On February 26, 2016, the bulk of the offshore-related amendments of the Energy Safety and Security Act (ESSA, formerly known as Bill C-22) take effect. ESSA significantly changes the regulatory regime in the Atlantic offshore and North oil and gas sector – and ultimately creates a tougher liability regime for environmental damage in these areas.

The federal government introduced ESSA, then known as Bill C-22, on January 30, 2014 (to learn more about Bill C-22 as it was introduced, read McInnes Cooper’s Legal Update: Feds Propose Energy Safety & Security Act – and Toughen Up Atlantic Offshore & North Oil & Gas Regimes) and  passed it on February 26, 2015. ESSA achieves the changes to the offshore petroleum regulatory regime through amendments to the Canada Oil and Gas Operations Act (COGOA), the Canada-Newfoundland Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (the Accord Acts) (altogether the Acts).

Here are the seven key changes to the Atlantic offshore and North petroleum regulatory regime under ESSA that will impact companies with existing and prospective interests on February 26, 2016.

1. “Polluter Pays” principle of accountability

One of the express purposes of ESSA’s operations provisions is the promotion of “accountability in accordance with the ‘polluter pays’ principle”. This may result in a stricter application of the Acts, particularly in light of the changes to the financial requirements provisions; while the polluter pays principle was implicit in the previous legislation, courts will have to consider this express new purpose in prosecutions or civil claims for pollution.

2. Higher limits on no-fault, absolute liability for spills

The most important change for many industry participants is the increased amount and range of potential liability for environmental damages under ESSA. Many typical offshore contracts allocate liability through “knock-for-knock” provisions in which each party will bear the cost of any damage or loss it suffers, regardless of the other party’s fault; careful drafting of these clauses will become even more important under ESSA.

Higher limits on no-fault, absolute liability. Although at-fault liability for damages in the event of a spill or debris remains unlimited under ESSA, the limit for no-fault, absolute liability is significantly higher. Without proof of any fault, the liability limits applicable to any person required to obtain an authorization will increase:

• From $30M to $1B for the NS and NL offshore areas under the Accord Acts.
• From $40M to $1B for Arctic waters under COGOA.

The Acts will also now allow these limits to be increased by regulation, making it easier and faster to increase them further in the future.

Expanded range of liability. ESSA also expands the types of damages for which operators can be liable. Whether at-fault or no-fault, an operator is liable for:

• All actual loss or damage as result of a spill or debris or as a result of any action or measure taken in relation to a spill or debris.

• Costs and expenses the government or any other person incurred in taking any action or measure in relation to the spill or debris.

• All loss of non-use value relating to a public resource affected by a spill or debris or as a result of any action or measure taken in relation to the spill or debris. The claim for loss of non-use value damages is relatively novel in the offshore context but in practice, it will likely be quite restricted: non-use value claims are actionable only by the Crown and aren’t available to private parties; the regulator isn’t required to consider the value when determining financial resources requirements (discussed below); and such claims are accorded last priority.

Vicarious Liability. Operators will also be vicariously liable for losses caused by the conduct of their contractors and subcontractors in relation to spills or debris.

3. More stringent Financial Resources & Financial Responsibility requirements

Operators will now also have to prove they have the financial wherewithal to cover the significant increase in their liability exposure for environmental damage. The new limits aren’t extraordinarily high in the global offshore context, and are unlikely to deter the major industry participants from investing in exploration and development. But they may make it more difficult for smaller industry participants to operate in the Canadian offshore – particularly in the current economic climate.

Greater financial resources. Operators must still provide proof of financial responsibility (unfettered access to funds) – but the extent of the financial resources they must prove is significantly higher. Currently, an operator must provide the applicable Board with proof of financial responsibility in an amount satisfactory to the Board; it doesn’t, however, have to prove it has the financial resources to satisfy the absolute liability limit, although in practice, the security required under the current $30M cap may do so. For activities other than drilling, development and production, the amount will still be determined by the Board; but for applicants for drilling, development and production authorizations, things will change – a lot:

• The amount will be fixed at $100M or a greater amount that the Board determines if it considers it necessary.
• In addition, an operator will now also have to provide proof that it has financial resources necessary to pay the greatest of the absolute liability limits in the applicable Act – which in the Atlantic offshore will be $1B.

The Boards will also have discretion to recommend that proof of financial resources be in a lesser amount than the liability cap. The proof must remain in force for the duration of the work or activity and, unless the Board decides otherwise, for one year after the Board is notified that the last well in respect of which the authorization was issued is abandoned.

