FEDERAL REG

SOR/2016-23: Canada-Newfoundland and Labrador Offshore Petroleum Financial Requirements Regulations

REGISTRATION OF FEDERAL REGULATION - VIA OIC DATABASE, PRIOR TO PART II OF THE GAZETTE

Registered
February 19, 2016


REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the regulations.) Issues Before the coming into force of Part 1 of the Energy Safety and Security Act (the Act), Canada’s offshore liability regime had not been updated since the 1980s, and financial requirements imposed on industry were no longer aligned with the contemporary financial realities of offshore oil and gas activity.... (Click for more)


House

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Published on February 19, 2016

Bill Summary

SOR/2016-23: Canada-Newfoundland and Labrador Offshore Petroleum Financial Requirements Regulations

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the regulations.) Issues Before the coming into force of Part 1 of the Energy Safety and Security Act (the Act), Canada’s offshore liability regime had not been updated since the 1980s, and financial requirements imposed on industry were no longer aligned with the contemporary financial realities of offshore oil and gas activity. To illustrate, Canada’s absolute liability limits were $30 million in the offshore area south of the 60th parallel, and $40 million in the offshore area north of the 60th parallel, while the limits on absolute liability in the offshore oil and gas regimes in other countries are higher. For example, the United States has an absolute liability limit of US$134 million, the United Kingdom has an absolute liability limit of US$250 million and Norway has no absolute liability limit. In an effort to support the modernization of Canada’s offshore liability regime, regulations are needed to (i) detail how applicants for authorizations are to demonstrate that they have the necessary financial resources to cover any liability claims (in the event of an accident or spill); (ii) establish the requirements that apply to the lowering of the absolute liability limit for projects of demonstrably lower-than-average risk; and (iii) establish the requirements that apply to pooled funds established by industry, which provide a flexible alternative for applicants and operators to meet the financial requirements of the liability 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, the Act 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 include the authority to create new regulations to modernize the financial requirements that industry is subject to. Before Part 1 of the Act came into force, the Canadian offshore oil and gas liability regime imposed a specified absolute (“no-fault”) liability limit of $40 million for the offshore area north of the 60th parallel, and $30 million for all other offshore areas south of the 60th parallel. Liability was unlimited in cases of fault or negligence in all of Canada’s offshore areas. Applicants for an authorization to engage in offshore oil and gas activities and operators of existing projects were required to make these amounts available to the regulatory board with authority in the area of the project (the National Energy Board, the Canada- Newfoundland and Labrador Offshore Petroleum Board, or the Canada-Nova Scotia Offshore Petroleum Board, as the case may be; collectively “the Boards”). A Board could require payment of these funds in response to an incident involving the release of debris, a spill, or an authorized discharge, emission or escape of oil or gas. This was effectively a financial “deposit.” This obligation, referred to in the legislation as “financial responsibility,” was required in order to ensure that the Board has unfettered access to funds for clean-up and remediation, should the Board consider that an operator has not taken appropriate action in response to such an incident. In addition, under the Offshore Boards’ guidelines — rather than under legislation or regulations — the Boards required that applicants and operators demonstrate by means of financial documents (e.g. a letter of credit, indemnity bond) that they had additional financial resources at their disposal (up to $250 million) in order to prove their capacity to pay for costs associated with an incident, including all applicable liability claims. If applicants were granted authorization from a Board to pursue the project they had proposed, they were, as operators, required to maintain the same level of financial responsibility and financial resources as they were required to demonstrate in the application process throughout the life cycle of the project, and to demonstrate this to the Board on an annual basis. The Act amended the Canada Oil and Gas Operations Act (COGOA) and the Accord Acts (the Canada– Newfoundland Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act) to increase the required financial responsibility (“deposit”) amount for offshore project applicants and operators from $30 or $40 million to $100 million. In addition, the Act introduced a financial resources (“assets” or “capacity to pay”) requirement in the COGOA and the Accord Acts, such that applicants and operators will be required to demonstrate to the Board, in the prescribed form and manner, that they have a minimum of $1 billion in assets, to correspond with an increased absolute liability limit. However, the Act also establishes the authority for the Boards to recommend to the Minister (i.e. under the COGOA, the Minister of Natural Resources or the Minister of Indian Affairs and Northern Development, as the case may be, and, under the Accord Acts, the Minister of Natural Resources) that the absolute liability limit and corresponding financial resources amount, or the amount of financial responsibility, be lowered for certain low-risk projects on a per-project basis. The Act states that, if the information provided to a Board indicates that the estimated total costs for which the applicant could be liable under the Accord Acts or the COGOA is lower than the absolute liability limit, the Board may make such a recommendation to the appropriate minister to lower the liability limit and the financial requirements to be demonstrated by the applicant. The Act also provides authority for applicants and operators to meet their financial responsibility requirements by means of a pooled fund established by industry which must be maintained at $250 million, should they choose to establish one. A pooled fund, which is a financial instrument that allows members to combine their resources in a common account, could be particularly useful for applicants or operators with projects in multiple jurisdictions (e.g. one in the Canada–Newfoundland and Labrador offshore area and one in the Arctic offshore), as they could use membership in one pooled fund to satisfy the $100 million financial responsibility requirements for both projects. The