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Competitiveness of Canada’s regulatory framework for the oil & gas sector
Much debate has occurred in Canada about the effectiveness of the various regulatory reviews of energy projects, large and small. The debate illustrates a tension between those stakeholders wanting a concerted stewardship of our natural environment with those that seek to create private and public benefits from energy project investments. Recently, Canadian Energy Research Institute (CERI) published a report, the purpose of which was to provide facts and evidence so that stakeholders can consider these observations as they move forward with individual oil & gas project reviews and conversations regarding improvements in the process. To that extent, the study assesses the competitiveness of Canada’s regulatory frameworks at the federal and provincial levels compared to the United States. It was also intended to show how regulatory matters compare with other investment factors such as market conditions and project economics.
This article provides a summary of the study findings, readers are encouraged to download the full study .
Bac kground
In Canada, responsibility for the regulation of energy and natural resources is shared by the federal and the provincial/ territorial governments. The ownership of oil and natural gas resources is split between the provincial/federal Crown (governments), holders of the majority of Canada’s mineral rights, private freehold ownership, and Indigenous peoples (ICLG 2019; Lawson Lundell LLP 2019).
Federal and provincial jurisdictions can overlap, so some energy projects are subject to both regulatory regimes. In those cases, projects may be jointly reviewed by a federal-provincial panel or may be a subject for a substitution process (the federal review is substituted for the provincial review process). In some cases, oil & gas projects may be regulated by a number of different government agencies in different jurisdictions. (NRCan 2016; Stikeman Elliott LLP 2019).
While there is no single federal regulatory agency or department overseeing oil and natural gas resources in Canada, there are
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two principal federal regulators, namely the Canada Energy Regulator (CER former the National Energy Board (NEB) and the Impact Assessment Agency of Canada (IAAC former the Canadian Environmental Assessment Agency (CEAA). Other important regulatory authorities and departments include but are not limited to Environment and Climate Change Canada (ECCC), Natural Resources Canada (NRCan), Fisheries and Oceans Canada, Transport Canada, Crown-Indigenous Relations and Northern Affairs Canada, etc. (Blake, Cassels & Graydon LLP 2019; ICLG 2019; NRCan 2016).
Each province has multiple acts, regulations, and policies in place for energy and natural resources management, environmental management, Indigenous consultation, and climate change (NRCan 2016; Lawson Lundell LLP 2019). While many regulations related to oil & gas activities are similar between jurisdictions, some of them are specific and unique for each province, such as LNG exports in British Columbia, oil sands operations in Alberta and Saskatchewan, or offshore oil production in Newfoundland and Labrador.
Economic regulations relevant to the oil & gas industry in Canada include taxes and other fees imposed on industrial activity. Taxes and fees will increase the cost and risk of an investment. Income is taxed by both federal and provincial governments under various legislations. For the oil & gas industry, other regulations, such as royalties, production taxes, and administrative levies, have an economic impact. In addition, related to environmental taxes/fees, social fund contributions, and industry sectorspecific taxes also have an impact.
Stud y Scope
The scope of the study includes a review of relevant key legislation and policies for nine jurisdictions in Canada and the United States at the federal (Canada and
the US, including Gulf of Mexico offshore), provincial (British Columbia, Alberta, Saskatchewan and Newfoundland), and state (Texas, North Dakota, Pennsylvania) levels. The report examines six case studies: onshore oil wells, onshore gas wells, offshore gravity-based structures, LNG plants, interprovincial/interstate crude oil pipelines, and interprovincial/interstate natural gas pipelines. For each jurisdiction, and where possible, for each case, the study evaluates the following characteristics of the regulatory framework: predictability, transparency, stringency, compliance, timelines, cost, and regulatory improvement.
Cost impacts of regulatory frameworks (including supply cost analysis, cost of delay estimation and investment risk analysis) are modelled for each applicable case. The cost of delay estimation consisted of two main parts: 1) The estimation of capital expenditures (CapEx) increases during the delay period; and, 2) Supply cost analysis using discounted cash flow (DCF) models after incorporating the delay period and incorporating new CapEx values.
