environmental concerns associated with the exploration and production of oil and gas?

Current federal government policy focuses on responsible resource development. The recently elected Liberal government is promising stricter environmental regulations and increased consultation before the approval of oil and gas projects. The government has emphasised that future projects must obtain a "social licence". Many environmental policies in Canada incorporate the "polluter pays" and "precautionary" principles. This means that regulations are designed to ensure that parties responsible for producing pollution are responsible for paying for the damage done to the natural environment, and to prevent harm when not all evidence is readily available.

Contentious extraction methods such as hydraulic fracturing (fracking) remain legal and regulated in most jurisdictions. However, some areas are averse to such development. In 2013, the province of Quebec proposed legislation to block shale gas fracking. Although the proposed legislation has not been enacted, the province has been hostile to fracking in certain regions, resulting in a de facto moratorium. In Nova Scotia, a ban on fracking was legislated in 2014 by an amendment to the Petroleum Resources Act. The bill prohibits high volume hydraulic fracturing in shale, unless for the purpose of testing or research.

Waste

21. What are the regulations on the disposal of waste products resulting from oil or gas extraction or processing?

The Canadian Environmental Protection Act and its regulations regulate pollution prevention and waste management in matters of inter-provincial or international application. Other federal statutes of note include the:

  • Fisheries Act.

  • Antarctic Environmental Protection Act.

  • Arctic Waters Pollution Prevention Act.

Environmental protection legislation in each province governs oil and gas waste management. For example, in Alberta, the Environmental Protection and Enhancement Act regulates waste disposal and includes regulations such as the:

  • Waste Control Regulation.

  • Designated Materials Recycling and Management Regulation.

In British Columbia, the main legislation which governs the disposal of waste products is the Environmental Assessment Act and its regulations.

Flares and vents

22. Are flare and vent regulations in place?

Flaring is highly regulated across Canada. For example, in Alberta, the AER has published Directive 060, which regulates flaring and venting in the province. Flaring gas that could be economically conserved makes the flared gas ineligible for a royalty waiver under the Otherwise Flared Solution Gas Royalty Waiver Program, which is aimed at encouraging the reduction of solution gas flaring in Alberta. In British Columbia, regulations have been introduced which are designed to eliminate routine flaring by the end of 2016.

For development under federal jurisdiction, flaring is prohibited unless it is necessary because of an emergency situation, permitted under a formation flow test, or otherwise authorised with valid rationale and estimated rates.

Decommissioning

23. What are the decommissioning obligations and liabilities that arise?

Wells, pipelines and facilities under federal jurisdiction must be decommissioned and abandoned in accordance with the Canada Oil and Gas Drilling and Production Regulations. In addition, the NEB regulates inter-provincial and international pipeline abandonment. Decommissioned pipelines must be removed or cleaned and treated before being left in the ground. As part of this process, the National Energy Board Act requires a public consultation and can impose conditions to protect the public interest.

Provincial legislation provides that all inactive wells, pipelines and facilities must be properly abandoned and reclaimed by the licensee. Provincial regulators enforce timely decommissioning. For example, to minimise the risk of licensees being unable to fund decommissioning, Alberta and Saskatchewan have implemented the Licensee Liability Rating Program which uses a ratio of deemed assets to deemed liabilities to determine a licensee's ability to fund remediation. If the ratio is below a certain level, the regulator can require additional security deposits.

 

Sale and trade

24. How is trade in oil and gas usually completed?

Trade in oil and gas in Canada operates on a free market basis with private companies conducting sales of oil and gas at wholesale and consumer levels.

 
25. Are oil and gas prices regulated?

Oil and gas prices in Canada are unregulated and market-driven. For consumers, the Canadian Competition Bureau has a role in ensuring that prices for oil and gas products remain fair and are based on market conditions.

 

Enforcement of regulation

26. What are the regulator's enforcement powers?

Orders

Federally, the NEB and other agencies such as Fisheries and Oceans and Transport Canada have powers to issue binding orders under their enacting legislation that allow them to enforce regulatory compliance.

Fines and penalties

Non-compliance with the NEB can result in monetary penalties of up to Can$100,000 per day per violation for a company. In addition, the Environmental Enforcement Act includes enforcement tools and applies whenever an offence under the Canadian Environmental Protection Act is prosecuted. Each province also has its own regulator with varied powers to issue orders, fines and penalties.

 
27. Is there a right of appeal against the regulator's decisions?

The applicable regulatory regime in Canada will provide for a right of appeal from administrative bodies to the courts. Judicial interpretation of statutory privative clauses and statutory rights of appeal has resulted in a high degree of curial deference to administrative tribunal decisions. In general, the time frame to appeal ranges from 30 to 60 days but varies depending on the jurisdiction and level of decision being appealed.

