Canadian Energy Law : Lawyers & Attorneys for Environmental Energy Law

Lewis Smith

Shell Canada Limited has been awarded exploration rights by the Canada-Nova Scotia Offshore Petroleum Board on four parcels of offshore lands located approximately 200 kilometers off the southwest shore of Nova Scotia. The area is largely unexplored, but recent geological work funded by the Province of Nova Scotia indicates it has significant oil and gas potential. Government officials have credited this work, the results of which were publicly released, with creating renewed interest in offshore exploration in the region. The Shell Canada initiative will be the first major exploration project in the province in ten years. 

Shell Canada’s bid commits it to spend a total of $970 million on exploration activities during the first six years of its nine year licence. These expenditure bids are the highest ever received by CNSOPB. A deposit of 25 percent of the bid amount will be required to secure Shell’s commitment.

The awards were based solely on the amount of money committed to exploration of each parcel. Bidders were required to demonstrate experience drilling deep-water exploration wells in the last ten years. Four other parcels included in the process received no bids. 

CNSOPB’s next call for bids will be issued in May 2012. Industry members may nominate parcels to be included in this round until March 16, 2012.

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On Wednesday May 11, 2011, Charlie Parker, Minister of Energy for Nova Scotia announced the results of the Play Fairway Analysis, a study into the offshore resources of Nova Scotia. The government invested in the study in order to develop an industry standard picture of Nova Scotia’s offshore geology.

According to the study, there are more than 3.3 trillion cubic meters of natural gas and 8 billion barrels of oil sitting offshore Nova Scotia. According to the minister, over the next several months the department will be marketing the study to oil and gas companies in the hope of gaining interest in a call for bids that will occur in the near future.
 

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On Wednesday May 11, 2011, the United States House of Representatives advanced two bills that would accelerate offshore oil and gas drilling. The first of two bills would give the Federal Bureau of Ocean Energy Management, Regulation and Enforcement a maximum of sixty days to approve or reject applications for offshore drilling permits. If the board fails to make a decision within the time frame, the legislation automatically deems the permit application to be approved.
 
The second bill relates to forcing the federal government to sell drilling leases in waters off the coast of California and much of the Atlantic coast. Neither measure is expected to advance in the Senate as the Obama administration, as well as congressional democrats have voiced there opposition to the passing of such legislation.

The bills attempt to address the continued debate surrounding the cause of and solution to high gasoline prices in the United States. Supporters of the house bill argue the legislation would have the effect of eventually lowering oil prices by ensuring more crude oil supplies are tapped domestically.
 

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Following the Deepwater Horizon Macondo incident, the British Petroleum blowout in the Gulf of Mexico, the government of Newfoundland and Labrador commissioned an independent study into the preparedness and ability of provincial agencies to respond to an off-shore crisis. Captain Mark Turner, an expert in marine safety and environmental management, was retained to assess the current regulatory framework and the ability of the province to respond to an incident.

Among the recommendations of the study, the report suggests the need to increase the liability cap on compensation in the event of a spill or blowout from the current Canadian law limits on liability for damages from a spill of $40 million for Arctic water and $30 million for spills on the eastern coast. The report also advocates for the inclusion of regular audits performed by independent third parties in order to add transparency to internal findings of the regulators. Furthermore, the report recommended the need for the Canada-Newfoundland and Labrador Offshore Petroleum Board to design more detailed strategies aimed specifically at blow-outs, and advocated for a “Total System” approach to blowout control, management response and recovery.

Newfoundland & Labrador Natural Resource Minister Shawn Skinner said the government supports all of the recommendations and is prepared to work with the other provincial and federal agencies that share responsibility for the oversight of off-shore drilling and production activities.
 

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Quebec and the Federal Government have entered an agreement to give the province 100 per cent of the oil and gas royalties from the portion of the Old Harry formation that lies within the province’s undersea boundary in the Gulf of St. Lawrence.

The Old Harry formation, which may contain up to 2 billion barrels of oil, straddles between the undersea boundaries of Quebec and Newfoundland & Labrador. The agreement relies on the 1964 undersea boundary between the two provinces. Quebec Premier Jean Charest indicated the agreement contains an arbitration clause to deal with potential boundary disputes.