Act also requires that the pooled fund be reimbursed by the operator on whose behalf payments are made out of the pooled fund, and that any other requirements prescribed in regulations be met. Objectives The objectives of the Canada Oil and Gas Operations Financial Requirements Regulations, the Canada– Newfoundland and Labrador Offshore Petroleum Financial Requirements Regulations and the Canada-Nova Scotia Offshore Petroleum Financial Requirements Regulations (the regulations) are to support the modernization of the absolute liability regime in the offshore oil and gas sector, to ensure that companies operating in the offshore are adequately prepared to cover remediation costs and liability claims in the event of an incident resulting from their projects and to ensure that it is the “polluter” who pays for an incident and not Canadian taxpayers. Description Requirements relating to financial resources The Regulations define the form and manner in which applicants must demonstrate that they have the financial resources (i.e. up to $1 billion in “assets” or capacity to pay) required under the Accord Acts or the COGOA, prior to receiving an authorization for their proposed oil and gas-related project. Applicants will be required to submit to the Board a statement of their net assets or funding arrangements that demonstrates that they are able to pay the applicable amount of the limits of liability required by the Accord Acts or the COGOA. The statement must be accompanied by one or more documents that substantiate it. These documents are audited financial statements accompanied, where applicable, by a credit rating; a promissory note; insurance; an escrow agreement; a letter of credit; an undrawn line of credit; a guarantee agreement; or a security bond or pledge, or indemnity bond or suretyship. Applicants currently demonstrate their ability to cover the liability amount in the form and manner described above. Having these requirements in regulations, as opposed to in guidelines, will make the requirements obligatory and provide industry proponents with regulatory certainty and increased transparency. Requirements relating to financial responsibility The Act establishes the option for industry to establish a pooled fund; however, certain requirements relating to the fund are set out in the regulations. These requirements do not dictate who is responsible for administering the pooled fund, or how it is to be established. This will allow an applicant or operator to satisfy their financial responsibility requirements by demonstrating their participation in a pooled fund that complies with the regulatory requirements. Although the pooled fund will be left to industry to manage (as per the Act), the Regulations establish the following criteria that the fund must meet: the fund must be located and administered in Canada; the fund must be solely used to make payments to meet participants’ financial responsibility requirements under the Canadian offshore oil and gas regimes; the moneys in the fund must be paid by the administrator of the fund to the applicable Board on demand; the administrator of the fund must provide a yearly audited financial statement to the applicable Board to demonstrate that the pooled fund has been maintained at a minimum of $250M; the administrator of the fund must notify the applicable Board within 24 hours of any change to the participants in the pooled fund or of any change in the amount of the pooled fund (other than one that is solely attributable to bank fees and interest payments, unless they lower the amount in the fund below $250M, which would contravene the Act); and the administrator of the fund must provide the applicable Board with specified contact information. Any payment from the fund to one of the Boards as a result of an incident must be reimbursed within seven days by the operator of the project from which the incident arose. This is to ensure that the polluter-pays principle is maintained. While the Government of Canada would not be responsible for overseeing the management of the pooled fund (this will be left to industry), the administrator of the fund must provide the applicable Board with an annual audited financial statement that demonstrates that the pooled fund has been maintained at a minimum of $250M. Recommendation for lower financial requirement amounts To account for exceptional situations where certain offshore projects may pose significantly less risk than is typical for the offshore sector (e.g. shallow water natural gas extraction, or onshore-to-offshore drilling), the Act enables the Boards to recommend that adjustments to the minimum amounts of absolute liability, financial resources and/or financial responsibility be made. This recommendation must be approved by the responsible minister. The regulations require that the recommendation identify the potential hazards that are relevant to a proposed project and include an assessment of the level of risk associated with each event that could be expected to occur in connection with each of those hazards and that could result in debris, in a spill or in an authorized discharge, emission or escape of petroleum (i.e. minimal amounts of oil or gas that are discharged into the water during the normal course of work and/or during resource extraction and that are authorized by the Boards). The regulations require that the Board must also provide to the responsible ministers the following information: the estimated total costs of the losses, damages, costs and expenses — other than losses of non-use value — for which the applicant could be liable; the recommended reduced amount(s) relating to financial responsibility, financial resources, or both; a summary of the reasons for the recommendation; a summary of any information provided by the applicant to the Board that the Board considers to be pertinent; any information concerning the recommendation that the Board provided to the responsible provincial minister; and any information requested by the minister to whom the recommendation is made. “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 the 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, Aboriginal groups, and the territorial governments on the financial requirements 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 from stakeholders received by NRCan: The offshore oil and gas industry (primarily as represented by an industry association) submitted 6 comments, environmental non-governmental organizations (ENGOs) submitted 10 comments, and 2 were received from academia. Overall, only minor changes to the regulations were necessary in order to address feedback from stakeholders. The changes that were made improve the structure of the regulations and the clarity of the language. In their comments, industry sought flexibility with respect to the ways by which applicants and operators will be able to meet financial