Canadian Energy Oil And Gas: Top 20 Of 2020 – Regulatory Decisions – Environment

Part 2

Without question, the top story over the last year has been the
COVID-19 pandemic and its tremendous ongoing effects felt across
Canada and the world.

This time has had a significant impact on Canada’s energy
industry and many of the changes and developments that took place
in 2020 will continue to influence trends, business decisions and
the future growth of Canada’s energy industry in 2021.

As we look back at 2020, we have highlighted the Top 20 industry
developments and decisions made throughout the year in four key
areas: Judicial decisions, regulatory decisions, legislative and
policy developments, and transactions and trends.

In this article, we analyze
the top five regulatory
decisions of the last year and how these decisions
may affect your business in 2021.

Top five regulatory decisions of 2020

In 2020, the Alberta Energy Regulator (AER) demonstrated its
willingness to intervene in commercial transactions with its
rejection of Shell Canada Limited’s sale of its sour gas
plants due to concerns over the splitting of the environmental
liability. In addition, the AER proved the extent of its commitment
to ensuring proper reclamation and abandonment with a two-year
investigation resulting in the cancellation of some 59 reclamation
certificates. The Canadian Energy Regulator is still hearing
Enbridge’s application to convert its Mainline pipeline to
contract carriage. The Alberta Court of Appeal issued important
rulings in relation to administrative tribunals, including its
ruling that the AER must consider the honour of the Crown when
reviewing projects in the public interest, and that the Alberta
Environmental Appeal Board’s test for standing was too
restrictive.

1. Alberta energy regulator rejects splitting of environmental
liability

After the Supreme Court of Canada’s
landmark Redwater decision highlighted the
importance of accounting for environmental obligations in asset
transfers, the AER signalled increased regulatory concern and
willingness to intervene in commercial transactions in its May 13,
2020 letter decision regarding the application by Shell Canada
Limited (Shell) and Pieridae Alberta Production Ltd. (Pieridae).
Shell and Pieridae jointly sought regulatory approvals relating to
the sale of Shell’s sour gas processing plants to Pieridae,
under a number of statutes, including the Environmental Protection
and Enhancement Act¹  (EPEA). The AER rejected the
parties’ proposal to allocate historic liability for sulfinol
and other substances to Shell while Pieridae assumed liability for
all other remediation and reclamation activities.

The AER’s reasons for rejecting the application focused on
practical uncertainties of allocating liability and inconsistency
with the polluter-pays principle under the EPEA. Firstly, the
AER was concerned with the uncertainty of the scope of
contamination at the sites, and how contamination could
distinguished as between historic operations and ongoing operations
for apportionment of liability. In this respect, the AER appeared
to consider the potential for future litigation in determining the
party liable for reclamation or remediation costs. The AER was
also concerned with the proposal’s incapability with the
policy objectives and principles of the EPEA. In particular, the
EPEA does not distinguish liability by specific substance, and the
parties’ obligations would still encompass the reclamation
and remediation of entire sites. Further, the proposal was contrary
to the polluter-pays principle, which requires that Shell (as
polluter and operator) must be responsible for all substances at
the site. The proposal would also diminish the AER’s ability
to ensure compliance given that Shell would no longer have an
interest in continuing operations of the sites.

The AER’s decision indicates limitations on the ability of
parties to contractually allocate environmental liabilities. The
limitation of the ability for commercial parties to construct
transactions to address environmental liabilities among themselves
will undoubtedly affect the pool of potential purchasers and the
terms of the proposed sale. Parties looking to enter into sale
transactions in the context of insolvency proceedings should
consider the effect of the AER’s decision on potential sale
approval applications, as well as early engagement of the AER in
the negotiation of potential transactions. For further discussion
on the application by 
Shell and Pieridae Alberta, see our comment here.

2. Administrative tribunals responsible to uphold the honour of
the Crown

In April 2020, the Alberta Court of Appeal released its decision
in Fort McKay First Nation v. Prosper Petroleum
Ltd². The decision arose out of Fort McKay
First Nation’s (FMFN) appeal following the AER’s
approval of the Prosper Petroleum Ltd. (Prosper) application to
build the Rigel oil sands bitumen recovery project within five
kilometres of the FMFN Reserves.

The factual background included that the Government of Alberta
and the FMFN had been taking part in ongoing negotiations for many
years to develop the Moose Lake Access Management Plan (MLAMP) in
order to address cumulative effects of oils sands development on
the FMFN’s Treaty 8 rights. The MLAMP included a 10km buffer
zone, and it was to be subsumed into the Lower Athabasca Regional
Plan (LARP). In 2014, the Alberta Premier committed via letter of
intent to completing the MLAMP under the LARP by September 30,
2015.

The question before the AER was whether the project was in the
public interest. The AER considered whether the project would
infringe an aboriginal right but found little real evidence to
establish such an infringement. The AER held that the Alberta
cabinet should assess the adequacy of project consultations and the
honour of the Crown, as opposed to the AER. The AER also did not
consider the MLAMP negotiations or the further commitment to
negotiations, as they had not yet been concluded.

The Court of Appeal allowed the appeal and found that the AER
should have considered the honour of the Crown and the MLAMP
process. The Court found that, where a tribunal is empowered to
consider questions of law, questions of constitutional law should
also be considered, unless there is a clear indication that the
legislature intended to exclude them. While the AER could not
assess the adequacy of Crown consultation, it was not restricted
from assessing the duty to uphold the honour of the Crown. For
further commentary on the 
Fort McKay First Nation v. Prosper
Petroleum decision, see our comment here.

