Legal Update: Feds Propose Energy Safety & Security Act – and Toughen Up Atlantic Offshore & North Oil & Gas Regimes
February 28, 2014
By Daniel Watt, at McInnes Cooper
On January 30, 2014, the Federal Government introduced the Energy Safety & Security Act (Bill C-22). If the Bill becomes law, it will significantly change the regulatory regime in the Atlantic offshore and North oil and gas sector, creating new opportunities – and risks – for companies with existing or potential interests in the Atlantic offshore:
- Environmental assessments by Boards. The Boards jointly overseeing the Atlantic offshore (the Canada-Nova Scotia Offshore Petroleum Board and the Canada-Newfoundland Offshore Petroleum Board) will be empowered to hold public hearings – making them “responsible authorities” able to conduct environmental assessments under the Canadian Environmental Assessment Act, 2012 (CEAA).
- Spill-treating agents. The Boards can pre-authorize offshore operators to use spill-treating agents.
- No-fault liability. Operators’ liability for no-fault environmental damage is significantly increased – and operators will have to prove they have the financial wherewithal to cover it.
- Penal consequences. The Boards will also be empowered to issue administrative monetary penalties against offshore operators – and companies convicted of regulatory offences will be exposed to tougher sentences:
- Broader disclosure. The Boards can disclose information or documents to foreign and domestic governments and to the public in certain circumstances.
The net effect of the changes: a tougher liability regime for environmental damage by Atlantic offshore and North operators.
The Bill creates a couple of new opportunities to streamline the environmental assessment process and respond if there is a spill:
Environmental Assessments By Boards. The Bill would allow the Boards – the most relevant agencies – to conduct CEAA assessments:
- Responsible Authority. Under the CEAA, designated projects to which a “responsible authority” is referred are subject to environmental assessments. Neither Board is currently a “responsible authority” because they lack the authority and framework to hold public hearings; the Bill provides both.
- Physical Activity. The new assessment process applies to offshore “physical activity”, defined as an activity:
- for which the Board is a responsible authority;
- carried out in the offshore area;
- designated by regulations under the CEAA; and
- where an environmental assessment has not already been referred to a CEAA panel.
- Timing. The Board must conduct its assessment and decide whether the activity is likely to cause significant environmental effects within 12 months of the completed application.
- Confidentiality. The Boards can take measures to ensure the confidentiality of information submitted by offshore operators where it is commercially valuable or there is a real and substantial risk that disclosure would impair the security of pipelines, installations, vessels and other material.
- Cost Recovery. The Board can also impose user fees on authorization applicants or operating license holders in order to recover its costs for environmental assessments.
Spill-Treating Agents. The Bill allows the Boards to “pre-authorize” an operator to use spill-treating agents when it applies for authorizations to work in the offshore:
- Considerations. 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.
- Liability. Operators who have obtained approval from the Chief Conservation Officer to use a spill-treating agent will be excused from liability under certain federal statutes for harms caused by its use so long as the agent was used in accordance with the approval and any relevant regulations. Operators will not, however, be excused from harm caused by either a spill itself or the interaction between the agent and the pollutant.
However, the Bill also creates some new financial and penal risks for Atlantic offshore and North operators:
No Fault Liability Increase. The Bill enshrines a “polluter pays” principle into the proposed Act – reinforcing that operators’ liability is unlimited when they are at fault for damage in the offshore. It also increases the cap and expands the scope for “no fault liability” on authorized operators:
- No Fault Cap. The maximum liability cap for an operator’s “absolute liability” in the Atlantic offshore areas would increase from $30M to $1B, and further increases would be permitted by regulation.
- Expanded Liability Scope. The potential liability of authorized operators would expand to include costs reasonably incurred by government or “any other person” for actions taken in relation to a spill and for loss of “non-use value” (i.e. environmental damages). The government will have a right of action to recover such losses, and authorized operators will be vicariously liable for acts of their contractors.
- Proof of Ability To Pay. An applicant for drilling, production or development authorizations will have to prove it has sufficient financial resources to pay the maximum absolute liability cap or the greater amount set by the Board. Notably, the Board isn’t required to consider potential environmental damage when setting this amount. Proof of ability to pay must remain in force during the work and for one year after the Board’s acceptance of the operator’s notification it abandoned the last well.
- Proof of Financial Responsibility. Applicants must also back up the proof of their ability to pay with a guarantee – called “proof of financial responsibility” – in the form of a letter of credit, guarantee or indemnity bond, or any other form acceptable to the Board. For drilling, development or production authorizations, the applicant must post a minimum of $100M, or prove that it participates in an industry pooled fund of at least $250M. For all other works and activities, the guaranteed amount required will be at the Boards’ discretion without recourse to a pooled fund.
Penal Consequences. The Bill adds a deterrent component by allowing the Boards to directly initiate penal proceedings for contraventions of the regulations.
- More Sentencing Options. Currently, summary convictions for regulatory offences are punishable by a maximum fine of $100,000, one year imprisonment, or both; on indictment, the maximum fine is $1M, five years’ imprisonment, or both. The Bill adds a wide range of sentencing options to these, including an order requiring the offender to:
- monitor – or pay for monitoring – environmental effects from the offence;
- change its environment management system;
- undergo an environmental audit;
- pay an amount 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”; and
- pay money to an educational institution.
- Application Ban. A court can also prohibit offenders from applying for any further interest, license or authorization for any period of time it sees fit.
- Aggravating Factors. The Bill lists “aggravating factors” that courts can consider in sentencing, 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”.
- Personal Liability. A corporate director, officer or agent who assented to, authorized or acquiesced to a corporate violation can be personally liable for it, and the legal defences available are limited. The proposed maximum penalty for individuals is $25,000.
- Publicity. As the penalties are intended to promote compliance, the Boards have authority to publicize the nature of the violation, the offender’s name and the amount of the penalty.
Broader Disclosure. The Bill broadens the Boards’ ability to disclose certain information and documentation:
- Governments. Boards will be able to disclose certain information to domestic and foreign governments and agencies for the purposes of law dealing with a petroleum-related works or activities. The receiving party must undertake to keep the information confidential and disclosure must be made in accordance with any agreed to conditions. Disclosure to a foreign government or agency will require written approval from the federal Minister of Natural Resources or corresponding Provincial minister.
- The Public. A Board can disclose information relating to safety or environmental protection to the public – including information provided in relation to a licensing application or an authorization request – if satisfied that 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 decision.
Click here to read the to read the proposed Energy Safety & Security Act (Bill C-22).
The Bill does create some new opportunities for operators in Atlantic offshore and North – but the net effect of the proposed changes is a tougher liability regime for environmental damage by them:
Streamlined CEAA Assessments. The Bill provides the Boards authority to conduct CEAA environmental assessments – possibly streamlining the environmental assessment process to some degree.
Spill Response Options. The Bill also authorizes the use of spill-treating agents. This, at the least, increases the response options available to operators in the unfortunate event of a spill.
Information Disclosure Clarity Lacking. The Bill does amend the provisions dealing with the disclosure of information submitted to the regulators – provisions that have caused litigation in the past. However, the changes don’t seem to increase their clarity, and are unlikely to resolve the issues that exist with the current provisions.
It remains to be seen whether the Bill will pass without major amendment – and if so, how the Federal Government will implement the changes. In any case, companies with current – or prospective – interests in the Atlantic offshore will be affected by the Bill and the new opportunities – and risks – it creates.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Energy and Natural Resources Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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