requirements; sought confirmation that they had correctly interpreted the pooled fund portion of the regulations; and indicated support for how they understood that pooled fund option is to work. The Steering Committee determined that the regulations already provide the flexibility requested by industry; therefore, no changes to the regulations resulted from these comments. With respect to how the pooled fund will work, industry had correctly interpreted the regulations. In addition to two editorial comments, which resulted in the suggested wording changes being made, comments from ENGOs focussed on two themes: limits of absolute liability and types of liability claims; and the process relating to the circumstances under which an applicant might be able to make a case to the respective regulatory Board for reduced absolute liability. In the first instance, the limits of absolute liability and types of liability claims are established in the Act and are outside the scope of the regulations; therefore, no changes to the regulations resulted from these comments. In the second instance, ENGOs requested the addition of three further requirements to the regulatory scheme: a public notice of applications for reduced liability With respect to the public notice comment, the Steering Committee determined that a public notice may be posted when the minister decides to approve an application for reduced liability, should such a circumstance ever arise; no changes to the regulations are required for that to happen. an opportunity for the public to submit information to the Board with respect to such applications Regarding the opportunity for the public to submit information to the Board, the environmental assessment process that is an integral part of the decision whether to authorize a project provides extensive opportunity for public consultation, and information provided by the public through that process can be considered by the Board as part of any assessment of an application for lower liability. The Boards have the technical expertise to assess such applications and will use all information available to them in order to do so, while protecting companies’ proprietary information and making determinations in a timely manner. As a result, no additional consultation process will be added to the regulatory framework. a requirement for the Board to consider the worst case scenario in their assessment of such applications ENGOs and academia both requested that the regulatory Boards be required to consider the worst case scenario in their assessment of applications for lower liability, while expressing support that the regulations limit the circumstances under which an applicant might be able to make a case for reduced liability (Section 5 of the regulations.) Since the regulations already require the regulatory Boards to consider all possible events in their assessment of such applications, which inherently includes the worst case scenario, no changes were required to the regulations to address this concern. The remaining comment from academia sought clarification as to how the demonstration of financial resources provisions would work. The question pertained primarily to the legislative framework for the financial requirements regulations. The legislation requires that proponents notify the Boards if the instruments used to demonstrate their financial resources no longer meet the legislative requirement. Therefore, if for example, market forces cause a proponent’s financial instruments to be devalued such that the proponent’s proof of financial resources falls below the legislated financial requirement, the proponent will be required to provide to the Board new or augmented financial instruments to demonstrate proof of financial resources per the legislation, or lose their work or activity authorization. Rationale Financial resources Requiring applicants for authorizations to demonstrate that they meet the financial requirements prescribed under the Accord Acts and the COGOA in order to prove that they have the necessary amount of resources to cover any liability claims in the event of an accident or spill supports the responsible development of Canada’s offshore oil and gas resources. Prescribing in regulation (as opposed to setting out in guidelines) the form and manner in which offshore and northern onshore applicants must demonstrate that they meet the financial resources (i.e. assets or capacity to pay) requirements will provide added predictability to the regulatory regime, which is beneficial for both regulators and for industry. Industry proponents currently pay, on a voluntary basis, for the costs associated with the financial instruments they use to fulfill their financial resources obligations. Therefore, no incremental costs are anticipated as a result of the regulations. Authorizing a lower amount Establishing the information requirements that the Boards must meet in order for them to be in a position to recommend that the absolute liability limit and associated financial requirements should be lowered for a proposed project of demonstrably lower-than-average risk supports a federal-provincial commitment to provide ministers with the flexibility to prorate absolute liability so that it is commensurate with the risk a project represents. Pooled fund Establishing the parameters for the use of a pooled fund as an alternative to other financial responsibility instruments will afford added flexibility to those interested or involved in exploring for, and developing, oil and gas resources in Canada’s offshore, while safeguarding the Boards’ ability to have access to liquid funds, as required. This flexibility could be beneficial to operators, as it could potentially save them some of the administrative costs associated with having to renew or maintain financial instruments with a financial institution (e.g. costs associated with having a bank issue a letter of credit, and ensuring that it remains valid and accessible for a pre-determined period of time of one year or more). Further, while the responsibility of establishing a pooled fund is left to industry, the regulations ensure that parameters on the nature and scope of what the pooled fund can be used for and on certain aspects of its administration are maintained. The establishment of a pooled fund is at the discretion of industry. Should there be any administrative or other costs associated with its establishment and administration, those costs would be taken on by industry, of its own volition. Implementation, enforcement and service standards The regulations enter into force on February 26, 2016, or on the day on which they are registered, if it is after February 26, 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, ss. 54(1) to (4) Footnote d S.C. 1987, c. 3; S.C. 2014, c. 13, s. 3 Footnote 1 SOR/88-262

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