The modernization of the Indian Oil and Gas regulatory regime - a federal government initiative that began over a decade ago - appears to finally be materializing. The new Indian Oil and Gas Regulations (“New Regulations”) were introduced on May 19, 2018 and will replace the current Indian Oil and Gas Regulations, 1995 (“1995 Regulations”), The New Regulations are intended to be the final step towards modernizing the on-reserve regulatory environment and to align the on-reserve regime with that which exists off-reserve.
Substantive steps to amend the governing legislation have not been made since May 14, 2009, when amendments to the Indian Oil and Gas Act, (1974)(“IOGA”) received royal assent. The IOGA, 2009 is not currently in force, as it requires the coming into force of the New Regulations.
Indian Oil and Gas Canada, a special operating agency of Indigenous and Northern Affairs Canada, administers the IOGA. Indian Oil and Gas Canada worked with the Indian Resource Council to find ways to modernize the IOGA, as well as held extensive direct consultations with most of the oil and gas producing First Nations and Tribal Councils from over one hundred First Nations.
The Government of Canada states that consultations for the modernization of the on-reserve regulatory regime were among the most comprehensive ever conducted by Indigenous and Northern Affairs Canada. During the consultations, some First Nations expressed broader jurisdictional aspirations for the management and control of their natural resources. While the realization of some of these aspirations are not captured in the New Regulations, the Government of Canada has committed to exploring options for greater First Nations control over natural resource development on-reserve, and is actively engaging these First Nations to determine how this goal may be realized.
Challenges under the current regulatory regime
As the current regime stands, there are barriers on First Nation reserves to investment in the oil and gas industry, as well as a lack of modern tools and initiatives for the federal government to meaningfully ensure and encourage industry compliance. For instance, there is presently an absence of consistent rules for the on and off-reserve regimes, which makes investment in oil and gas development on-reserve less attractive and creates more uncertainty for industry. This results in duplicative processes for investors: one for on-reserve projects and one for those on all other lands in the province. To further exacerbate these issues, the current 1995 Regulations do not have compliance or enforcement mechanisms, resulting in the cancellation of contracts or court action becoming the principle form of recourse for addressing issues.
The federal government also presently lacks the necessary authorities to audit companies doing business on-reserve. Given the substantially large amount of money involved in oil and gas projects, this represents a serious deficiency in oversight abilities, as auditing is a critical tool used to ensure that First Nations are in fact receiving what they are rightfully owed in exchange for their natural resources.
Key provisions of the New Regulations
So, what do the New Regulations look like, and will the proposed new on-reserve regulatory regime truly assist in modernizing access to and participation in the oil and gas market on-reserve?
The proposed New Regulations are intended to provide a predictable regulatory environment for First Nations in which First Nations and third parties can make investment decisions. The New Regulations are divided into the following themes:
- Drainage and compensatory royalty
- Subsurface tenure
- Surface tenure
- Money management
Some of the provisions have been carried over from the 1995 Regulations to minimize any regulatory gaps once the New Regulations are brought into force. New provisions address key areas such as First Nations’ audits, and royalty reporting requirements to facilitate royalty verification. The New Regulations also aim to incorporate modern federal drafting standards and to reflect some of the IOGC’s current practices and policies, such as the requirement for environmental reviews to accompany applications for exploration programs, surface agreements and bitumen projects.
Other notable changes include those that were made to subsurface tenure. Going forward, both the Chief and Council and the Minister must approve any contracts issued for the exploration or exploitation of oil and gas on reserve lands. The New Regulations set out the criteria the Minister must use, in consultation with the First Nation, to evaluate a contract. First Nations will have the ability to negotiate drilling commitments, earning provisions, and the contract depth of earning wells. Leases will have an initial term of 3 years and permits will have an initial fixed term between 2 and 5 years depending on the region in which the contract is located. First Nations will be able to grant an initial term up to 5 years or amend the term to a maximum of 5 years. The New Regulations will also allow oil and gas production to occur from permit lands, and earned permit lands to qualify for a three-year intermediate term, though the First Nation will have the flexibility to increase the intermediate term to five years.
The New Regulations also provide for a compensatory royalty when reserve lands are drained of their resources by drilling in adjoining areas, following the existing provincial drainage laws. Further, the New Regulations make it possible for First Nations to ensure that all applications for surface activities include an environmental review to ensure no irreparable, adverse impacts are caused to reserve lands.
The IOGC has stated that another benefit the New Regulations will bring is an improved investment climate as the on-reserve regulatory regime is brought more in line with that of the rest of the province. This improvement should be felt by the oil and gas industry as a whole, as well as by involved First Nations. The abolishment of the duplicative processes for on and off-reserve oil and gas development is expected to reduce the cost of doing business on-reserve, to the tune of $55.6 million in total present value over the next ten years, which is an annualized savings of $7.86 million.
The long overdue implementation of the New Regulations will enable the IOGA, 2009 to finally be brought into force. The modernization of this legislation will not only create greater certainty for all stakeholders, it will allow the federal government to better fulfill its obligations to effectively and efficiently manage the oil and gas resources on reserve lands. The amendments to the legislative framework will also bolster First Nations’ ability to protect the environment in the course of oil and gas development, to increase and ensure regulatory compliance, and to more effectively facilitate the collection of the royalties due to them.
A comment period for the New Regulations is open until August 17, 2018. McLennan Ross will continue to closely follow the progress of the coming into force of the New Regulations, and provide further updates as they arise.