Form of proof TBA. New financial requirements regulations will ultimately set out the form of proof required. These regulations are currently published in draft form in the Canada Gazette; if passed, they will require the applicant to provide a statement of net assets or of funding arrangements that demonstrates, to the Board’s satisfaction, it is able to pay the applicable amount. The statement will also have to be accompanied by one or more of the following “substantiating documents”: the most recent audited annual financial statement and, if available, a current credit rating; a promissory note; an insurance policy or a certificate of insurance; an escrow agreement; a letter of credit; a line of credit agreement with funds available; a guarantee agreement; a security bond; a pledge agreement; an indemnity bond; or suretyship agreement.

Pooled funds option. A Board may alternatively accept proof that the applicant is a participant in a pooled fund established by the oil and gas industry, maintained at a minimum of $250 million, and meeting any other requirements that may be established by regulation. The form of the pooled fund will largely be left to industry, with minimum requirements set out in the financial requirements regulations.

4. CEAA environmental assessments by Boards

The CNSOPB and the CNLOPB will be “responsible authorities” under the Canadian Environmental Assessment Act, 2012 (CEAA), and responsibility for conducting federal environmental assessments (EAs) for offshore activities will be transferred from the Canadian Environmental Assessment Agency to the Boards. The federal government’s stated impetus for this change is to reduce the number of regulators necessary for project approval and to allow the regulator most closely connected with a project to conduct EAs. It’s not clear, however, that the Boards themselves wanted this increased responsibility. In particular, they have little experience with the quasi-judicial roles and public hearings that larger EAs will undoubtedly require, and neither Board is currently staffed or resourced for such tasks.

Currently, the Canadian Environmental Assessment Agency conducts CEAA EAs for offshore activities and the Accord Acts don’t enable the Boards to conduct public hearings, a precondition for EA responsibility under CEAA. ESSA will enable the Boards to hold public hearings, while draft regulations made under CEAA will designate the Boards as “responsible authorities.” These regulations (currently published in the Canada Gazette) will transfer responsibility for EAs to the Boards. The respective Board’s responsibility for EAs will be triggered where the physical activity (including any incidental physical activity) meets all of the following criteria:

• It’s carried out in the offshore area.
• It’s designated by regulations or in an order made under CEAA.
• It’s one for which the Board is the responsible authority under CEAA.
• It’s one in relation to which an EA wasn’t referred to a review panel under CEAA.

Skeletal process. The new EA provisions are skeletal and the Boards will have to put flesh on them, but neither has yet indicated what its EA process will look like. ESSA includes the following basic processes:

• The CEAA process will be the “EA by a Responsible Authority”.
• Public notice and consultation are required.
• The Boards must issue decisions within 12 months from the date of the completed application.
• If a Board requires an applicant to provide information or undertake a study, the time the applicant takes to comply with the requirements won’t be included in the 12-month period.
• The Boards may institute a Participant Funding Program to facilitate public participation in the EA.
• The Boards may recover their costs of these public hearings.

There may be some real differences between CNSPOPB and CNLOPB in light of their varied activity levels and past experience with EAs, but some consistencies can be expected. It’s not clear when the Boards will release their plans for EAs; a number of competing activities at the Boards, such as the Frontier and Offshore Regulatory Renewal Initiative (“FORRI”, a joint initiative of government and the NEB, CNLOPB and CNSOPB in which all operations-related regulations made under Part III of the Accord Acts and COGOA will be updated) and the need to create permanent occupational health and safety regulations, may be taking precedence over planning for the EA role. The Boards’ efforts and resources are probably focused on these initiatives, and offshore activities don’t compel immediate action, at least in Nova Scotia: BP’s exploratory drilling program is planned for 2017, while Shell’s Shelburne Basin project is under CEAA Agency responsibility.

Public consultation approaches. The CEAA’s “EA by a Responsible Authority” process requires public consultation but neither CEAA nor the Accord Acts post-ESSA expressly mandates public hearings; the bulk of ESSA’s provisions on hearings relate to the disclosure of confidential information. The Boards’ past experiences will likely shape how consultation takes place and when hearings occur. For example, the CNSOPB, given its experience and size, will probably be inclined to avoid an onerous NEB-type process and prefer consultation by written submissions. Funding written consultation, which the CEAA Agency currently does, could ease public calls for full oral hearings. The Boards may be able to foster this approach through the development of Participant Funding Programs, which CEAA requires and ESSA will permit the Boards to develop. However, it will be difficult to resist public calls for oral hearings once a proponent seeks authorization for major designated activities and the Boards have the power to hold oral hearings.

Broader information disclosure. ESSA gives the Boards broader authority to disclose confidential information by making significant amendments to the Accord Acts and COGOA provisions governing disclosure of information submitted to them. Currently, information submitted to the Board is “privileged” and the Boards can’t disclose it without the submitting party’s written consent (although some information, such as seismic or other geophysical data, is only privileged for a certain time period, after which the Boards may disclose it). Post-ESSA, however, the Boards will be able to disclose a broader range of information:

• Certain information to domestic and foreign governments and agencies for the purposes of laws dealing with a petroleum-related work or activity. The receiving party must undertake to keep the information confidential and they must make disclosure in accordance with any agreed-to conditions. Disclosure to a foreign government or agency will require written approval of the federal Minister of Natural Resources or corresponding provincial minister.

