Originally published in The 2011 Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada
Three main trends are apparent in the oil and gas industry in 2011. First, there remains an ambivalent attitude in some quarters towards foreign investment in the sector. The Federal Government wants to encourage companies to continue to access foreign capital while also balancing concerns about the potential impact that such investments may have on national security. Secondly, more favorable royalty rates for conventional oil and gas have come into effect in Alberta in response to the growing importance and competitiveness of Saskatchewan and British Columbia in the sector. Finally, there is increasing concern about the impact of oil and gas production on the environment.
Four recent developments are discussed below: changes to the Investment Canada Act, reductions in conventional oil and gas royalties in Alberta, a new directive on tailings ponds for oil sands mining operations, and new greenhouse gas reporting requirements in British Columbia.
1. Changes to the Investment Canada Act
Rapid economic growth and growing demand for energy in Asia is making Canada's oil and gas industry an increasingly attractive destination for foreign investment. But much of this investment may now come from stateowned enterprises and sovereign wealth funds which have traditionally not been major players. As Canadian companies seek foreign investment and foreign companies seek access to Canadian resources, both must consider the Investment Canada Act ("ICA").
The ICA applies to any transaction where an investor controlled outside of Canada will acquire control of an existing Canadian business and the book value of the business' assets exceeds a prescribed threshold.
If applicable, the investment must be reviewed by Industry Canada's Investment Review Division.The Minister of Industry must be satisfied that the investment is "likely to be of net benefit to Canada". In determining whether an investment is likely to be of net benefit to Canada, the Minister considers various factors, including:
- the effect on economic activity, employment and resource processing in Canada;
- the utilization of parts and services produced in Canada and exports from Canada;
- the degree and significance of participation by Canadians; and
- the effect on productivity, industrial efficiency, technological development, product innovation and product variety in Canada.
Increased Review Threshold based on Enterprise Value
The review threshold for World Trade Organization ("WTO") investors, including corporations controlled in any WTO member state, is C$299 million for most transactions in 2010. Industry Canada recently announced that this threshold will soon rise to C$600 million following the enactment of new regulations. Thereafter, the threshold will rise to C$1 billion over a four-year period.
Once the new regulations are in force, the threshold will no longer be based on book value. Instead, the threshold will be calculated with reference to "enterprise value". At the time of this writing, it is unknown when the new threshold and calculation method will be implemented.
It appears that the intention of these changes is to reduce the number of foreign investments subject to review under the ICA, but this will not become clear until "enterprise value" is defined. A reduction in the number of reviewable transactions could bring more players into the market, increasing competition for assets.
Industry Canada recently implemented Guidelines for State-Owned Enterprises ("SOE") under the ICA. An SOE is an enterprise, such as a national oil company, that is owned or controlled directly or indirectly by a foreign government.
If an SOE seeks to acquire control of a Canadian business, the Minister of Industry will examine its corporate governance and reporting structure relative to Canadian standards. Many statecontrolled oil and gas companies have issued publicly listed securities, or are otherwise subject to North American style disclosure requirements.The Minister and the Division also assess whether the target company will continue to be run on a commercial basis with regard to matters such as exporting, processing, participation of Canadians in operations, support for ongoing research and development, and capital expenditures needed to maintain the competitiveness of the business.
National Security Review
Part IV.1 of the ICA now provides for a separate review for investments potentially injurious to national security. Under this Part, the Federal Cabinet may take measures it considers necessary to prevent investments that could be injurious to national security. The regulations implementing these provisions of the ICA came into force in September, 2009.
The Minister of Industry, after consultation with the Minister of Public Safety and Emergency Preparedness, may refer a proposed investment to Cabinet to determine whether a national security review should be ordered. If Cabinet orders a review, the Minister of Industry must send notice to the investor. The Minister of Industry then has an additional 45 days to submit a report and recommendations to Cabinet. After receiving the report, Cabinet has 15 days to order any measure it considers advisable to protect national security, including disallowing the investment or attaching conditions.
Although the powers granted to the federal Cabinet under this Part are very broad and "national security" is not defined in either the ICA or the regulations, these rules are expected to be engaged only in rare situations. To date, only one transaction has ever been blocked under the ICA — the C$1.3 billion proposed acquisition of the Information Systems and Geospatial Services division of MacDonald, Dettwiler and Associates Ltd. by Alliant Techsystems Inc., an American aerospace and defense firm, prior to the implementation of the national security rules.
