SOR/2016-21: Canada-Newfoundland and Labrador Offshore Petroleum Cost Recovery Regulations


February 19, 2016

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the regulations.) Issues Cost recovery is a sound management practice that seeks to recover from industry the costs associated with administration and enforcement of Canada’s regulatory regime in the offshore oil and gas sector and to minimize the burden on public taxpayers, particularly given that the roles and responsibilities ... (Click for more)


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Published on February 19, 2016

Bill Summary

SOR/2016-21: Canada-Newfoundland and Labrador Offshore Petroleum Cost Recovery Regulations

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the regulations.) Issues Cost recovery is a sound management practice that seeks to recover from industry the costs associated with administration and enforcement of Canada’s regulatory regime in the offshore oil and gas sector and to minimize the burden on public taxpayers, particularly given that the roles and responsibilities of regulators continue to evolve with respect to safety and environmental protection. Currently, cost recovery is implemented on a voluntary basis. The Canada–Newfoundland and Labrador Offshore Petroleum Cost Recovery Regulations and the Canada–Nova Scotia Offshore Petroleum Cost Recovery Regulations (the regulations) will introduce mandatory requirements for cost recovery in the Atlantic Accords offshore areas to increase the transparency, predictability, and enforceability of cost recovery for regulatory activities. Enhancing the predictability of cost recovery by prescribing requirements in regulations is expected to promote confidence and investment in Canada’s offshore oil and gas sector, and strengthen Canada’s already strong offshore oil and gas regulatory regime. Background In 2009 and 2010, two large-scale oil spills from offshore oil and gas operations occurred: the Montara wellhead platform blowout off the northwest coast of Australia, and the Macondo field Deepwater Horizon oil rig blowout in the Gulf of Mexico. These incidents highlighted the safety and environmental risks inherent in offshore oil and gas activity, and the corresponding need for strong and transparent legal frameworks and regulatory regimes with stringent planning, prevention, and preparedness requirements. As a part of the response to these incidents, Part 1 of the Energy Safety and Security Act (the Act), which received royal assent on February 26, 2015, but which is not yet in force, amended the Accord Acts (the Canada–Newfoundland and Labrador Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act), the Canada Oil and Gas Operations Act (COGOA), and the Canada Petroleum Resources Act (CPRA), to strengthen the safety and environmental protection of Canada’s offshore oil and gas regime, by modernizing the liability and compensation regimes and updating incident preparedness and response requirements. These amendments included the authority to create new regulations to allow regulators (see footnote 2) to recover from industry the costs associated with regulating offshore and northern onshore oil and gas activity. At this time, cost-recovery regulations are being introduced for the Atlantic Accords areas only; costrecovery regulations for the offshore and onshore oil and gas activities regulated under the COGOA and the CPRA are expected to be developed in the future, and are subject to Governor in Council approval. Previous cost-recovery regime (Atlantic Accords areas) Until now, the two regulatory boards (the Canada-Newfoundland and Labrador Offshore Petroleum Board [CNLOPB] and the Canada-Nova Scotia Offshore Petroleum Board [CNSOPB]; collectively “the Offshore Boards”) did not have authority to recover costs for their regulation of oil and gas activity in offshore areas where they retain regulating authority. The Offshore Boards therefore recovered a significant proportion of their costs from industry, on a voluntary basis. In 1999, after the Accord Acts were established and offshore oil and gas activity began in the Accord areas, the federal and provincial governments established a voluntary cost-recovery agreement with industry, as represented by the Canadian Association of Petroleum Producers (CAPP). The CNLOPB currently recovers approximately 75% of their costs from industry and the CNSOPB recovers approximately 50% of their costs. The remaining 25% and 50% respectively, were split between federal and provincial government funding. These levels were established in order to reflect the level of oil and gas activity at the time, and to support the development of Atlantic Canada’s emerging offshore oil and gas sector. Objectives The objective of the regulations is to remodel the existing voluntary cost-recovery regime in the Atlantic Accords areas to recover up to 100% of the regulators costs. This would help to ensure that the costs recovered are more closely attributable to the services rendered, as opposed to a general proportion (e.g. 50% or 75%) of the