Canada Gazette, Part I, Volume 149, Number 28: Canada Oil and Gas Operations Financial Requirements Regulations

July 11, 2015

Statutory authority

Canada Oil and Gas Operations Act

Sponsoring departments

Department of Natural Resources and Department of Indian Affairs and Northern Development

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issues

As of February 2015, Canada's offshore liability regime had not been updated since the 1980s, and existing financial requirements for industry were no longer aligned with the contemporary financial realities of offshore oil and gas activity. To illustrate, Canada's current absolute liability limits (until the entry into force of Part 1 of the Energy Safety and Security Act [the Act]) are $30 million in the offshore south of the 60th parallel, and $40 million in the offshore north of the 60th parallel, while the limits on absolute liability in the offshore oil and gas regimes of other countries are higher: 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) ensure that industry is able to demonstrate that it has the necessary amount of financial resources to cover any liability claims (in the event of an accident or spill) in a predictable manner;
• (ii) allow for the lowering of the absolute liability limit imposed by the Act for projects of demonstrably lower-than-average risk (where warranted); and
• (iii) support the creation of an industry-led “pooled fund” to provide a flexible alternative for applicants and operators when determining how they can best 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 spill incidents, the Act, which received royal assent on February 26, 2015, but which is not yet in force, amended the Canada-Newfoundland and Labrador Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (the Accord Acts), 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.

At present, the Canadian offshore oil and gas liability regime imposes a specified absolute (“no-fault”) liability limit of $40 million for the offshore areas north of the 60th parallel, and $30 million for all other offshore areas south of the 60th parallel. Liability is unlimited in cases of fault or negligence in all of Canada's offshore areas. Companies applying for authorization to engage in offshore oil and gas activities (applicants) and operators of existing projects are required to make these amounts (“financial responsibility”) available to the regulatory board with the authority in the area of the project (either the National Energy Board, the Canada-Newfoundland and Labrador Offshore Petroleum Board, or the Canada-Nova Scotia Offshore Petroleum Board [“the Boards”]), to be accessed by the Board, if needed, in response to an incident involving the release of debris and/or a spill, or an authorized discharge, emission or escape of oil or gas. This is effectively a financial “deposit” and is required in order to ensure that the Board has unfettered access to funds for clean-up and remediation, should the Board deem that an operator has not taken appropriate action in response to an incident.

It is also current practice — set out in the Offshore Boards' guidelines, but not in legislation or regulation — for the Boards to require that applicants and operators demonstrate by means of financial documents (e.g. a letter of credit, an indemnity bond) that they have additional financial resources at their disposal (up to $250 million) beyond the financial responsibility “deposit” amount, in order to prove their capacity to pay for the costs associated with an incident, including all applicable liability claims. These “assets” are commonly referred to as “financial resources.”

If an applicant is granted authorization from a Board to pursue a proposed project, the applicant, as an operator, is required to maintain the same level of financial responsibility and financial resources as the applicant was required to demonstrate in the application process, throughout the life cycle of the project, and to prove this to the Board on an annual basis.

The Act amended the Canada Oil and Gas Operations Act (COGOA) and the Canada-Newfoundland and Labrador Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (the Accord Acts) to increase the required financial responsibility (“deposit”) amount required offshore project applicants and operators from the minimum of $30 or $40 million to a minimum of $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 the increased absolute liability limit.

However, the Act also establishes the authority for the Boards to recommend to the ministers (i.e. in non-Accord Act areas: the Minister of Natural Resources or the Minister of Indian Affairs and Northern Development; and in the Accord Act areas: the federal Minister of Natural Resources as well as the provincial minister with jurisdiction over offshore oil and gas) 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 prescribes 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 $1 billion absolute liability limit, the Board may make such a recommendation to the appropriate ministers to lower the liability limit and the financial requirements to be demonstrated by the applicant.

The Act will also provide authority for applicants and operators to meet their financial responsibility requirements by means of an industry-led pooled fund that must be maintained at a minimum of $250 million, should they choose to organize 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 area ) as they could use their 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 the regulations must be met.

