Canadian Energy Law : Lawyers & Attorneys for Environmental Energy Law

This morning, the Ontario Power Authority announced contract offers for 40 large scale renewable energy projects under the Feed-In Tariff Program, representing over 872 megawatts of renewable power.

Although only four of the contracts offered are for on-shore wind projects, on-shore wind is the energy source for over 70% of the capacity offered.  Thirty-five solar projects (33 groundmount and two 500kW rooftop) represent over 29% of the capacity. A single water-power project of 500 kW makes up the balance. By region, 49% of the capacity is in the central region, 22% in the east and 28% in Niagara.

The announcement reflects the long anticipated results of the OPA’s transmission and distribution availability tests (so called TAT and DAT). Contract offers for smaller capacity allocation exempt(or CAE) projects are expected to follow over the coming weeks.

The list of contracts offered is available from the OPA FIT website.

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The Alberta government announced that it will be directing a portion of the province's oil sands production to a proposed $5 billion upgrader that is scheduled to be completed by 2014. The upgrader is a joint venture between North West Upgrading Inc. and Canadian Natural Resources Ltd. The government will supply 37,500 barrels of bitumen per day to the proposed upgrader, which bitumen will be obtained by the government from production royalties it will collect from oil sands companies. In addition, Canadian Natural Resources Ltd. will supply 12,500 barrels of bitumen per day to the facility.

Alberta presently has a handful of upgraders that refine bitumen into crude, but the proposed upgrader will be the first to refine bitumen into a producing diesel fuel. The upgrader will also capture about 3,000 tonnes of carbon dioxide per day, which will be used for enhanced oil recovery in conventional oil fields.

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In Bearspaw Petroleum Ltd. v. EnCana Corporation, the Alberta Court of Appeal upheld a trial court's interpretation of "producible" to mean, in the context of an oil and gas lease's habendum clause, hydrocarbons which are capable of being produced "with no more to be done than turning on a valve."

For a lease where the term endures "so long thereafter as the leased substances or any of them are producible from the leased area," it is sufficient if the lessee has drilled a well that is capable of producing hydrocarbons. The ordinary and natural meaning of the word "producible" does not require immediate commercial production or a pipeline tie-in to market as a condition for the lease's continuation.

The Court of Appeal distinguished this case from Freyburg v. Fletcher Challenge Oil and Gas Inc., where the term of the lease depended upon the leased substances being "produced" rather than "producible." The Freyburg case outlined policy considerations in favour of the strict construction of habendum clauses, including the desire of lessors to have wells produce as soon as possible to generate royalty income.

Nevertheless, the Court of Appeal held that the policy concerns in Freyburg do not preclude parties to a lease from choosing its duration on a basis other than that of immediate production, which is what occurred through the use of the word "producible" rather than "produced."

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In Smith v. Alliance Pipeline Ltd., the Supreme Court of Canada upheld a Pipeline Arbitration Committee (Committee)'s award of costs for the proceedings before it, as well as the costs incurred by a landowner in prior arbitration proceedings and a related Alberta Court of Queen's Bench action.

The case arose from a dispute regarding compensation to a landowner for reclamation work that he completed, but which a pipeline company was obligated to perform. The dispute, which continued for over ten years, resulted in two Pipeline Arbitration Committee proceedings and a discontinued Queen's Bench action that was commenced by the pipeline company.

The Committee determined that the costs from the other proceedings "all related to a single claim for compensation in respect of a single expropriation by a single expropriating party." The SCC held that this was a reasonable interpretation and exercise of Section 99(1) of the National Energy Board Act (NEBA), a provision that requires an expropriating company to pay all "legal, appraisal and other costs" reasonably incurred by a party in asserting their claim for compensation.

Writing for the unanimous court (with concurring reasons also written by Madam Justice Deschamps), Justice Fish mentioned that the Committee's decision was consistent with Section 75 of NEBA, which expresses the principle that parties should be made "economically whole" for all damages sustained by reason of expropriation.

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The Ontario government announced on Friday that the province will not proceed with any proposed offshore wind projects until further scientific research is completed. The press release circulated mid-Friday afternoon noted that no renewable energy approvals for offshore projects have been issued to date, no new applications for offshore wind projects under the OPA’s FIT program will be accepted and current applications for such projects will be suspended.

To date only one off-shore wind project has been granted a FIT contract, although without the necessary renewable energy approval from the Ministry of Environment, the project will be unable to meet its obligations under such contract. Three additional off-shore wind projects are listed as awaiting connection tests under the FIT program; today’s announcement will see such applications suspended.

This announcement comes as the Ontario government is attempting to balance its commitment to renewable energy in the face of increasing public criticism of wind energy projects related to health and safety and environmental concerns.

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In the face of increasing force majeure claims arising from delays related to obtaining renewable energy approvals and necessary connection approvals, the OPA announced yesterday that it will be offering one year extensions of the milestone date for commercial operation to all FIT counterparties who have not yet reached commercial operation. The one-year extension will not affect domestic content requirements, meaning that solar projects meeting the 50% domestic content level and wind projects meeting the 25% domestic content level will be permitted to be constructed throughout 2011. It is unclear how this extension will apply to capacity-allocation exemption projects, which had the applicable milestone date for commercial operation pushed out by four months last year.

The extensions will be implemented through FIT contract amendments, which will include a waiver by the supplier of certain force majeure rights. The OPA has indicated that it will be contacting FIT counterparties directly via email with the extension offer and further details on the associated amendment.

The announcement, along with a frequently asked questions summary, can be found on the OPA’s website.