regulators costs. Prescribing cost-recovery requirements in regulations, as opposed to voluntary agreements, increases transparency and ensures these requirements are enforceable. This will ensure that most regulator costs are borne by industry and not by taxpayers, in keeping with other cost-recovery frameworks implemented by the Government of Canada. Description The regulations establish the new cost-recovery model, which divides regulator costs into four categories. Different cost-recovery methods will be used for each category of costs, depending on the type of licence, approval, or regulatory activity that is undertaken or provided by the regulator (i.e. one of the Offshore Boards). Having different cost-recovery methods provides flexibility for regulators and industry, to ensure that cost recovery is tailored to the nature of the activity, project, or service provided. The four cost-recovery methods are the Regulatory Activity Plan (RAP) method; the Formula Fees method; the Other Charges method (direct billing for 100% of regulator costs); and Geodata Centre set fees. For any given project or activity, one cost-recovery method would be applied, and where applicable, direct billing can also occur (i.e. the Other Charges method and either the RAP method or the Formula Fees method can be applied simultaneously to the same project or activity, as long as the Other Charges collected for specific services are not already captured under the RAP charge or formula fees). Regulatory Activity Plan (RAP) method The Regulatory Activity Plan (RAP) method will be used to recover regulator costs associated with larger, more complex projects such as drilling, development, production, and abandonment activities, as well as multi-year or complex seismic surveying programs. As these types of projects are considered complex and can vary significantly in terms of the degree of resources required by the regulator, the level of costs to be recovered are determined on a project-specific basis. The RAP charge (the amount owed by the applicant or operator) is a calculation of the total costs based on the estimated time required by the regulator to regulate each project, over the course of one fiscal year. The regulations require that a RAP be prepared, and that the total costs for the regulator to implement the RAP be calculated. The RAP model is designed to be performance-based, and to ensure that regulators use a consistent approach to recover costs in the two Accord Areas. This ensures that the total costs borne by the regulator with respect to a given project are recovered, and that these costs are based on a regulatory plan established each year by the regulator. It also provides flexibility to the regulators by ensuring that the total costs of undertaking the activities set out in the RAP are calculated in a way that reflects their respective methods and accounting procedures used to determine the various subsets of costs (e.g. the amount of time spent for any given activity, and associated indirect costs like legal services, human resources, operations and maintenance). For a new project (also known as a “work” or “activity” under the Accord Acts) captured by the RAP model, the regulator will, upon receipt of a project description or letter of intent from an applicant, prepare a RAP, estimating the charge related to that project for that year. The RAP will also identify the total estimated number of units of time (days or hours) of direct regulatory activities required for a project. “Direct regulatory activities” include assessing applications, issuing licences, granting approvals and authorizations, verifying and enforcing compliance and providing information, products and services, that are required for the regulator to fulfil its regulatory responsibilities. The RAP will then be shared with the applicant, and the amount owing will be billed on a quarterly basis. For existing projects already under a RAP, the regulator will prepare a RAP each new fiscal year following the approval of the regulator’s budget. The federal and provincial budget approval process for the regulators will not change as a result of the regulations. If changes occur to a project under a RAP, the regulator may recalculate, at their discretion, the estimated charge for that project and adjust the amount to be invoiced accordingly. For example, if a proponent decided to increase the number of wells that would be drilled within the scope of an existing exploratory drilling project after the RAP for that project had been established, the regulator would need to increase the total oversight workload for that project. This ensures that regulators can adjust estimated charges following unexpected changes to proposed projects. If at the end of the fiscal year the actual regulator costs associated with the project are different than the estimated costs invoiced, the regulator will adjust the charge and either issue a supplementary invoice or provide a credit to the operator on a subsequent invoice. Formula Fees method The Formula Fees method will be used to recover regulator