Objectives

The objectives of the proposed 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

Proof of financial resources

The proposed Regulations define the form and manner by 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.

Similarly, operators will be required to submit a summary statement explaining to the Board how their net assets or funding arrangements would allow them to pay the amount of financial resources required by the Accord Acts or the COGOA. Applicants would be required to do this upon application, while operators would need to submit such a summary statement and accompanying documentation annually unless the Board requests that they be submitted more frequently.

The statement must be accompanied with the proof of each instrument used to demonstrate financial resources. Such instruments could include one or a combination of the following:

• the audited financial statement accompanied where applicable by a credit rating;
• a promissory note;
• an insurance policy;
• an escrow agreement;
• a letter of credit;
• an undrawn line of credit agreement;
• a guarantee agreement; or
• a security bond or pledge agreement, or an indemnity bond or a suretyship agreement.

The options for the form and manner that can be utilized by industry (as outlined here) to demonstrate its ability to cover the liability amount (now at $1 billion) are currently being used by applicants and operators. Prescribing them in regulations will make their use enforceable. Having these requirements in regulations as opposed to in guidelines provides industry proponents with regulatory certainty and increased transparency.

Industry pooled fund requirements

The Act establishes the option for industry to create a pooled fund; however, the parameters defining the fund must be set in regulations. The requirements set in the proposed regulations would be performance-based, and would not dictate who is responsible for administering the pooled fund or how it is to be organized.

This is to allow an applicant or operator to satisfy their financial responsibility requirements by demonstrating their participation in a pooled fund in a manner that is acceptable to the Board (i.e. meaning it is in line with regulatory requirements).

Although the pooled fund will be left to industry to manage (as per the Act), the proposed 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 for the purposes of demonstrating financial responsibility (i.e. not for financial resources) under the Canadian offshore oil and gas regimes;
• the monies in the fund must be paid by the administrator of the fund to the Boards on demand;
• the administrator of the fund must provide a yearly audited financial statement to the Boards to demonstrate that the pooled fund has been maintained at a minimum of $250 million;
• the administrator of the fund must notify the Boards within 24 hours of any changes in the fund (except bank fees and interest payments, unless they lower the amount in the fund below $250 million, which is in contravention of the Act); and
• the administrator of the fund must provide the Boards with the specified contact information.

Any withdrawal from the fund made by one of the Boards as a result of an incident must be repaid to the fund 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. If the responsible party does not repay the fund, it will be the responsibility of the other members to ensure that the fund stays in compliance with the Act (i.e. is maintained at $250 million).

While the Government of Canada would not be responsible for overseeing the management of the pooled fund (this will be left to industry), the Boards will be required to determine if the pooled fund has adequate resources to meet the minimum fund balance requirement set in legislation. In making this determination (on a case-by-case basis), the applicable Board will review financial documents (those prescribed in the regulations), such as third-party audited financial statements, which are to be provided to them by the applicant or operator.

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 to ministers that adjustments to the minimum amounts of absolute liability, financial resources and/or financial responsibility deposit be made. This recommendation must be approved by the responsible ministers.

The proposed regulations require that the applicable Board, in its recommendation to the ministers, identify, at its discretion, the potential hazards associated with a proposed project and assess the level of risk associated with them — particularly, hazards that could possibly result in debris and/or a spill, and the risk associated with an authorized discharge, emission or escape of petroleum (e.g. minimal amounts of oil that are being discharged into the water during the normal course of work and/or during resource extraction and that are authorized by the Boards).

The proposed regulations require that the Board must also provide the following in its recommendation:

• the estimated total costs that could result from damage caused by debris and/or a spill, or by an authorized discharge, emission or escape of oil or gas;
• the recommended reduced amount(s) [i.e. financial responsibility, financial resources, or both] of financial requirements (i.e. from those specified in legislation);
• a summary of any information provided by operators to substantiate the lower level of risk; and
• any other information deemed relevant by the Board and any information requested by the ministers.

