Vol. 149, No. 16 — August 12, 2015
SOR/2015-212 July 31, 2015
NATIONAL ENERGY BOARD ACT
Regulations Amending the National Energy Board Act Part VI (Oil and Gas) Regulations
P.C. 2015-1176 July 31, 2015
His Excellency the Governor General in Council, on the recommendation of the Minister of Natural Resources, pursuant to subsection 119.01(1) (see footnote a) of the National Energy Board Act (see footnote b), makes the annexed Regulations Amending the National Energy Board Act Part VI (Oil and Gas) Regulations.
REGULATIONS AMENDING THE NATIONAL ENERGY BOARD ACT PART VI (OIL AND GAS) REGULATIONS
1. The National Energy Board Act Part VI (Oil and Gas) Regulations (see footnote 1) are amended by adding the following after section 10:
10.1 For the purposes of subsection 119.01(1.1) of the Act, “natural gas” means a mixture of gas that is composed of at least 85% methane and that may also contain other hydrocarbons that at a temperature of 15°C and an absolute pressure of 101.325 kPa are in a gaseous state, as well as minor amounts of non-hydrocarbon gas and impurities.
COMING INTO FORCE
2. These Regulations come into force on the day on which they are registered.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
The Economic Action Plan 2015 Act, which received royal assent on June 23, 2015, amended the National Energy Board Act (the NEB Act) to extend the maximum term for which natural gas export licences can be issued, from 25 to 40 years. In order to implement this change, the National Energy Board Part VI (Oil and Gas) Regulations (the Regulations) must be amended to include a definition of “natural gas.” This is because the NEB Act, as amended, provides that 40-year licences can be issued “for the exportation of natural gas as defined by the regulations.”
Until the Regulations are amended to provide a definition of natural gas, the National Energy Board (NEB or Board) is unable to consider natural gas export licence applications requesting a term of longer than 25 years (i.e. up to a maximum term of 40 years as stipulated by the NEB Act). The absence of a definition of “natural gas” may cause uncertainty for potential natural gas export project proponents interested in applying for an export licence of up to 40 years.
“Natural gas” is a commonly known and used term, but prior to this amendment, was not specifically defined in the NEB Act or the Regulations. It was previously considered “gas,” as defined in the NEB Act, and therefore natural gas export licence applications were subject to a 25-year maximum term.
Natural gas is a mix of hydrocarbon gases, consisting primarily of methane, but also containing heavier hydrocarbon gases (sometimes called natural gas liquids) such as ethane, propane and butane, as well as small amounts of impurities such as carbon dioxide, oxygen, nitrogen, hydrogen sulphide and rare gases such as argon, helium, neon, and xenon. Natural gas liquids are more energy-rich than methane, and as a result, generally receive a higher price due to their higher energy content (i.e. amount of energy in a unit of volume).
This amendment to the Regulations defines the term “natural gas,” which is used in both the NEB Act and the Regulations. The term “gas” is defined in the NEB Act as a hydrocarbon or mixture of hydrocarbons in a gaseous state at 15°C and standard pressure, or any substance designated as a gas product under the NEB Act.
Under Part VI of the NEB Act, the NEB regulates the import and export of hydrocarbons, such as gas and crude oil, through short term orders and long term licences. The Regulations list the information that applicants seeking hydrocarbon export orders and licences must provide to the Board, and the terms and conditions that the Board may impose on orders and licences. Most gas currently exported from Canada is authorized under short-term export orders (i.e. for a maximum of two years) issued by the NEB. Historically, export licences could be for up to 25 years for a specific volume of gas. Long-term export licence applications must be reviewed and approved by the NEB, but are also subject to Governor in Council approval before they can be issued.
Canada has vast natural gas resources of up to 1,566 trillion cubic feet or 300 years supply of marketable resources at current production rates. However, Canadian natural gas production has been on a downward trend in recent years, due mainly to low prices and surging natural gas production in the United States (U.S.), which has meant less U.S. demand for imports from Canada. Every year since 1994, more than half of Canada’s annual natural gas production has been exported to the U.S., but these exports have been declining in recent years. With the U.S. projected to become a net exporter of natural gas by 2017, Canada’s natural gas exports to the U.S. are expected to continue to decline. This situation has led natural gas producers in Canada to pursue new markets overseas via exports of liquefied natural gas (LNG).