costs for oversight of smaller oil and gas-related projects: geological, geophysical, and geotechnical activities, such as petrography, seismic surveys, or seafloor gravity surveys, respectively. Such costs will arise from the assessment of applications for project licences, verification of regulatory compliance by operators of existing projects, and any other foreseeable regulatory work that is necessary for these types of projects or activities. The types of projects or activities for which a formula fee will be used are listed in the regulations, along with the applicable formula for calculating the associated fee. For example, petrography work will be subject to the Formula Fees method calculated without variable units of time, while offshore seismic surveys and seafloor gravity surveys will be subject to the Formula Fees method calculated with variable units of time. The formulae can include the following elements: At minimum, the formula will include the base units of time and the effective rate: (X hours or days of work [base units of time]) multiplied by (Y cost per hour or day of work [effective rate]) = basic formula fee. The calculation of variable units of time is applicable only to the list of activities prescribed in the regulations, and the heavy burden coefficient variable is applied at the discretion of the regulator. Base units of time (hours or days) : This is an estimate of time spent by the regulator on direct regulatory activities (as described above under the RAP method). Variable units of time : This is an estimate of the amount of time of regulatory oversight attributed to particular characteristics of a project or activity that will add time for the regulator (in other words, to account for oversight activities that can require variable amounts of time). This time estimate is in addition to the base time, and is to be calculated using the same unit of hours or days. For example, for an average offshore seismic project (i.e. one that would not be complex enough to warrant using the RAP method) that will use one vessel, for which the base units of time is 30 days and the variable units of time is 10 days per vessel, the total amount of time spent by the regulator on direct regulatory activities for that project would be 40 days. If the project required two vessels, the base units of time would be 30 days and the variable units of time would be 20 days, for a total of 50 days of direct regulatory activities. Effective rate : This is the rate (the dollar amount) to be charged for every hour or day of direct regulatory activities. It is derived from the total of the regulator’s costs for the year (for both “direct regulatory activities” and “indirect regulatory costs”), minus costs for regulatory activities to which cost recovery does not apply, divided by the units of time (in hours or days) spent on the direct regulatory activities. “Indirect regulatory costs” are those costs that support the Board’s direct regulatory activities, such as training, administration, human resources services, information technology, legal services, operations and maintenance. “Heavy burden” coefficient : This is a multiplier that can be applied to formula fees in instances of noncompliance, negligence or lack of effort by an applicant or operator in responding to the regulator’s requirements during an application process or activities (this is not meant to be an enforcement tool; the objective is to recover costs imposed on the regulator that were unforeseen). This is a retroactive charge based on the extra amount of effort (measured in units of time) required by the regulator. The regulator would multiply the fee already charged to the proponent by a coefficient representing the additional amount of units of time of regulatory oversight required as a result of the non-compliance, negligence or lack of effort. For example, if the regulatory oversight took double the amount of time normally required because of non-compliance, the coefficient would be 2, and the fee would be double. Following their budget processes, each of the Offshore Boards will publish (online) the estimated values for each of the elements in the formulae, (except for the heavy burden coefficient, which is not predictable in advance) and the resulting activity fees for each project or activity listed in the regulations. Payment of Formula Fees Fees are to be paid by an applicant at the same time as the application is submitted to the regulators for review. Other charges (direct billing of 100% of certain costs) The regulator may require companies to reimburse them for 100% of the regulator’s costs for certain activities undertaken or services provided that are not captured under the RAP or Formula Fees methods. These costs will be directly billed to the relevant person or company, and pertain to all activities related to the following: (a) the inspection of rigs or equipment involving travel to another location by the regulator’s staff; (b) oil and gas committees (a committee established as needed by the Governor in Council for the purpose of