Canada: Energy @ Gowlings – June 25, 2008

Edited by Paul Harricks

Contents:

• Narrowing the Infrastructure Deficit in the Oil Sands - Arnie Olyan and Janelle Brown
  
  
• Nuclear Training News - Atlantis and PWU form Powertrain - Alan Dean
  
  
• Alberta Court of Appeal Upholds Lease Based on Shut-In Payments - Paul Edwards and Veronika Pidskalny
  
  
• Ontario Implements Smart Grid Forum - Michael Morrison
  
  
• Update on Imperial Oil's Kearl Project - Lisa Jamieson and Ethan Sinclair
  
  
• Bill C-5 Update - Terry McNally
  
  
• Gowlings Opens London, U.K. Office - Graeme Scotchmer
  
  
• Fourth Edition of Ballem's The Oil and Gas Lease in Canada Released - Paul Edwards
  
  

Narrowing The Infrastructure Deficit In The Oil Sands
By: Arnie Olyan and Janelle Brown

The single greatest trend in Canada's burgeoning energy sector in this decade has been the growing exploitation of Alberta's oil sands resources centred in the Municipality of Wood Buffalo, particularly in the Fort McMurray community.

The population of Fort McMurray has swelled over the past decade, with official numbers indicating a near doubling to 65,000 not including approximately 25,000 mobile workers living in work camps in or near Fort McMurray at any given time. Fort McMurray is therefore currently servicing a minimum of 90,000 people.

It is pretty much conceded that not enough has been done to accommodate this soaring growth, and as a result serious infrastructure deficits have emerged in the need for additional schools, hospitals and recreational facilities, larger water and sewage facilities, as well as roads and airport development. In 2005, the Municipality of Wood Buffalo released a study estimating that $1.2 billion would have to be invested in infrastructure by 2009 to merely keep pace with development.

During the past year, the long-ignored cries of the citizens of Fort McMurray have begun to be heard, and greater commitment to help alleviate the infrastructure strain in the oil sands area is evident. In February 2007, the provincial government committed $396 million to infrastructure improvements in the region. An additional $420 million was committed in January 2008, and confirmed in the April 2008 provincial budget, in response to the Radke Report, Investing In Our Future: Responding to the Rapid Growth of Oil Sands Development. With government support now coming into focus, a great opportunity exists for P3 and industry-supported project initiatives.

Schools

In January 2006, 17 modular classrooms were being used to supplement Fort McMurray schools, highlighting an urgent need for new schools in the area.

The pressure was partially alleviated when a new school was opened in the fall of 2006. At about the same time, the provincial government earmarked $9.2 million towards a major preservation and modernization project for Westwood Community High School in Fort McMurray. A further $2 million was dedicated toward a major study, plan and design for a new high school in the separate school system (which has since been tendered), and a new junior high school in the public school system.

Hospitals

Health-related infrastructure has been under pressure not only from the growing permanent population, but also, and disproportionately so, from the workforce situated at the oil sands facilities under construction. It was estimated in 2007 that these workers accounted for 32% of emergency room visits.

Of the $396 million committed to infrastructure improvement by the province last year, more than $200 million (to be provided over three years) was dedicated to the development of three new health clinics and a helipad for the regional hospital. In response to the Radke Report recommendations, the provincial government further committed $26.4 million this year for three community health centres in the Northern Lights Health Region, the purchase of land for a proposed continuing care facility and the provision of subsidized housing units for health care providers.

Recreational Facilities

In July 2006, a new recreational facility was listed as a top priority by the Municipality of Wood Buffalo. In an apparent prompt response, the $36-million Keyano College Sport and Wellness Centre was completed in September of 2007. The facility included two new indoor soccer pitches and a basketball court. The $140-million MacDonald Island Redevelopment Project is also underway, which, when completed in 2009, will be the largest recreational facility in Alberta, complete with pool, water park, fitness centre, library, four curling rinks, two arenas and two indoor soccer pitches.

Water and Sewage Facilities

Of the $396 million in provincial monies committed to the region in 2007, $100 million was allocated to help build a new sewage treatment facility, as well as to upgrade the existing water treatment plant. This latter project is currently underway.

Roads

While a ring road around Fort McMurray and the twinning of regional Highways 881 and 55 are all high on the municipality's wish list, the highest transportation priority (and one that is getting the most media attention) relates to the necessary twinning of Highway 63 from the Edmonton area to Fort McMurray. Given the size of the workforce traveling on Highway 63 every day and the quantity of large and oversized equipment being transported along the corridor, it is not surprising that this largely untwinned stretch of road has remained a serious safety concern. The cost of twinning Highway 63 has been estimated by the provincial government at $1 billion.

While both the federal and provincial governments committed funding for this initiative in 2006, progress has been slower than many would have hoped. This summer, 17 kilometres of Highway 63 will be twinned north of Fort McMurray, between the Suncor Energy junction and the Syncrude Canada site. To date, and to the chagrin of the local population, little progress has been made on the twinning of the portion of Highway 63 running south of Fort McMurray.