A survey involving key stakeholders from various groups (government/regulatory agencies, oil & gas industry, Indigenous organizations) was conducted as part of this study.
Stud y Results
Figure 1 presents the results of CERI’s survey with key stakeholders and illustrates the major factors affecting oil & gas investments in Canada. These influencing factors are a ranking of risk related to project investment and decision making. Regulatory uncertainty (i.e. timeliness for different types of projects: LNG, pipelines, and oil & gas wells) and access to major demand markets are of biggest concern to investors. These two factors are mainly connected to market access infrastructure.
CERI found that for typical day-to-day approvals of routine small-scale onshore oil & gas wells, Canada and the US have similar requirements and similar processes. For those projects, there is no significant difference in the competitiveness of Canadian and US project approvals demonstrated in our assessments.
CERI found that Canada has a competitive disadvantage of oil & gas investments compared to the US when it comes to liquified natural gas (LNG) projects and interprovincial oil and natural gas pipelines. Canada’s increased approvals period with increased uncertainty of the decision-making process adds to the cost of projects in Canada . Risk-based assessments of cost, if higher, add to the profitability hurdle rate for investors. In such a situation, when increased costs are combined with risk, competitiveness is challenged. CERI’s analysis found that:
For LNG projects, • a one-year project approval delay results in: – increased supply cost by two per cent, – a decrease in profit by 6.4 per cent, equivalent to CAD$644 million, – decreased government tax receipts by 8.3 per cent, equivalent to CAD$295 million • it takes approximately 19 months more
for approval in Canada than the US, providing a competitive advantage to US
investments.
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Major oil and natural gas pipeline projects take approximately 13 additional months for approval in Canada than those in the US, providing a competitive advantage to US investments. Pipeline projects that are legally challenged take considerably more time in Canada.
For oil pipeline projects, a one-year project approval delay results in:
• increased supply costs by 10 per cent • decreased profits by 8.9 per cent, equivalent to CAD$442 million • a decrease in government tax receipts by 8.9 per cent, equivalent to CAD$150 million
For natural gas pipeline projects, a oneyear project approval delay results in: • increased the supply cost of eight percent
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• a decrease in profit by 10.1 percent, equivalent to CAD$259 million • a decrease government tax receipts by 8.1 percent, equivalent to CAD$93 million
CERI’s review of the regulatory process focused on the investor perspective. In the myriad factors, regulatory efficiency or timeliness is a consideration alongside market conditions and project economics. When CERI considered the competitiveness of the Canadian oil & gas sector to that of the US, large and unique projects pose a great challenge for completion in Canada.
References
Blake, Cassels & Graydon LLP. 2019. “Environmental Law in Canada.” October 2019. https://www.blakesbusinessclass.com/ wp-content/uploads/2019/10/Environmental_Roadshow_Booklet-1.pdf.
ICLG. 2019. “Canada: Oil & Gas Regulation 2019.” In International Comparative Legal Guide to Oil & Gas Laws and Regulations. London, UK: Global Legal Group. https:// iclg.com/practice-areas/oil-and-gas-lawsand-regulations/canada.
Lawson Lundell LLP. 2019. “Oil and Gas Regulation in Canada: Overview.” 2019. https:// content.next.westlaw.com/Document/ Id592f8f2755f11e698dc8b09b4f043e0/ View/FullText.html?transitionType=Defaul t&contextData=(sc.Default).
Miller Thomson LLP. 2019. “Environmental Law and Practice in Canada: Overview.” Thomson Reuters Practical Law. https:// ca.practicallaw.thomsonreuters.com/ Document/I020626f21cb611e38578f7ccc38dcbee/View/FullText.html.
NRCan. 2016. “Regulation of Shale and Tight Resources.” Government of Canada | Natural Resources Canada. August 23, 2016. http://www.nrcan.gc.ca/energy/sources/ shale-tight-resources/17680.
Stikeman Elliott LLP. 2019. “Oil and Gas Activity in Canada.” A Legal Overview. Stikeman Elliott LLP. https://www.stikeman.com/-/ media/files/kh-guides/oil-gas/oil-andgas-activity-in-canada.ashx. v
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