conducting an inquiry, hearing or appeal, or making an order, pursuant to the Accord Acts); (c) a project-specific technical analysis or process review that is requested by an applicant or operator; (d) a project-specific public review, hearing or inquiry that is required or initiated by the regulator; (e) a participant funding program that is part of an environmental assessment held under the Canadian Environmental Assessment Act, 2012; and (f) information, products or services that are requested of the regulator by the applicant or operator. Such fees will be billed as costs are incurred. Geodata Centre set fees These fees represent the costs incurred by the two Atlantic Offshore Boards when providing access to physical geoscience data (e.g. core samples). The fees will be determined and published by the two Offshore Boards. The fees will cover costs associated with the time required by the regulator to prepare samples for viewing, or to complete other related requests. Such fees will be billed immediately to persons requesting access to data. The fees do not capture access to digital geoscience data, which will remain available at no additional cost. Requests for access to physical samples for academic purposes or by government employees are exempt from these fees. Remittance of funds The funds that are cost-recovered by the two Offshore Boards are collected and remitted to the federal and provincial governments on a quarterly basis, subject to operational requirements. “One-for-One” Rule The “One-for-One” Rule does not apply to the regulations, as there is no change in administrative costs for business. Small business lens The small business lens does not apply to the regulations, as they do not impact small businesses. Consultation In January 2014, a Steering Committee was convened by Natural Resources Canada (NRCan), Indigenous and Northern Affairs Canada (INAC), the two provincial governments, and the three Boards, to develop these regulations and consult with stakeholders. The Steering Committee met three times in 2014 (every four months), and monthly in early 2015. The Steering Committee’s Technical Working Group conducted technical analysis to inform the development of the regulations, and met as needed: multiple times between each of the Steering Committee meetings in 2014, and at least once between each of the Steering Committee meetings in 2015. Consultations were held with industry stakeholders and Aboriginal groups on the cost-recovery regulations in April, May, and early July of 2015. Subsequent to these consultations, the 30-day comment period provided through the Canada Gazette, Part I, prepublication resulted in the following comments received by the Department of Natural Resources: The offshore oil and gas industry (primarily as represented by an industry association) provided nine comments, falling into three broad themes. No other stakeholders submitted comments. The three themes covered in the comments submitted by industry were as follows: predictability and transparency of the cost-recovery regime; structure of the regime; and application of the heavy burden coefficient. Predictability and transparency of the cost-recovery regime Industry requested that further details about formula fees, indirect regulatory costs, other charges, and hearings, be added to the regulations, as follows: expected service times for formula fees or an amendment to the formula fees cost-recovery model such that formula fees be charged after the completion of the activity, rather than upfront; additional detail related to the management of indirect regulatory costs budget, rates, and charges, how they will be calculated, and whether that information will be made public; explicit prescription that “other charges” be billed on a quarterly basis, along with the Regulatory Activity Plan (RAP) method charges; and specification that hearings may be either oral or written, per standard practice in oil and gas regulatory matters. All of the comments received were communicated to the Boards, to bring implementation concerns to their attention. Regarding the Formula Fees method, the Boards will consider whether it will be operationally feasible for them to address the concern about timing of payment. With respect to how rates are calculated, it should be noted that the legislation prohibits the recovery of more than 100% of the costs — direct and indirect — associated with a project. Further, the charges for projects under the Formula Fees method will be the same for operators in the same administrative area (e.g. the Canada–Newfoundland and Labrador offshore area), and information on the formula fees will be public. Should applicants and operators need further information, they will be able to request it from the Boards. Therefore, no changes were made to the regulations in this regard. Concerning other charges, for the sake of simplicity and to ensure that the Boards’ budgetary processes remain sound, other charges will be billed as they are incurred. Finally, the wording of the provision pertaining to hearings has been amended as