In practice, these requirements would only be triggered if the operator indicates to the Board that its project would represent a lower risk than is intended to be captured by the $1 billion absolute liability amount. Once a Board has decided that a lower amount is appropriate, it would be required to fulfill these regulatory requirements when making a recommendation to the responsible ministers.

“One-for-One” Rule

The “One-for-One” Rule does not apply to the proposed regulations, as there is no change in administrative costs for business.

Small business lens

The small business lens does not apply to the proposed regulations, as they do not impact small businesses.

Consultation

A Steering Committee and a Technical Working Group were convened by the Department of Natural Resources (NRCan) in January 2014, with membership from the Department of Indian Affairs and Northern Development (DIAND), the two provincial governments, and the three regulatory boards. The Steering Committee, which provides direction and oversight to the Technical Working Group and approves the work drafted by the Technical Working Group, met three times in 2014 (every four months), and has met every month so far in 2015. The Technical Working Group meets 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.

The committee and the group have collaboratively informed the development of the proposed Financial Requirements Regulations.

Further consultations are planned with industry stakeholders, Aboriginal groups, and the territorial governments on the proposed Financial Requirements Regulations in April and May of 2015.

Rationale

Financial resources

Requiring the oil and gas industry 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 a spill, supports the responsible development of Canada's offshore oil and gas resources.

Prescribing in regulations (as opposed to in guidelines) the form and manner in which offshore and northern onshore project operators 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 both for 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 proposed regulations.

Authorizing a lower amount

Establishing the information requirements that the Boards must meet for them to be in a position to recommend that the absolute liability limit and associated financial requirements be lowered for a proposed project of demonstrably lower-than-average risk supports a federal-provincial commitment to provide ministers with the flexibility to pro-rate 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 areas, 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. there are costs associated with having a bank issue a letter of credit and ensuring it remains valid and accessible for a predetermined period of time [one year or more]).

Further, the performance-based design of the pooled-fund regulatory requirements ensures that the responsibility of organizing and administering a pooled fund is left to industry, while still maintaining the parameters of the nature and scope of what the pooled fund can be used for, and in what manner.

The creation of a pooled fund is at the discretion of industry. Should there be any administrative or other costs associated with its creation and maintenance, those costs would be taken on by industry of its own volition.

Contact

Daniel Morin
Policy Advisor
Offshore Petroleum Management Division
Natural Resources Canada
580 Booth Street
Ottawa, Ontario
K1A 0E4
Telephone: 613-992-4217
Email: Daniel.Morin@NRCan-RNCan.gc.ca

PROPOSED REGULATORY TEXT

Notice is given, pursuant to subsection 15(1) of the Canada Oil and Gas Operations Act (see footnote a), that the Governor in Council, pursuant to subsection 14(1) (see footnote b) of that Act, proposes to make the annexed Canada Oil and Gas Operations Financial Requirements Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Daniel Morin, Policy Analyst, Frontier Lands Management Division, Natural Resources Canada, 580 Booth Street, Ottawa, ON K1A 0E4 (tel.: 613-992-4217; email: daniel.morin@nrcan-rncan.gc.ca).

Ottawa, June 18, 2015

JURICA ČAPKUN
Assistant Clerk of the Privy Council

CANADA OIL AND GAS OPERATIONS FINANCIAL REQUIREMENTS REGULATIONS

INTERPRETATION

Definitions

1. The following definitions apply in these Regulations.

“Act”
« Loi »

“Act” means the Canada Oil and Gas Operations Act.

“Board”
« Office »

“Board” means the National Energy Board.

FINANCIAL RESOURCES

Proof of financial resources

2. (1) For the purposes of subsection 26.1(1) of the Act, the proof that an applicant has the necessary financial resources is to be made by the applicant providing the Board with a statement of its net assets or of funding arrangements that it has made that demonstrates to the Board's satisfaction that it is able to pay the applicable amount referred to in that subsection.