Quebec is under a self-imposed moratorium on offshore drilling until 2012, and will continue its course despite the signing of the agreement.
 

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The White House Council on Environmental Quality (“CEQ”) released a report which reviewed the permitting policies of the federal agency responsible for oil and gas offshore leases.

Under the National Environmental Policy Act (“NEPA”), all federal agencies must consider the environmental impacts of their proposed actions, and follow NEPA implementation Regulations created by the CEQ.

NEPA procedures may include:

1. An Environmental Assessment (“EA”) to determine whether an Environmental Impact Statement is necessary;
2. An Environmental Impact Statement (“EIS”) for proposed actions that may create significant environmental impacts; or
3. A Categorical Exclusion (“CE“) for activities that are determined through a public process not to raise environmental issues or concerns which would require analysis in an EA or an EIS.

The CEQ’s NEPA Regulations allows agencies to “tier” their analyses by “incorporating by reference” information, findings, and recommendations from existing studies into subsequent NEPA analyses and documents.

The Minerals Management Service, recently renamed the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEM”), relies on “tiering” in the approval of offshore drilling Exploration Plans.

The Minerals Management Service uses the analysis performed at the leasing program level to carry the information forward to the individual lease-level. Since the Deepwater Horizon incident, the CEQ report now recommends that the BOEM refrain from tiering in a way that limits site-specific analysis, “despite the availability of major, prior environmental reviews and studies.”

The CEQ report also recommends the BOEM review the use of CEs for offshore Exploration Plans. Establishing a CE requires that a categorized action has neither individual nor cumulative significant effects on the environment, and that there are no extraordinary circumstances which would preclude the use of a CE.

Going forward, the BOEM will review its interpretation of the threshold requirement for “extraordinary circumstances,” which will likely lead to an increase in the number of leases that are subject to additional environmental reviews prior to approval.

To accommodate the increase in EAs and EISs, the CEQ also seeks to amend the Outer Continental Shield Lands Act to provide more time for the BOEM to conduct environmental reviews. Currently, the BOEM must make its decision whether to approve a submitted Exploration Plan within 30 days.

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U.S. offshore operators may soon face expanded liabilities, more stringent rig and well design requirements, vigorous and frequent inspections, and greater civil and criminal penalties in the event of an oil spill. 

On June 30, two Senate Committees separately approved, and advanced to the full Senate, bills that would tighten offshore drilling regulations.

The Senate Energy and Natural Resources Committee’s Bill, S.3516 would separate the Bureau of Ocean Energy Management, Regulation, and Enforcement into two agencies: one responsible for offshore revenue and royalty collection, and the other for licensing, safety and environmental regulation.  

Bill, S.3516 would also include tougher civil and criminal penalties that increase over time with inflation, and would place a levy on operators to fund the hiring and improved training of federal inspectors.

The same day, the Senate Environment and Public Works Committee approved  Bill S.3305 to eliminate the $75 million cap on liability found in the Oil Pollution Act of 1990.  As well, operators would need to submit extensive spill response plans before new drilling applications are approved.

Meanwhile, three Committees in the House of Representatives are working on similar legislation.  The U.S. House Transportation and Infrastructure Committee approved Bill H.R. 5629 that would, with retroactive effect, remove the above mentioned $75 million liability cap, and raise to $1.5 billion the minimum amount of insurance that offshore facilities must hold.  Further, under federal law, operators would be liable for health-related claims associated with oil spills, claims that are currently pursued in State courts.

The U.S. House Energy and Commerce Committee’s proposed Blowout Prevention Act of 2010 would require operators who drill “high-risk wells” (wells located within 200 nautical miles of the U.S., or those onshore where a blowout “could lead to substantial harm to public health and safety or the environment”) to install blowout preventers and obtain independent technical inspection of new rigs before they begin operating.  Rigs would have to be reviewed every six months by third party inspectors, with the possibility of surprise inspections by federal authorities.

The U.S. House Natural Resources Committee will consider its own bill on July 14, written with the intent to improve the transparency and accountability in federal energy regulation. 

Congress’s focus on offshore reform may result in a broad, merged legislation by the end of the Second Session.  Despite support for increased regulation by both parties, Republican critics argue that with open-ended liability and tougher drilling requirements, only the largest offshore operators will be able to shoulder these new costs.

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