requested, to ensure that the notion of oral or written hearings is captured. Note that this change was made only to the French version of the regulations, as the language in the English version already captures that notion. Structure of the regime Industry had concerns with the inclusion of indirect regulatory costs in the cost-recovery regime. Indirect regulatory costs such as those listed in the regulations are in fact actual costs of the Boards, required for the Boards to exist and to carry out their regulatory functions. The costs are, therefore, indirectly attributable to applicant and operator activities. This is in line with other federal cost-recovery models, including the cost-recovery model of the Canadian Nuclear Safety Commission. Industry also requested that a process by which to appeal or dispute charges be added to the regime. That comment has been communicated to the Boards, for them to consider administrative means of addressing the concern. The Act does not provide regulatory authority to create an appeal process through the regulations. Application of the heavy burden coefficient Industry sought a definition of heavy burden coefficient. The definition of heavy burden coefficient is found in section 7 of the regulations, and it includes an indication of how the calculation works (it is a multiplier reflecting the additional units of time spent by the Board on certain direct regulatory activities as a result of applicant or operator negligence, lack of effort, or non-compliance with the Act.) Industry also sought clarification as to whether the Board could issue an administrative monetary penalty (AMP) for an instance of negligence or lack of effort for which the Board was also applying the heavy burden coefficient. Cost recovery charges and AMPs have different regulatory objectives. A regulatory cost-recovery regime aims to ensure that regulators are appropriately, transparently, and predictably funded, while an AMP regime aims to encourage compliance with a legislative and regulatory framework. Depending on the particulars of an instance of non-compliance with the Act or lack of effort, it will be possible for an AMP officer to issue an AMP for the regulatory violation, and for the respective Board also to apply a heavy burden coefficient to recover its costs related to additional regulatory burden. However, as noted, the cost-recovery regime serves a specific purpose quite distinct from that of the range of enforcement and compliance tools available to the Boards, including AMPs. Following the Canada Gazette, Part I, public consultation period, further discussions within the Technical Working Group and the Steering Committee resulted in several changes to the format and wording of the regulations in order to achieve greater clarity. Rationale The regulations are required to formalize and re-structure the existing voluntary cost-recovery regime for offshore oil and gas activities, which brings added transparency, predictability and enforceability to the regime. Cost recovery ensures that there is a shared responsibility in the management of the offshore oil and gas sector, in that those who derive the greatest benefit from the activities — the operators — will pay a fair share of the costs associated with regulatory activities. The costs recovered from industry by the regulators will constitute direct savings for the Government of Canada and the provincial governments of Nova Scotia and Newfoundland and Labrador of an estimated total of $29.4 million over 10 years. The regulations will enable regulators to recover up to 100% of their costs. This will result in estimated incremental cost savings for the federal and provincial governments of up to 25% of the CNLOPB’s costs, up to 50% of the CNSOPB’s costs. Given that the incremental costs to industry are also a direct savings to the federal and provincial governments; the regulations are considered cost-neutral. Cost recovery is part of the overall costs associated with doing business in the oil and gas sector around the world; companies involved in Canada’s offshore sector are aware and generally accepting of this aspect of their sector, as demonstrated by the voluntary cost recovery arrangements currently in place in the Atlantic Accords areas. Implementation, enforcement and service standards The regulations enter into force on April 1, 2016. Contact Daniel Morin Senior Policy Analyst Offshore Petroleum Management Division Natural Resources Canada 580 Booth Street Ottawa, Ontario K1A 0E4 Telephone: 343-292-6155 Email: [email protected] Footnote a S.C. 1987, c. 3; S.C. 2014, c. 13, s.3 Footnote b S.C. 2015, c. 4, s. 38 Footnote c S.C. 2015, c. 4, s. 39 Footnote d S.C. 1987, c. 3; S.C. 2014, c. 13, s.3 Footnote 1 SOR/88-263 Footnote 2 Regulators include the National Energy Board, the Canada-Newfoundland and Labrador Offshore Petroleum Board, the Canada-Nova Scotia Offshore Petroleum Board, the federal Minister of Natural Resources and the federal Minister of Indian Affairs and Northern Development.

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