 

Reform

28. Are there plans for changes to the legal and regulatory framework?

In June 2016, the federal government launched a review of environmental and regulatory processes. The changes are said to focus on:

  • Reviewing federal environmental assessment processes.

  • Modernising the NEB.

  • Restoring lost protections.

  • Introducing modern safeguards to the Fisheries Act and the Navigation Protection Act.

Provincial governments are considering the need for change as the industry evolves. For example, a recent Alberta Queen's Bench decision Redwater Energy Corporation (Re) 2016 ABQB 278 involves the ability of a receiver to "renounce" non-producing AER licences and thereby avoid the licensees abandonment liability. The decision is currently under appeal to the Alberta Court of Appeal.

*The authors would also like to thank Mark Graham, Daphne Rodzinyak and James Scott for their assistance in writing this article.

 

The regulatory authorities

National Energy Board (NEB)

W www.neb-one.gc.ca

Alberta Energy Regulator (AER)

W www.energy.alberta.ca

Alberta Utilities Commission

W www.auc.ab.ca

British Columbia Oil and Gas Commission

W www.bcogc.ca

Government of Manitoba Petroleum Branch

W www.gov.mb.ca/iem/petroleum

Government of Saskatchewan Ministry of the Economy

W www.economy.gov.sk.ca



Online resources

Alberta Environment and Sustainable Resource Development

W http://apsts.alberta.ca

Description. Alberta Environment and Sustainable Resource Development helps protect and enhance Alberta's natural environment

Department of Justice: Canada

W http://canada.justice.gc.ca

Description. The federal Department of Justice provides federal laws and regulations.

Canadian Legal Information Institute (CanLII)

W www.canlii.org

Description. The Canadian Legal Information Institute provides access to Canadian statutes and cases from all jurisdictions.

Canadian Association of Petroleum Producers

W www.capp.ca

Description. The Canadian Association of Petroleum Producers represents companies that explore, develop and produce natural gas and crude oil throughout Canada.

Alberta Energy Regulator (AER)

W www.energy.alberta.ca

Description. The Alberta Energy government website provides programmes, services and updates regarding natural resources in Alberta.

Freehold Owners Association: Canada

W www.fhoa.ca

Description. The Freehold Owners Association is a federally-incorporated, not-for-profit corporation that provides information and education to help freehold owners understand their oil and gas rights.

Natural Resources Canada

W www.nrcan.gc.ca

Description. Natural Resources Canada is a federal ministry that develops policies to enhance responsible development and use of Canada's natural resources to increase Canadian competitiveness in the sector.

Canadian Association of Petroleum Landmen

W www.landman.ca

Description. Canadian Association of Petroleum Landmen is an organisation for persons involved in the acquisition, disposition, and management of petroleum and natural gas rights.



Contributor profiles

Lewis Manning

Lawson Lundell LLP

T +403 781 9458
F +403 269 9686
E lmanning@lawsonlundell.com
W www.lawsonlundell.com

Professional qualifications. Admitted to the Bar, Alberta, 1982

Areas of practice. Energy, oil and gas, public utility, and electricity.

Non-professional qualifications. LLM, London School of Economics and Political Science, 1993; LLB, University of Ottawa, 1981; BA, Concordia University, 1978;

Recent transactions

  • Represented a major wind power developer regarding interconnection to the Alberta grid.
  • Represented Canadian oil and gas producers regarding aboriginal claims and challenges to NEB approved pipelines.
  • Represented various industrial customers regarding rate disputes and successfully obtained major refunds from a local utility.
  • Represented various oil and gas companies regarding generic cost of capital proceeding before Alberta regulators.
  • Represented large industrial and commercial ratepayers in successfully challenging more of Can$33 million of surcharges proposed by a local distribution company.
  • Provided advice and counsel to a regulatory board in relation to review and variance application brought by a local utility in relation to its rates.
  • Represented a major utility in relation to Alberta transmission tariffs and related matters.
  • Represented several major oil shippers in relation to successfully contested NEB tariffs regarding oil pipelines.
  • Represented Calgary Health Authorities in relation to successfully contested sour gas well developments.
  • Represented oil and gas producers in relation to Mackenzie Valley Pipeline matters.

Bernadita Tamura-O'Connor, Partner

Lawson Lundell LLP

T +403 218 7545
F +403 269 9686
E btamuraoconnor@lawsonlundell.com
W www.lawsonlundell.com

Professional qualifications. Alberta, 1997

Areas of practice. Energy, oil and gas, commercial law.

Non-professional qualifications. LLB, University of Calgary, 1996; BSc, University of Alberta, 1990.


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