3. Enbridge applies to convert its mainline to contract
carriage

In a watershed moment for the Western Canadian oil industry,
Enbridge Inc. (Enbridge) applied to the Canada Energy Regulator
(CER) to convert its Canadian Mainline pipeline, which represents
approximately 70 per cent of the available oil pipeline capacity
out of the Western Canadian Sedimentary Basin, from 100 per cent
common carriage to 90 per cent contract carriage. The CER
proceeding is in full swing, with participation from 39 different
interveners from a broad cross-section of the industry.

Enbridge’s CER application was precipitated by a number of
complaints filed with the CER by shippers when Enbridge first
announced in 2019 that it would be holding an open season for
contract capacity prior to CER approval. During this time, shippers
also lodged complaints about the high levels of apportionment of
capacity caused by shippers nominating “air barrels”,
bidding for more capacity than they actually needed, so that when
apportionment was applied, they would still be left with enough
capacity to meet their needs.

The ongoing CER proceeding has already proven to be contested
and the outcome is likely to have tremendous effects on the
industry in western Canada, particularly with the recent
cancellation of the US approvals for the Keystone XL pipeline.
Access to oil pipeline transportation is at a premium, and the
proposed switch to contract carriage would drastically reduce the
amount of common or “spot” carriage available to
producers. BLG continues to follow this proceeding and post on
further developments as they occur.³

4. Alberta Court of Appeal expands standing before the Alberta
Environmental Appeal Board

In the Normtek Radiation Services Ltd. v. Alberta
Environmental Appeal Board⁴ (the Board)
decision in December 2020, the ABCA overturned the Board’s
determination that the applicant did not have standing because it
failed to show it was directly affected by the decision under
review. In making that ruling, the ABCA found that the test applied
by the Board was too narrow.

Normtek Radiation Services Ltd. (Normtek) was in the business of
transporting and disposing of naturally occurred radioactive
materials (NORM) which accumulate as a waste product of oil and gas
operations. Secure Energy Services Inc. (Secure) applied to the
designated Director for an amended approval to allow Secure to
accept and dispose of NORM at its Pembina Landfill. Normtek
submitted a statement of concern in response to Secure’s
application claiming that the application would be outside the
industry accepted standards for handling NORM with high levels of
radioactivity. Accepting such materials at Secure’s landfill
would also give Secure a competitive advantage because Normtek, in
accordance with accepted practices, disposed of its high
radioactivity waste at salt caverns in Saskatchewan.

Normtek’s letter of concern was rejected because it
resided outside the areas of environmental impact associated with
the project. Normtek appealed to the Board and the Board held an
initial written proceeding on the issue of standing. Following that
proceeding, the Board concluded the Normtek did not have standing
because its concerns were primarily commercial or economic, and it
could not show that its use of the natural resource would be
affected. Normtek’s application for judicial review was
dismissed.

The ABCA reviewed the interpretation of being “directly
affected” under the Act⁵ and concluded that
it was not necessary for the adverse impact to be on the
appellant’s actual use of a natural resource near the
activity in order for the appellant to be “directly
affected.”⁶ The ABCA also determined that
economic impacts of an approval are sufficient for standing
regardless of whether the economic effects link back to the
environment.⁷ As the Board’s interpretation
of “directly affected” was too restrictive, the ABCA
remitted the matter back to the Board.

With the ABCA overturning the “restrictive”
interpretation of “directly affected”, this is likely
to expand the persons that will have standing to appeal before the
Board. The ABCA’s finding that an economic interest that is
not tied to the natural resource is sufficient for standing is
likely to open the doors to more appeals before the Board. It
remains to be seen how the Board will interpret the phrase
“directly affected” in any particular matter given the
judicial interpretation by the ABCA in this case going forward.

5. Alberta energy regulator cancels reclamation
certificates

An investigation that began in 2018 culminated in the AER, on
November 27, 2020 issuing warning letters to Aeraden Energy Corp.
(Aeraden) and its service provider CEPro Energy & Environmental
Services Inc. (CEPro), arising out of reclamation
activities.⁸ The AER investigated 59 well sites,
which Aeraden and CEPro claimed had been properly abandoned and
reclaimed, but which in fact were still strewn with debris, dead
vegetation, and even one active well.

Aeraden and CEPro, the latter having signed off on the
reclamation work, obtained reclamation certificates from the AER.
However, local landowners quickly complained and the AER initiated
its investigation. The results of the investigation found
deficiencies ranging from groundwater monitoring wells left on
site, fencing and berms remaining, and slumping and dead
vegetation. In its investigation report, the AER stated that it
“considers this matter to be very serious” and that
“[w]ith additional time and investigation, it is likely that
a more significant enforcement action would have been taken”
– but the AER was constrained by a limitation period that
prevented further investigation. All 59 reclamation certificates
were cancelled as a result of the investigation.

Given the heightened public awareness of the extent of abandoned
oil and gas facilities in the province, and the concern around
growing abandonment liabilities, companies must ensure they are
properly fulfilling their abandonment and reclamation obligations.
As demonstrated by the Aeraden case, the AER takes these matters
very seriously and will devote significant resources to ensuring
reclamation activities are completed and the certificates validly
issued.

Footnotes

1 RSA 2000, c E-12

2 2020 ABCA 163

3 BLG’s Alan Ross acts for ConocoPhillips while
Randall Block, QC and Jonathan Liteplo act for the Explorers and
Producers Association of Canada in this proceeding.

4 2020 ABCA 456

5 Environmental Protection and Enhancement Act, RSA 200 c
E-12

6 Para. 105

7 Para. 128

8 Alberta Energy Regulator’s (AER) enforcement
response

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