Canada does not yet export LNG, nor does it have the necessary infrastructure in place to do so. LNG projects require significant investments of time and financial resources to reach economic production. As part of Budget 2015, to support the development of an LNG export industry, the Government of Canada amended the NEB Act to allow the NEB to issue natural gas export licences of up to 40 years, subject to Governor in Council approval, instead of the previous maximum duration of 25 years. Twenty-five years is still the maximum duration of an export licence for hydrocarbons other than natural gas (i.e. gas, propane, butanes, ethane and oil).
The objective of this amendment is to define “natural gas” in order to support the development of Canadian LNG export facilities by providing LNG exporters with some degree of flexibility in the composition of natural gas to be exported under 40-year licences, but not to allow exporters to export natural gas with a high concentration of natural gas liquids under 40-year licences.
By not making 40-year licences available for exporters wishing to export natural gas with a high concentration of natural gas liquids, Natural Resources Canada (NRCan) is balancing the needs of Canadians and the Canadian industries which rely on natural gas liquids with the objective of supporting the development of Canadian LNG export facilities.
The Regulations are amended to specify that “natural gas” consists of at least 85% methane, meaning the concentration of methane can be higher, but not lower than 85%. The balance can consist of other hydrocarbons in a gaseous state, as well as minor amounts of non-hydrocarbon gas and impurities. These are generally present in natural gas.
After considering typical natural gas pipeline specifications which dictate the properties of the natural gas that can be shipped on the pipeline (i.e. energy content, amount of impurities such as carbon dioxide and hydrogen sulphide) and the composition of LNG that is exported by other countries currently exporting LNG (for example Qatar, Malaysia and Australia, who were the largest exporters in 2014), NRCan and the NEB determined that 85% methane is a reasonable threshold that would provide exporters with flexibility with respect to the composition of the natural gas to be exported, but also provide assurances that large amounts of natural gas liquids would not be exported under 40-year licences.
Natural gas liquids are often removed from the gas stream at processing facilities and are used in the petrochemical industry, for space heating, or by oil refineries for the production of refined petroleum products, such as gasoline. Any person wishing to export natural gas liquids such as ethane, propane or butane may still apply to the NEB for a short-term order or a licence of up to 25 years.
The Asia-Pacific market is calibrated for LNG imports with a higher concentration of natural gas liquids than in the North American domestic natural gas market. Setting the threshold at the lower end of the spectrum puts Canada in a good position to serve principal LNG import markets.
Existing holders of gas export licences of up to 25 years can retain their existing licences or could apply to the NEB for a natural gas licence of up to 40 years.
Current applicants would have the opportunity to amend their application for consideration of a longer-term licence, or could choose to continue with consideration for the term applied for in their current application.
In either case, applicants must demonstrate to the NEB that the gas proposed to be exported does not exceed the surplus remaining after due allowance has been made for the reasonably forecast requirements for use in Canada, having regard to the trends in the discovery of gas in Canada. This criteria is stipulated in section 118 of the NEB Act.
Export authorizations that were previously available will continue to be available. That is, exporters can continue to apply for export orders and/or licences for gas, natural gas liquids and oil, as they have in the past.
The NEB will retain its authority to determine the duration of export licences on a case-by-case basis.
Adding a definition to the Regulations will not result in any incremental increase or decrease in administrative burden being imposed on businesses; therefore, the “One-for-One” Rule does not apply.
Small business lens
It is predominantly large companies who apply for authorizations to export natural gas. This amendment is not expected to increase compliance or administrative costs on small businesses. As a result, the small business lens does not apply.
On June 29, 2015, the NEB posted a letter to its Web site initiating a 30-day public comment period on the proposed amendment. The NEB also sent letters to existing licence holders, current applicants, all provincial governments, and key industry associations. In addition, NRCan sent a copy of the NEB’s consultation letter to potentially interested First Nations groups in British Columbia on July 13, 2015. NRCan conducted in-person or telephone consultation meetings with key industry associations, companies and the Government of British Columbia in July 2015. The NEB supported NRCan in all in-person meetings.
The above-mentioned letter, posted to the NEB’s Web site and sent to stakeholders described the amendment to the Regulations as adding a definition of “natural gas” and a new section in the Regulations that would list the filing requirements for these new licences, as well as the terms and conditions that the Board may impose on them. However, through further consideration, it was determined that the filing requirements for these new licences, as well as the terms and conditions can be better articulated through NEB guidance materials.
For example, on July 11, 2012, the NEB issued guidance on filing requirements for oil and gas export applications following the royal assent of the Jobs, Growth and Long-term Prosperity Act of 2012, which amended the criteria that the NEB uses to evaluate an oil or gas export licence application (section 118 of the NEB Act). These guidance materials are an interim measure while the NEB develops regulatory amendments to update the Regulations to reflect the aforementioned changes to the NEB Act.