• Information relating to safety or environmental protection to the public, including information provided in relation to a licensing application or an authorization request, if the Board is satisfied the public interest in disclosure outweighs the associated risks. The Board must give the supplier of the information notice of its intention to disclose; the information supplier then has 20 days to make written submissions objecting and, if the Board still decides to disclose, 20 days to apply for judicial review of the Board’s decision.

There is some uncertainty around certain of the Acts’ disclosure provisions because of ongoing substantial litigation by a single seismic operator claiming that seismic data it submitted to the NEB and the Boards can’t be disclosed. Interestingly, the ESSA amendments don’t clarify the currently contested disclosure provisions, so the uncertainty this litigation is causing will be left to the courts to resolve.

5. Firmer footing for cost recovery powers

ESSA also puts the Boards’ ability to recover their costs from industry participants on firmer legal footing by providing a regulation-making power with respect to cost recovery. Currently, compliance with the Boards’ cost recovery guidelines is a condition of Board authorizations. Draft regulations currently published in the Canada Gazette mandate four cost recovery methods: regulatory activity plans for larger, complex projects; formula fees for smaller projects; direct billing for full regulator costs of requested procedures; and set geodata centre fees. The approach will be the same across the NEB, CNLOPB and CNSOPB, but the fee variables and coefficients will differ.

6. Stronger enforcement powers and tougher consequences

ESSA will add a deterrent component to the Acts by increasing the Boards’ enforcement powers and providing for a wider – and tougher – array of sanctions.

Stronger enforcement powers. Boards will have the power under ESSA to directly issue administrative monetary penalties (AMPs) for violations of the regulations, in addition to their current authority to require operators to take certain safety measures or action to prevent waste of petroleum resources. Administrative monetary penalties, already a familiar feature in other federal regulatory contexts, are intended to promote regulatory compliance rather than to punish – so the Boards will also be permitted to “name and shame” by publicizing the offender’s name, the nature of the violation, and the amount of the penalty imposed.

Restricted defences. The Acts will severely restrict the defences available to persons or companies cited for violations under the AMP regime by expressly removing the common law defences of due diligence and mistake of fact.

Directors’ personal liability. Corporate directors, officers and agents will also now be exposed to personal liability if they assented to, authorized or acquiesced in the violation. The maximum penalty will be $100,000 for a corporation will be $100,000 and $25,000 for individuals.

Tougher consequences. A wide range of additional sentencing options will join those currently available for regulatory offences under the Acts. Currently, regulatory offences under the Acts are punishable:

• If convicted on summary proceeding, by a fine of up to $100,000, imprisonment for up to a year, or both.
• If convicted on indictment, by a fine of up to $1M, imprisonment for up to five years, or both.

Post-ESSA, courts can make additional orders against offenders. Perhaps most significantly from an operator’s commercial perspective, a court can effectively bar an operator from the offshore jurisdiction by prohibiting it from applying for any further interest, license or authorization for any period of time the court sees fit. Other orders a court can make include requiring the offender to:

• Monitor, or pay to monitor, environmental effects from the offence.
• Make changes to its environment management system.
• Undergo an environmental audit.
• Pay an “amount that the court considers appropriate” into the Environmental Damages Fund or to the federal government.
• Publish the facts underlying the offence and the punishment.
• Post a bond or pay into court security to ensure compliance.
• Perform community service.
• Pay money to “environmental, health, or other groups”.
• Pay money to an educational institution.

Courts must also consider the new enumerated “aggravating factors” when sentencing companies convicted of regulatory offences, including whether the offence caused damage or risk of damage to the environment or to “any unique, rare, particularly important or vulnerable component of the environment.”

7. Pre-authorized Use of Spill-Treating Agents

ESSA allows the Boards to “pre-authorize” an operator to use spill-treating agents when it applies for authorizations to work in the offshore. This, at the least, increases the response options available to operators in the unfortunate event of a spill. Boards must consider whether using the agent would result in “a net environmental benefit” considering the factors prescribed by regulation and any others they deem appropriate.

Operators that have obtained the Chief Conservation Officer’s approval to use a spill-treating agent will be excused from liability under certain federal statutes for harms caused by its use, so long as it used the agent in accordance with the approval and any relevant regulations; they will not, however, be excused from harm caused by either a spill itself or the interaction between the agent and the pollutant.

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Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Energy & Natural Resources Team to discuss this topic or any other legal issue.