Canada: The Quebec Government Introduces The Petroleum Resources Act

On June 7, 2016, the Quebec Minister of Energy and Natural Resources, Mr. Pierre Arcand (the "Minister") introduced Bill No. 106 at the National Assembly (An Act to implement the 2030 Energy Policy and to amend various legislative provisions) (the "Bill"). Among other things, this Bill would enact the new Petroleum Resources Act in replacement of the existing provisions of the Mining Act (CQLR c M-13.1) that currently regulate hydrocarbons mining activities in the province.

This Bill had been expected for several months and would significantly modify the legal framework applicable to the development and production of hydrocarbons in Quebec. It purports to govern the development of petroleum resources in the province of Quebec while ensuring the safety of persons and property, environmental protection, and optimal recovery of the resource. The bill also aims at ensuring that mining work involving hydrocarbons is performed in compliance with the greenhouse gas emission reduction targets set by the Quebec Government.

Exploration Phase

If the Bill is adopted in its current form, an exploration licence valid for an initial five-year period would be required to explore for petroleum or underground reservoirs. Such licences would be awarded by auction, which will be conducted in accordance with the process to be determined by regulation. The Minister may also decide not to award a licence after such an auction process.

This new auction process for awarding hydrocarbon exploration rights constitutes a major shift from current legal Framework.

An exploration licence would give its holder the right (i) to explore for petroleum or an underground reservoir in the territory covered by the licence; and (ii) to extract petroleum and dispose of it or use an underground reservoir for a trial period. However, such work will need to be carried out in accordance with the conditions agreed on by the Minister and the licence holder or which will otherwise be determined by regulation. For instance, the Minister may subject the licence to conditions designed to avoid conflicts with other uses of the territory.

An exploration licence holder would be required to establish a monitoring committee to foster the local community's involvement in the exploration project as a whole, within 30 days after the licence is awarded. In this regard, the Bill goes beyond the requirements of the current Mining Act, which requires the establishment of a monitoring committee only upon the issuance of the lease authorizing mining operations. Under the Bill, this committee would also need to be maintained throughout the term of the licence if the holder does not carry out drilling work or until all the work required under the permanent well closure and site restoration plan has been completed.

The holder of an exploration licence would also have a right of access to the territory subject to the licence. However, if the licence is awarded on private land or land leased by the State, the holder will have to obtain written authorization from the owner or lessee at least 30 days in advance in order to access the site. However, the Bill would not grant expropriation rights to the exploration licence holder, even if no agreement can be reached with the land owner or leasee.

The licence holder would be subject to various annual requirements, including performance of minimum work determined by regulation, reporting to the Minister on all the work performed in the year and payment of annual fees, which will be specified by regulation.

The holder would also be required to inform the Minister of any significant discovery and of any commercial discovery of hydrocarbons. In the latter case, the holder will be required to submit a petroleum production project to the Régie de l'énergie (the ʺBoardʺ) and apply to the Minister for a production licence, within four years after such discovery, failing which the Minister may revoke the exploration licence, without compensation, and award to a third party a production licence for the territory affected by the revocation.

An exploration licence may be renewed by the Minister for the terms and subject to the conditions to be determined by regulation.

Production Phase

Before undertaking the production or storage of petroleum, an exploration licence holder would be required to:

  • submit its project to and obtain a favourable decision from the Board;
  • obtain an authorization under the Environment Quality Act further to completion of the environmental impact assessment and review procedure;
  • obtain a production or storage licence from the Minister.

In the case of a territory that is not subject to an exploration licence, the Minister would have the power to award a production or storage licence by auction.

Any amendment to a petroleum production project would have to be submitted to the Board, which will be required to examine the project again if it considers that the amendment is substantial.

The Bill would thus confer a crucial new role to the Board with regard to petroleum production or storage projects in Québec.

Under the Bill, a production licence would give its holder the right to produce petroleum in the territory subject to the licence. Such a licence would be valid for 20 years and, as for exploration licences, would be subject to the conditions agreed on by the Minister and the holder or determined by regulation. The Minister may also include conditions designed to avoid conflicts with other uses of the territory as well as conditions proposed by the Board.

As for exploration licences, the holder of a production licence would have a right of access to the territory subject to the licence. However, if the licence is awarded on private land or land leased by the State, the holder will be required to obtain written authorization from the owner or lessee at least 30 days in advance in order to access the site. Unlike exploration licences, the Bill would allow the production licence holder to acquire the real rights or property by expropriation for the production of petroleum.