Substantiating documents

(2) The statement must be accompanied by one or more of the following documents that substantiate it:

• (a) the applicant's most recent audited annual financial statement and, if the applicant has been given a credit rating by a credit rating agency that is current at the time the application is made, a document that indicates that credit rating;
• (b) a promissory note;
• (c) an insurance policy or a certificate of insurance;
• (d) an escrow agreement;
• (e) a letter of credit;
• (f) a line of credit agreement under which the funds identified in the statement are available;
• (g) a guarantee agreement;
• (h) a security bond or pledge agreement or an indemnity bond or suretyship agreement.

Audited statement and documents

(3) For greater certainty, the Board may require that an applicant provide a statement of net assets or funding arrangements, and substantiating documents, that have been audited by a qualified independent auditor and a report of the audit signed by that auditor.

FINANCIAL RESPONSIBILITY

Requirements of pooled fund

3. For the purposes of subsection 27(1.01) of the Act,

• (a) a pooled fund must be located and administered in Canada and must be used solely to make payments
  • (i) under subsection 27(2) of the Act in connection with the drilling for, or the development or production of, oil or gas in the part of Canada that is referred to in paragraph 3(d) or (e) of the Act,
  • (ii) under subsection 163(2) of the Canada–Newfoundland Atlantic Accord Implementation Act in connection with the drilling for, or the development or production of, petroleum in the offshore area as defined in section 2 of that Act, and
  • (iii) under subsection 168(2) of the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act in connection with the drilling for, or the development or production of, petroleum in the offshore area as defined in section 2 of that Act;
• (b) the administrator of the pooled fund must pay moneys out of the pooled fund to the Board on demand; and
• (c) the administrator of the pooled fund must
  • (i) every year, provide the Board with an audited financial statement that demonstrates that the pooled fund has been maintained at a minimum of $250 million,
  • (ii) notify the 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 an interest charge or a banking fee,
  • (iii) notify the Board of a contravention by a participant in the pooled fund of their obligation under subsection 27(1.1), (1.2) or (5) of the Act within 24 hours after they become aware of the contravention, and
  • (iv) provide the Board with the phone number, email address and mailing address of their contact person.

Reimbursement into pooled fund

4. For the purposes of subsection 27(5) of the Act, the reimbursement into the pooled fund of an amount that is paid out of that fund to the Board, the Canada–Newfoundland and Labrador Offshore Petroleum Board or the Canada-Nova Scotia Offshore Petroleum Board must be made by the holder of an authorization referred to in that subsection within seven days after the day on which the payment is made.

BOARD RECOMMENDATION REGARDING LESSER FINANCIAL REQUIREMENTS

Circumstances relating to recommendation

5. (1) For the purposes of subsection 27.1(1) of the Act, the Board may make a recommendation to the Federal Minister in respect of an applicant if the Board is satisfied that the estimated total of the losses, damages, costs and expenses — other than losses of non-use value — for which the applicant may be liable under paragraphs 26(1)(b) and (2)(b) of the Act in connection with the proposed work or activity to which the application pertains is less than the amount referred to in paragraph 26(2.2)(a) or (d) of the Act.

Recommendation

(2) The recommendation must identify the hazards that are relevant to the proposed work or activity to which the application pertains and must include an assessment of the risks associated with each event that could reasonably 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.

Required information

(3) The following information must accompany the Board's recommendation:

• (a) the estimated total of the losses, damages, costs and expenses referred to in subsection (1);
• (b) the recommended amount that is less than the amount referred to in paragraph 26(2.2)(a) or (d) or 27(1)(a) of the Act, as the case may be;
• (c) a summary of the reasons for the recommendation;
• (d) a summary of any information provided by the applicant to the Board that the Board considers to be pertinent;
• (e) any information concerning the recommendation that the Board provided to the Provincial Minister in connection with that Minister's approval under subsection 27.1(1) of the Act; and
• (f) any information requested by the Federal Minister.

Additional information

(4) The Board may submit to the Federal Minister any other information that it considers to be pertinent.

COMING INTO FORCE

S.C. 2015. c. 4

6. These Regulations come into force on the day on which section 20 of the Energy Safety and Security Act comes into force, but if they are registered after that day, they come into force on the day on which they are registered.

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