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Despite a consistent rise in Canadian oil shipped overseas in the last few years, less than 2 per cent of all Canadian crude exports are delivered to destinations other than the United States.  A lack of sufficient infrastructure is to blame.  However, Asian markets may soon assume a greater share of Canadian production if various projects come online to raise transport capacity to the West Coast of Canada. 

In the last month, pipeline and railway players have made the following announcements:

• Enbridge’s Northern Gateway pipeline received a $100 million injection from a corsortium that included China Petroleum & Chemical Corp., also known as Sinopec, to help the $5.5 billion pipeline get through the regulatory approval process. If approved, Northern Gateway will transport up to 525,000 barrels per day and may commence deliveries as early as 2016.
• Kinder Morgan plans to construct an 80,000 barrel-per-day expansion to its TransMountain pipeline that runs from Edmonton, Alberta to Burnaby, B.C. Kinder Morgan intends to accept open season bids for shipping commitments later this year, and may complete its expansion project by 2014 to 2015.
• Canadian National Railway Co. confirmed that it is in early discussions with Canadian oil producers and Chinese companies to ship oil via railway from Saskatchewan and Alberta to yet-to-be-determined West Coast tanker ports. 
• There are also reports that Canadian Pacific Railway Ltd. is working on a similar proposal for a “pipeline on rail” to the West Coast.

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The government of the United Kingdom announced today that they are launching a review of their current Feed in Tariffs (FITs) program. This review comes less than a year after the launch of the FITs program and follows concerns that commercial-scale solar farms are accessing money that was meant to help homes, communities and small businesses generate their own electricity.  The FITs program is restricted to projects of 5 MWs or less and was intended to encourage small scale installations with price tariffs for projects as small as 1.5kW.  Into its first year, already more than 21,000 installations have been registered under the FITs program, with the majority being domestic solar photovoltaic installations. The total installations under the FIT program have a combined capacity of 76.66MW. 

The review is also part of the UK government's commitment to reduce the costs of FITs in 2014-2015 by 10%. Initially, FITs was scheduled for a review to commence in 2012 but the concern over large-scale solar farms and the need to give industry added certainty to invest prompted the government to begin the review early.  The review is expected to be completed by the end of the year and tariffs are expected to remain unchanged until April 2012. Click here for more information on the review and the FITs program.

The UK government's response is similar in principal to that of the Ontario Power Authority's announcement last week for commercial aggregators under the microFIT program. Governments appear to be increasingly aware of the commercial incentives to small-scale renewable generation projects when done in large numbers and are attempting to create programs that balance the overall goals of a Feed in Tariff system with commercial realities.

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On February 1, 2011, the OPA released much anticipated draft rules and a proposed contract for commercial aggregators under the microFIT program (available to 10 kW or less projects).  This group of renewable energy generators, being businesses that lease land or rooftops from individuals for multiple small renewable energy generation projects, has been shut out of the FIT/microFIT program since last fall, when the OPA announced size and applicant restrictions in both the FIT and microFIT rules. 

The proposed C-FIT program includes more commercial terms, including secured lender provisions similar to those under the FIT program, than those available to microFIT generators.  The proposed contract remains simplistic and does not include all standard commercial terms, including assignment and change of control provisions, but is still viewed as many as being critical in making such projects financeable.  Interestingly, the OPA has restricted its own assignment right – limited to entities that have a credit rating not lower than that of the OPA at the time of such assignment.  This provision is an attempt to address lenders’ concerns regarding the strength of the payment covenant following an assignment of these contracts.  This proposal would make the C-FIT contract more onerous than the FIT contract in terms of the OPA’s assignment rights.

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In a recent case decided in the Superior Court of California, Association of Irritated Residents vs. California Air Resources Board et al, a San Francisco County judge made a tentative ruling against the California Air Resources Board (CARB) ordering CARB to postpone the implementation of regulations to reduce greenhouse gas emissions, including the creation of a cap-and-trade system. The judge ruled that CARB failed to properly consider alternatives to a cap-and-trade system and that alternatives should have been presented to the public for comment. If the ruling is finalized, it could impact both future and existing greenhouse gas regulation in California. Pursuant to the rules governing court proceedings in California, both sides have 15 days from January 21, 2011, the date of judgement, to file objections to be considered by the Court prior to the issuance of the final order. For more information on the proposed California cap-and-trade program, please see our earlier blog post.

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On January 27, 2011, a three-member Joint Review Panel established by the federal Minister of Environment and the Alberta Energy Resources Conservation Board ("ERCB") released its Report on a review of TOTAL E&P Joslyn Ltd. ("TOTAL")'s Joslyn North Mine Project, a proposed oil sands surface mine that would begin production in 2017.

The Joint Review Panel expressed an intention to approve TOTAL's application subject to twenty conditions that pertain to environmental benchmarks, monitoring and planning, among other requirements.  The conditions include submissions of a detailed tailings management plan two years prior to commencing operations to demonstrate TOTAL's ability to meet all of the requirements of ERCB Directive 074.

Starting 2012 onward, Directive 074 states that mining operators must capture 50 per cent of their annual production of "fines" suspended in tailings.  It is interesting that recent tailings management plans submitted by current oil sands mining operators have been approved despite not meeting the criteria established by Directive 074.

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The Alberta Court of Appeal recently denied an application by Celtic Exploration Ltd. ("Celtic") for leave to appeal a decision from a Companies’ Creditors Arrangements Act (Canada) ("CCAA") proceeding involving Celtic and SemCAMS ULC ("SemCAMS"). The CCAA court found that the parties’ gas purchase agreement had been suspended as of July 2008, and as a result, Celtic could not set off amounts it owed to SemCAMS after that date against indebtedness arising under the agreement.

SemCAMS is the operator and joint owner of natural gas processing plants and related gas gathering lines in Alberta.

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