During in-person and telephone consultations, stakeholders expressed support for the proposed changes and did not identify any major issues. Moreover, most LNG export proponents indicated their support for timely implementation of the amendment. Stakeholders commented that a definition of natural gas based on 85% methane would provide enough flexibility to meet the needs of LNG importers.
Five letters of comment were received from LNG export project proponents and a pipeline company. Comments included expressions of support for timely implementation of the amendment; requests to refrain from specifying a methane content in the definition of natural gas, or to adopt provincial definitions of natural gas into the Regulations; requests to automatically extend existing export licences to 40 years, or to create a streamlined approach to allowing existing licence holders to apply for extensions to 40 years; and concerns from existing licence holders and current applicants over the costs of commissioning reports to support applications for 40-year export licences. The pipeline company also indicated that not all gas exported to the United States. through its pipeline will meet the definition of “natural gas,” as it is liquids-rich, and thus some marketers transporting gas through its pipeline may not be able to use the 40-year natural gas export licences.
The objective of this amendment is to support the development of Canadian LNG export facilities, not to allow exporters to export natural gas with a high concentration of natural gas liquids under 40-year licences. Specifying a minimum amount of methane required for exports of natural gas under licences of up to 40 years is considered the optimal way to achieve this objective. Short-term gas export orders and gas export licences of up to 25 years remain unchanged and are still available for exports which fall under the broader definition of “gas.” Exports of natural gas liquids may also be authorized under short-term export orders or export licences of up to 25 years. Referencing provincial definitions in the Regulations would not be suitable in this instance, as provinces have varying definitions of natural gas.
With respect to stakeholders’ desire to see existing 25-year licences be automatically extended to 40 years, section 118 of the NEB Act requires that applicants demonstrate that the quantity of gas proposed to be exported is surplus to Canadian requirements, taking into account trends in the discovery of gas in Canada. The duration of the proposed exports has an impact on the NEB’s assessment of whether the surplus criterion has been satisfied. The NEB Act does not provide the authority to automatically extend the term of a licence that has been issued by the NEB.
This regulatory amendment does not change the filing requirements for export licence applications; this will be addressed through a future amendment. However, comments concerning the application filing requirements and the terms and conditions of licences will be taken into consideration by the NEB prior to issuing guidance. With respect to the concern over costs of commissioning additional studies to apply for a 40-year licence, the NEB’s existing Filing Manual advises applicants that the filing requirements pertaining to the surplus criterion are not prescriptive and can be met in a variety of ways, including lower-cost options. For example, industry could collaborate on studies to meet the filing requirements of multiple applications.
As a result of consultations, the definition of “natural gas” was changed to specify that the “other hydrocarbons” that may be contained in “natural gas” must be in a gaseous state at a temperature of 15°C and an absolute pressure of 101.325 kPa.
Canadian LNG export projects are competing with proposed projects on an international scale, and have a narrow window of opportunity to make final investment decisions. As LNG export projects are capital-intensive and often operate for many decades, proponents seek long-term export licences to underpin project economics. LNG export facilities are built with an expected lifespan of at least 25 years, but generally operate much longer. Many LNG export facilities built around the world in the 1970’s and 1980’s remain in operation today.
This amendment operationalizes a Budget 2015 commitment of extending the maximum term of natural gas export licences to 40 years, up from 25 years, subject to Governor in Council approval. It is expected that this will improve regulatory certainty and support the creation of an LNG export industry in Canada by increasing Canada’s competitive advantage vis-à-vis competing jurisdictions. This initiative will support the development of this industry by assuring investors in Canadian LNG that the Government of Canada is committed to allowing long-term exports of LNG, consistent with the expected life cycle of capital investments in this industry.
The definition of natural gas is not expected to impose any costs on businesses. Applicants can continue to apply for export licences of 25 years or less, as previously allowed. In addition, most gas exports are authorized under short-term export orders, which are not affected by this amendment.
The NEB currently receives and reviews applications for export licences of up to 25 years; the ability to accept and review natural gas export licences of up to 40 years would not result in any additional costs to the NEB.
Implementation, enforcement and service standards
These Regulations come into force on the day on which they are registered.
This amendment allows the NEB to consider natural gas export licence applications requesting a term of longer than 25 years (i.e. up to a maximum term of 40 years, as stipulated by the NEB Act). It does not enable any other changes.
Pipelines, Gas, and LNG Division
Petroleum Resources Branch
580 Booth Street