2. Alberta Royalties: The Results of the Competitiveness Review
On March 11, 2010, Alberta Premier Ed Stelmach and Energy Minister Ron Liepert announced changes to the province's oil and gas royalty regime following the Alberta Competitiveness Review.The effect of these changes was to undo some of the damage caused by the earlier Fair Share royalty review released in October 2007. The Fair Share royalty review provoked widespread industry opposition. The changes to the royalty regime resulting from Fair Share review were implemented on January 1, 2009 — right in the midst of the economic downturn. In response to these changed circumstances, the Alberta government announced that it would conduct a Competitiveness Review of conventional oil and gas royalties.This review was led by the Ministry of Energy. It examined Alberta's investment climate in the upstream natural gas and conventional oil industries as compared with competing jurisdictions in Western Canada and the United States.
Based on several factors, including structural market changes, advancements in technology, and regulatory barriers, the Competitiveness Review concluded that Alberta had lost ground relative to other jurisdictions and that changes were needed to address this. The changes that were accepted by the government focused on improving the fiscal regime, streamlining the regulatory system, and encouraging innovation to enhance production.
Two key concerns addressed in the Competitiveness Review were the excessive risk created by high front-end royalty rates and the overall risk-reward balance associated with maximum royalty rates. To address these concerns, the Alberta government decided that:
- the maximum 5 per cent front-end rate (which applies to initial production) on new natural gas and conventional oil wells will become permanent;
- the maximum royalty rate on natural gas (both conventional and nonconventional) will be reduced from 50 per cent to 36 per cent effective January 1, 2011;
- the maximum royalty rate on conventional oil will be reduced from 50 per cent to 40 per cent effective January 1, 2011. These changes to front-end royalty rates should make Alberta more competitive with British Columbia, Saskatchewan, and various jurisdictions in the United States, while also reducing the risk associated with using new technologies to access unconventional resources. Decreasing maximum royalty rates allows producers to realize on the benefits of higher commodity prices.
These changes represent a return to similar royalties that existed prior to the Fair Share framework announced in October 2007. However, it is noteworthy that royalty rates for oil sands projects remain unchanged.
3. ERCB Directive 074 — Tailings Ponds
As the scale of oil sands mining continues to grow in Alberta, concern is increasing about how the by products of these operations are managed and disposed of. Public attention was focused on this issue following recent charges against Syncrude Canada Ltd. relating to the death of several hundred ducks at a tailings pond. On February 3, 2009, the ERCB released Directive 074:Tailings Performance Criteria and Requirements for Oil Sands Mining Schemes.
Directive 074 is focused on the reduction of fluid tailings volumes and the formation of trafficable deposits. It is the first component of a larger initiative to improve the management of tailings. It applies to all existing, approved, and future oil sands mining operations. Following extensive inter-governmental consultations, the Alberta government outlined several long-term objectives with respect to tailings management:
- to minimize and eventually eliminate long-term storage of fluid tailings in the reclamation landscape;
- to facilitate progressive reclamation;
- to eliminate or reduce containment of fluid tailings in an external tailings disposal area during operations;
- to reduce stored process-affected waste water volumes on site;
- to maximize intermediate process water recycling to increase energy efficiency and reduce fresh water import;
- to minimize resource sterilization associated with tailings ponds; and
- to ensure that the liability for tailings is managed through reclamation of tailings ponds.
Directive 074 requires operators to establish dedicated disposal areas ("DDAs") and to reduce the overall level of fluid tailings. Operators are required to submit DDA plans to the ERCB along with annual compliance and status reports to track performance. The plans must be provided to the ERCB two years prior to construction for new operations and must specify dates for construction, use, closure, capping, and formation of trafficable deposits. For existing operators, the timing of the submission of the plan will vary. Existing approvals will need to be amended accordingly.
The ERCB has recognized the need for some flexibility in implementing the directive. It noted that the technology in this field is still developing and operators need room to apply the techniques best suited to the circumstances of a particular project.
4. BC Greenhouse Gas Reduction (Cap and Trade) Act
Effective November 2009, the Greenhouse Gas Reduction (Cap and Trade) Act (the "GGRA") and its associated Reporting Regulation, require emissions reporting by operators of "regulated operations or reporting operations" in British Columbia.
The Reporting Regulation sets out the required disclosure under the GGRA and outlines the criteria for determining whether an operation is a regulated or reporting operation. The Reporting Regulation requires an operator to comply with the reporting requirements of the GGRA if the operation is a single facility or linear facilities operation that has a total amount of "attributable greenhouse gas emissions" greater than or equal to 10,000 metric tons of carbon dioxide equivalent per annum.A greenhouse gas emission is "attributable" to an operation if it involves a specific activity, source and gas type listed in Schedule A of the Reporting Regulation, such as stationary combustion at oil and gas facilities, oil and gas extraction and processing, petroleum refining, or natural gas storage and processing.
The contents of the disclosure report are set out in section 12 of the Reporting Regulation, but additional information may be required in specific circumstances. Operators subject to reporting requirements must meet reporting obligations on an annual basis, beginning January 1, 2010, or on the date thereafter that the operations commence.
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