Canada: The Top Three Atlantic Canada Offshore Legal Developments Of 2016

Last Updated: January 9 2017
Article by Daniel Watt, Wylie Spicer and Elizabeth McIsaac

As 2016 draws to a close, Oil & Gas Team @ McInnes Cooper offers its picks for the top three legal developments of 2016 that impacted the Atlantic Canada offshore oil & gas sector.

ENERGY SAFETY AND SECURITY ACT (ESSA) AMENDMENTS KICK IN

On February 26, 2016, the bulk of the offshore-related amendments of the Energy Safety and Security Act (ESSA, formerly known as Bill C-22) took effect. With an express purpose of "accountability in accordance with the 'polluter pays' principle," ESSA significantly toughens the Atlantic Canada offshore and North oil & gas sector liability regime for environmental damage.

Of most importance for many industry participants, ESSA increases the amount and range of potential liability for environmental damage. At-fault liability for damage from a spill or debris remains unlimited, but the no-fault, absolute liability limit is significantly increased from $30M to $1B in the Atlantic offshore areas.

ESSA also expands the types of damage for which operators can be liable and makes them vicariously liable for spills or debris their contractors caused; operators will need to closely review "knock-for-knock" provisions, where each party bears the cost of any damage/loss it suffers regardless of the other party's fault, in typical offshore contracts. Heavier financial responsibility and resources requirements accompany this increase. Applicants for drilling, development and production authorizations must now provide the offshore petroleum board with unfettered access to $100M or a greater amount the board determines, and prove they have financial resources to pay the increased absolute liability limits. These limits aren't extraordinary in the global context and won't likely deter major participants from exploration and development investment, but they'll make it harder for smaller participants.

The enforcement powers of the offshore petroleum boards have also expanded. More – and tougher – sanctions are available, including powers to issue administrative monetary penalties and to "name and shame" offenders. Key defences are removed and corporate directors, officers and agents are now exposed to personal liability in certain circumstances. Courts have additional sentencing options for regulatory offences and must consider new "aggravating factors" when sentencing offenders – and can now bar an operator from the offshore by prohibiting it from applying for any further interest, license or authorization for any duration it sees fit.

ESSA also goes some way to transferring responsibility to conduct environmental assessments under the Canadian Environmental Assessment Act, 2012 (CEAA) to the boards. They now have authority to conduct the hearings necessary for these environmental assessments. However, regulations designating the offshore activities for which the boards will be responsible haven't yet been enacted, so it remains to be seen whether the boards will assume responsibility for CEAA environmental assessments.

Importantly, ESSA also gives the offshore petroleum boards authority to disclose a broader range of previously "privileged" information. But ongoing litigation is creating uncertainty around some disclosure powers and since ESSA doesn't clarify them, the courts will.

BALANCING PUBLIC AND OPERATOR INTERESTS IN OFFSHORE PETROLEUM RESOURCES DATA

This balance is at the heart of the dispute in Geophysical Service Incorporated v. Encana Corporation. In April 2016, Alberta's superior court decided just where the balance lies – at least until the appeals finish.

Geophysical Services Incorporated (GSI) obtained seismic data through offshore surveys in the Atlantic and Arctic and submitted it to the National Energy and offshore petroleum boards as a condition of regulatory approval and as required by legislation. After statutory confidentiality periods expired, the boards publicly released the data. GSI started lawsuits in Alberta, Nova Scotia, Newfoundland and Labrador and the Federal Court against the boards, exploration, production and other companies claiming (among other things) it owned copyright in the data and the defendants infringed it by disclosing or copying it without GSI's consent.

The Court decided two issues common to 25 Alberta cases – whether seismic data can be copyrighted and the effect of the offshore regulatory regime on that copyright. The Court agreed seismic data can be copyrighted but the offshore regulatory regime overrides the copyright law. The regulatory regime balances operators' interest in commercializing seismic data and the public's interest in disseminating it by allowing disclosure after a period of confidentiality to stimulate exploration and development – even if that balance seems "unfair." The Court has since decided a photocopy company isn't liable for copying GSI data accessed from the National Energy Board.

This first confirmation that copyright can subsist in seismic data validates industry supposition. The regulatory regime dispute, however, is far more significant and it's not over. The Appeal Court heard (but hasn't yet decided) GSI's appeal in November 2016 and the case could reach the Supreme Court of Canada. If the decision survives, it will confirm the industry understanding that seismic data submitted to the boards can be freely copied after the confidentiality period expires, ending years of uncertainty and litigation. If overturned, the boards and anyone who has copied GSI's data are exposed to significant liability (GSI's collective claims approach $1B). Similar claims may proliferate because the regime requires the submission, and permits disclosure, of information about all sorts of topics (including exploratory, delineation and development wells). And public access to seismic data for regulatory, exploratory, research or other purposes will be threatened.

THE UN CONVENTION ON THE LAW OF THE SEA (UNCLOS) PAYMENT REGIME FOR RESOURCE EXTRACTION FROM THE EXTENDED CONTINENTAL SHELF

UNCLOS Article 82 provides for a system of payments (resembling royalties) by coastal states respecting the exploitation of non-living resources in the extended continental shelf through the International Seabed Authority (or "ISA", the intergovernmental body tasked with regulating the international seabed area) and of distributions of those payments.

Article 82 has been "dormant" because there's been no resource extraction from the extended continental shelf (the area beyond 200 nautical miles but still on the Continental Shelf). In 2016, the ISA commissioned a technical study of the key terms of Article 82, signalling it's ramping up to discharge its Article 82 responsibilities in light of recent developments in offshore exploration on the extended continental shelf. This study reveals, however, there are hurdles to implementing the Article 82 regime.

Article 82 is deceptively complex to interpret. Though brief, its wording is broad and ambiguous on three key issues – member countries' obligations to make payments through the ISA for extracting resources from the extended continental shelf; their entitlement to payments through the ISA from other member countries for such resources; and how disputes, both those between member countries and those between they and the ISA, will be resolved. Since the issue is who pays and who receives money, it's almost certain there will be disputes. These ambiguities pose real hurdles for the implementation of the regime.

A strong academic discourse around resolving these ambiguities is well underway and will impact UNCLOS member countries. But the current state also impacts resource producers looking to expand operations farther offshore. The UNCLOS member countries, not the ISA, have the jurisdiction to authorize exploration on the extended continental shelf, and it's up to them to comply with their obligations under UNCLOS. However, the hurdles Article 82 faces increase the potential for disputes both within and among member states, and between they and the ISA. That creates uncertainty for the governments responsible for and empowered to authorize exploration on the extended continental shelf. And government uncertainty translates into greater risk for resource producers seeking to explore, and eventually extract, resources from the extended continental shelf.

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.

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