Canada: "Pay (From) The Piper"— Ensuring Financial Resources Under The Absolute Liability Regime For Federal Pipelines

On October 8, 2016, Natural Resources Canada issued notice of the proposed Pipeline Financial Requirements Regulations (the "Regulations") of the National Energy Board Act ("NEB Act"). The Regulations establish the "no fault" absolute liability limits, and the financial resource requirements, for companies operating federally regulated oil, gas, and other commodity pipelines. The Regulations follow from the Pipeline Safety Act, which came into force on June 19, 2016, and which amended the NEB Act and the Canada Oil and Gas Operations Act to increase the National Energy Board ("NEB") oversight powers as well as pipeline operator's liability (including absolute liability) for releases.

The Regulation

As we noted when it was initially introduced in our 2014 In Review: Top 10 Legislative And Regulatory Changes For The Canadian Oil And Gas Industry, the Pipeline Safety Act enshrined the "polluter pays" principle by confirming that the liability of pipeline companies is unlimited if an unintended or uncontrolled release of oil, gas or other commodity is the result of the operator's fault or negligence. It also established an absolute liability regime, without proof of fault or negligence, to ensure a prompt response to a release without a determination of fault. The Regulations support and clarify this absolute liability regime.

When it was passed, the Pipeline Safety Act established a "no fault" absolute liability limit of $1 Billion for operators of oil pipelines transporting 250,000 or more barrels per day ("bpd"). The proposed Regulations build on this by establishing the absolute liability limits for all remaining pipelines (classified according to commodity and risk), and set out certain financial resource requirements. According to the proposed Regulations, Oil pipelines transporting 50,000 to 250,000 bpd will have an absolute liability limit of $300 Million, and those transporting less than 50,000 bpd will have an absolute liability limit of $200 Million. Unlike oil pipelines which are classified according to throughput, the risk profile of gas pipelines are classified by multiplying their outside pipe diameter squared (in millimetres) and maximum operating pressure (in megapascals) to arrive at a "risk value" so that gas pipelines with a risk value of 1,000,000 or above will have an absolute liability limit of $200 Million, gas pipelines with a risk value between 15,000 to 1,000,000 have an absolute liability limit of $50 Million, and gas pipelines with a risk value less than 15,000 will have absolute liability limit of $10 Million. Pipelines transporting other commodities, such as pulp, slurry, salt water or carbon dioxide will have an absolute liability limit of $10 Million if carrying liquids, and $5 Million if carrying in a gaseous state.

The proposed Regulations also set out the financial resource requirements. Under the NEB Act, as amended by the Pipeline Safety Act, operators are required "to maintain the amount of financial resources necessary to pay the amount of the limit of liability". To support this, the NEB may order an operator or class of operators to maintain those amounts in specified types of financial instruments. The Regulations provide that, if the NEB orders such specified types of financial instruments, the types specified must be an insurance policy, an escrow agreement, a letter of credit, a line of credit, a pooled fund, a parent company guarantee, a surety bond or cash. The Regulations also provide that the NEB can require that at least 5% of the amount of financial resources necessary to pay the limit of liability must be held in "readily accessible" types of financial instrument consisting of a letter of credit, line of credit, pooled fund or cash. These are intended to provide assurances that financial resources are available to the operator in the event of a release, and these may need to be in a specified form to ensure liquidity, security and access to the funds.

Interestingly, under section 48.14 of the NEB Act, an operator may meet all or a portion of its financial requirements by participating in a "pooled fund" established by other authorized pipeline operators. This diversifies the risk and leverages the contributions of other, similar, operators. According to the Regulations, in order to qualify, a pooled fund must be located in Canada, used solely to meet the financial requirements, the NEB must approve both the administrator of the pooled funds and the terms of administration, and the pooled fund must maintain minimum readily accessible funds of $250 Million. While the NEB Act also authorizes the promulgation of regulations which specify the conditions for an operator to participate in a pooled fund (including minimum contributions), the maximum amount that a participant could withdraw from the pooled fund, and the maximum amount of an operator's financial requirements that may be met by the pooled fund, the Regulations do not include such requirements. It should be noted that while the NEB is authorized to compel an operator to maintain financial resources of certain types, and a "pooled fund" will be eligible to meet those obligations, both section 48.14 of the NEB Act, and the background statement to the Regulations, provide that participation by an operator in a pooled fund is optional, so it seems unlikely that the NEB could require an operator to participate in a pooled fund. In addition, given the minimum amount of accessible funds required in a pooled fund, it is expected that any pooled funds that industry operators form will cover only the riskier and larger classes of pipelines. Nevertheless, such pooled funds offer an innovative, flexible, industry led, option for meeting the financial requirements.

The sections of the proposed Regulations that require 5% of funds to be "readily accessible", that establish the requirements for a pooled fund, and that identify the acceptable financial instruments would come into force promptly following publication of the Regulations. However, the need for operators to demonstrate they can meet the financial resource obligations would not come into force for twelve months. This is to allow sufficient time for compliance.

Implications

Generally, the proposed Regulations support Canada's efforts to strengthen the pipeline safety regime, and bolster public confidence in the safety of pipelines, by ensuring pipeline operators have adequate, acceptable and accessible financial resources to meet their no-fault liabilities for a release. Industry, which was consulted and has been generally supportive of the Regulations, already voluntarily maintains financial resources for such purposes. However, the Regulations provide further clarity on the exposure and costs to pipeline operators (and their shippers) under the absolute liability regime, and provide a number of options, including industry led pooled funds, to demonstrate their financial ability to respond to a release.

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