New Indian Oil and Gas Regulations To Modernize On-Reserve Regime



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.

Background

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:
  1. Drainage and compensatory royalty
  2. Subsurface tenure
  3. Surface tenure
  4. Exploration
  5. Environment
  6. Enforcement
  7. Conservation
  8. Money management
  9. Royalty

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.

Next Steps

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.

Bill 13 - Alberta's Capacity Market

Authors: Michael Barbero and Gavin Fitch, Q.C.
Bill 13, An Act to Secure Alberta’s Electricity Future, has received Royal Assent. Bill 13 sets out significant changes to electrical generation and distribution in Alberta, including the creation of a Capacity Market. Further, Bill 13 proposes to end the era of “Stores Block”, the Supreme Court of Canada’s jurisprudence relating to utility asset disposition - so-called “stranded assets”.

Changes to Legislation

Bill 13 is intended to advance a number of goals, including:
  • creation of a capacity market
  • increased investor confidence
  • consumer protection
  • the creation of greater opportunities to generate and distribute renewable power

To bring about these changes, Bill 13 amends the legislation presently governing electrical generation, transmission and distribution in the Province. Amendments to at least five separate acts are planned:  Alberta Utilities Commission Act, Electric Utilities Act, Hydro and Electric Energy Act, Renewable Electricity Act, and the Gas Utilities Act.

Alberta’s Capacity Market

One key change in Bill 13 is the creation of a Capacity Market by the year 2021. Alberta presently utilizes an energy only market or what is often referred to as a wholesale generation market. This approach is rare (Alberta is one of only two jurisdictions in North America to use it).

In an energy only market prices are based on supply and demand; generators must bid into the market to sell their power. Unfortunately for generators, market prices can be depressed for lengthy periods of time. This has been the experience in Alberta. Consequently, generators are forced to make investment decisions based on the hope of the market being high when they are prepared to sell. There is no certainty as to the price that will be available.

This approach, it has been argued, creates investment uncertainty. In light of the province’s need for an estimated $25 billion dollars of investment in electrical generation by the year 2030, as part of the early phase out of coal in favor of more renewable and less polluting means of generation, the provincial government has stated that investment uncertainty is not an option.

The Capacity Market addresses investor uncertainty by paying generators through a mix of competitive auction contracts and fixed costs payment. In effect, a Capacity Market is two markets: (1) a market where generators compete to sell the power they generate and (2) a market where generators compete for payments to keep generation capacity available to produce electric power when required. 

Generators will thus receive two revenue streams: energy payments, which are paid to the generator for the electricity sold; and capacity payments, which are paid to the generator for making generation capacity available on demand. Investors gain certainty that they will at least be paid something for their efforts with the prospect of earning a premium in the “spot” market.

Utility Asset Disposition

Stranded assets are those assets a utility no longer requires. In the Stores Block case[1] the asset was land that ATCO purchased in 1922.  In 2001, when the land was sold, it earned $6 million dollars more than what is was carried for on ATCO’s books. The question was who keeps the upside – the utility or rate payers?  The Supreme Court of Canada concluded that the utility would keep the profit.

This authority was subsequently applied by the Alberta Court of Appeal on multiple occasions, to varied effect. Perhaps most significantly, the Court of Appeal subsequently held that if utilities could profit from the upside of stranded assets they would also have to bear the risk of any losses, for example where assets were destroyed by natural disaster.

The Supreme Court of Canada’s decision in Stores Block had far reaching implications for Alberta utilities and rate payers. The decision now appears to be destined for the history books as Bill 13 proposes an new legislative approach to the issue of stranded assets.

Under Bill 13, the Alberta Utilities Commission would now be called upon to balance the interests of the parties and determine compensation for stranded assets on a case by case basis having regard to the public interest. The change is likely a victory for utilities who have long lobbied against the downside of the Supreme Court’s decision.

Closing

Bill 13 is a lengthy and complicated piece of legislation that is intended to make major changes to Alberta’s electric energy market place. To a large extent, the implications of Bill 13 will not be known until several regulations are created that will implement the bill. 

However, creation of a capacity market is already under way with a series of auctions having taken place or planned in the near term. These auctions have resulted in multiple bids. In this sense, the approach appears to be spurring investment dollars as the government had hoped, at least in the renewable generation space.

Less obvious, but likely to be more problematic, are the changes to the approach on stranded assets. Given the large dollars often at play there is much incentive on both sides to fight tooth and nail over the proceeds of the sale of utility assets. Removing the analytical framework set out by the SCC and returning these decisions to the AUC on a case by case basis will, we predict, result in numerous appeals at least one of which will likely end up back before the Supreme Court. Stores block 2.0?
 




[1] ATCO Gas & Pipelines Ltd v Alberta (Energy and Utilities Board), 2006 SCC 4