The Bill also provides that the Quebec Government may, on reasonable grounds, require that the benefits within Quebec of producing petroleum be maximized when awarding or renewing a production licence. It should be noted that similar provisions were enacted in the Mining Act in the past years.

Under the Bill, the production licence holder must send a monthly report to the Minister detailing the amount of petroleum extracted during the previous month as well as an annual report on its activities. The production licence holder must also pay the royalties payable to the Minister and the annual fee the Government determines by regulation. If a monitoring committee has not already been established, the production licence holder must establish one.

In addition, the Bill includes various other permitting requirements applicable to different hydrocarbon-related activities, including geophysical or geochemical surveys, stratigraphic surveys, as well as drilling, completion, re-entry and major maintenance work in a well.

The Bill also prohibits the junction of a well to a hydrocarbons distribution or transportation network or certain facilities through a junction pipeline without holding a specific junction pipeline authorization. A favourable decision from the Board and a certificate of authorization issued under the Environment Quality Act would be required as a condition for the issuance of such authorization.

Closure Phase

In order to obtain a drilling authorization, a well final closure and site restoration plan would need to be filed for approval with the Minister. A guarantee covering the anticipated cost of completing the work would also need to be furnished to the Minister with such a plan, which would have to be implemented within six months following the cessation of activities.

In case of a temporary or permanent cessation of its activities, the license holder would be required to proceed to the closure of the well and to obtain an authorization from the Minister prior to the closure. Such an authorization would be subject to various conditions to be prescribed by regulation, including the completion of the work provided in the closure plan. A certificate from an environmental expert will also be have to be sent to the Minister following completion of the closure work in order to confirm that such work was carried out according to the plan requirements.

Safety Obligation and No-Fault Liability Regime

The Bill would also require that license holders recover petroleum in an "optimal" manner using generally recognized best practices for ensuring the safety of persons and property, environmental protection and optimal recovery of the resource. To this end, the Minister would have the power to require the license holder to justify the method used, to conduct a study to evaluate such method and even to order the holder to take the necessary steps to remedy a situation that could compromise the optimal recovery of petroleum. Failure of the holder to comply with such requirement could result in the suspension of its activities.

The Bill would also establish a no-fault liability regime requiring license and junction pipeline authorization holders to indemnify any person for damages caused through or in the course of its work or activities, including a loss of non-use value relating to a public resource.

Such a no-fault liability regime would remain applicable even in the case of force majeure, but would be limited to an amount determined by regulation. The licence holder would also have to provide the government with a proof that it is solvent to an amount determined by regulation.

The above liability cap would not apply in case of damages caused by a fault committed by the licence or authorization holder or its subcontractors or employees in the performance of their functions.

It should also be noted that the Bill would introduce a system of monetary administrative penalties of an amount ranging from $500 to $10,000 per failure to comply with the requirements of the Petroleum Resources Act. The minister would also be granted various administrative and regulatory powers in connection with hydrocarbon exploration and production activities, including in certain circumstances the power to suspend or revoke a license or authorization or to require the completion of specific work.

In the event of an offence to the requirements of the Petroleum Resources Act, the Bill also provides for potential fines of up to $6 million for a first offense and up to $18 million in case of repeated offences.

Disclosure of Information

The Bill provides that the information sent to the Minister by a license holder following surveys would become public five years after completion of the work, while those sent after the drilling of a well would become public two years after the date of permanent closure of such a well.

Finally, it should be noted that the Bill provides for the establishment of a public register of real and immovable petroleum rights which would describe, among other things, the real property rights and authorizations granted under the Bill and the closure and site restoration plans.

Transitional Provisions

Licences and authorizations issued under the Mining Act which remain valid on the date of coming into force of the Bill shall be deemed to have been issued in accordance with the new provisions of the Petroleum Resources Act for their remaining term. Likewise, pending applications for licences and authorizations under the Mining Act will be continued and decided in accordance with the Petroleum Resources Act.

Next Steps

The Bill was submitted to the members of the National Assembly for review on June 7, 2016. Considering how significant the proposed reform is, this Bill could be subject to many amendments in due course.

The Oil and Gas Team of McCarthy Tétrault will continue to closely monitor this Bill, which could have a significant impact on such exploration and production projects in Québec.

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