LNG Regulatory Process Imposes Lesser Burden

As we've previously discussed on this blog, the increased interest in exporting liquefied natural gas offers Canadian producers the opportunity to access international markets and higher international prices. Notably for producers, the requirements for approval by the National Energy Board for LNG projects over the last few years have eased significantly.

The earliest decisions were made under the NEB's surplus determination procedure, called the Market-Based Procedure, that had been established in 1987, during the early days of oil and gas deregulation in Canada. The first LNG export licence was granted to KM LNG and involved the filing of detailed gas supply information, an oral hearing, multiple submissions and the production of long and complex reasons. BC LNG Export Co-operative obtained the second licence following a written hearing process.

In contrast, recent applications have been approved without any hearing process and have been accompanied by the issuance of relatively standard or similar letter decisions from the NEB. 

The following chart provides a summary of the major LNG projects announced to date and the status of their applications to the NEB for long term natural gas export licences.

Two separate, but equally significant factors, explain the significant evolution described above.

First, the recently enacted federal Jobs, Growth and Long-Term Prosperity Act (the Act) contains amendments to the National Energy Board Act (the NEB Act) that affect the review of gas export licence applications. As a result of the amendments, hearings for gas export licences are no longer mandatory. The NEB Act was also amended to address what the NEB must consider when deciding whether to issue a gas export licence. When reviewing an application for a licence, the NEB can only consider whether the quantity to be exported is "surplus to Canadian needs", taking into account trends in discovery of the resource. In the recent letter decisions, the NEB has emphasized that the Market-Based Procedure is no longer in effect.

Second, the NEB has held "that the gas resource base in Canada, as well as North America, is large and can easily accommodate reasonably foreseeable Canadian demand". Based on expert reports filed with LNG export applications, the NEB has repeatedly emphasized that "the North American gas market is highly liquid, open, efficient, integrated, and responsive to changes in supply and demand". Updated natural gas resource estimates for western Canada and industry consensus on the magnitude of recoverable natural gas reserves support this view. In January of 2014 the NEB released the "Energy Briefing Note – The Ultimate Potential for Unconventional Petroleum from the Montney Formation of British Columbia and Alberta" . According to the NEB, the Montney formation is expected to contain 449 Tcf of marketable natural gas, 14,521 million barrels of marketable natural gas liquids and 1,125 million barrels of marketable crude oil. The report follows a similar report published in 2011 by the NEB with respect to reserves in the Horn River Basin which identified the magnitude of recoverable resources in the Horn River Basin. The significant potential of the Montney, the Horn River Basin and other tight shale plays (such as the Alberta deep basin) make it easy for the NEB to satisfy itself that exports will be "surplus to Canadian needs".

The BC LNG industry faces many significant hurdles and challenges – some so significant as to imperil or materially constrain the ultimate size, shape and even existence of the industry itself. It is fair to say though, that the reluctance of the NEB to authorize substantial gas exports will not be one of them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.