Airport

The Fort McMurray Airport, with 2600 square metres of space and a single runway, was originally designed to handle 70,000 passengers annually. The facility now struggles to accommodate 560,000 passengers annually.

There was good news for air travel passengers in March 2007, when architects finalized plans for a $100-million expansion of the Fort McMurray Airport.

Power Generation

With regional industrial demand for electricity growing constantly, the development of a nuclear power facility in the area is now being given active consideration. A first step has been taken by Bruce Power, which has applied to build one twin-unit reactor near Peace River. If a nuclear facility is ultimately granted regulatory approval and the design-construction process goes well, nuclear power could be a reality in about a decade.

The development of a nuclear power plant would involve much more than construction of the reactor itself. Roads, security system, waste management facilities, a switchyard for transmitting energy (including towers, transmission lines and associated gear), turbine hall, pump house, water treatment plant, laboratories, administration, service and annex buildings, and a cooling water system (including tunnels, piping and cooling towers) would all be required and would require development by the time the nuclear facilities become operational.

Conclusion

For years the mounting infrastructure deficit in Fort McMurray has been widely discussed, but poorly addressed. Over the past two years, the provincial government has begun to seriously address the infrastructure deficit, creating a unique opportunity for companies wishing to become involved in the development process and undoubtedly relieving the residents of Fort McMurray. One would hope that, as the infrastructure deficit narrows, the willingness of Albertans and all Canadians to live and work in the Fort McMurray area, and by extension, in the oil sands, cannot help but increase.

Nuclear Training News - Atlantis And Pwu Form Powertrain
By: Alan Dean

On June 11, 2008, Atlantis Systems Corp. and the PWU Training Incorporated (PWUTI), a wholly owned subsidiary of the Power Workers' Union, announced the formation of Powertrain Inc. to engage in training for the global energy sector. Headquartered in Toronto, Powertrain will maintain an advanced nuclear training facility in Tiverton, Ontario - perhaps not coincidently near the Bruce Nuclear Generating Station operated by Bruce Power L.P. Powertrain will initially focus on training, and knowledge management in the nuclear industry using a variety of training methodologies.

Noting the importance of nuclear power to our energy future and the need for a well-trained workforce, Duncan Hawthorne, President and Chief Executive Officer of Bruce Power, reportedly went on to comment that: "Powertrain addresses a very important requirement in our efforts to train current employees and the next generation of workers efficiently and cost-effectively."

After lying largely dormant for many years, the nuclear industry is entering a period of significant new growth - by some reports there are 30 reactors under construction and 300 in the planning stage worldwide. In Ontario it is estimated that $26 billion will be spent on building and refurbishing nuclear facilities over the next 20 years. This will make further demands on the supply of highly skilled tradespeople, already in short supply given the labour requirements of the Alberta oil sands and the potential requirements of tens of billions of dollars of infrastructure projects for roads, transportation, water and other public infrastructure that are being rolled out over the next few years. In the nuclear industry the situation is compounded by the fact that 38% of its specialized workforce is over 50 or approaching retirement.

Against this backdrop, the creation of Powertrain is generally seen as a welcome and promising development. It is estimated that over the next 20 years $5 billion will be required globally for training in the nuclear industry.

Alberta Court Of Appeal Upholds Lease Based On Shut-In Payments
By: Paul Edwards and Veronika Pidskalny

Abstract

John Ballem's The Oil and Gas Lease in Canada, reviewed in this newsletter, tells the tale of the fascinating and sometimes precarious life of the Canadian oil and gas lease. The courts have sometimes seemed surprisingly ready to hold a lease to have been dead for years, even though the lessee has produced substantial quantities of oil and gas from wells on the lands and has paid (in some cases) millions of dollars in royalties to the mineral owner. In a recent decision, however, the Alberta Court of Appeal held that a lease was kept alive without production because of a shut-in well on the lands and regular "shut-in" payments by the lessee.

A recent decision of the Alberta Court of Appeal, Kensington Energy Ltd. v. B & G Energy Ltd., could have important implications for the holders of freehold oil and gas leases. The Court held that the lease under consideration could be continued by means of annual shut-in payments whenever there was a shut-in well on the lands, regardless of the reason for shutting in the well.

Typically, Canadian freehold oil and gas leases are granted for a fixed "primary term" (usually one to five years), plus a "secondary term" which can extend the lease indefinitely as long as the lessee is successful in obtaining oil or gas production from a well on the lands. Depending on the form of lease used, and the habendum clause in particular, "deemed production" (e.g. from a well that is "shut-in") may similarly extend the term.

The Kensington lease followed a form quite commonly found in the western Canadian oilpatch. The habendum clause allowed the lease to be extended beyond the five-year primary term in a number of circumstances, one of which was "if any well on the [leased] lands ... is shut-in, suspended or otherwise not produced for any cause whatsoever which is in accordance with good oil field practice...".

The trial judge focussed on the reasons why a particular well had been shut-in, and whether this constituted a "cause ... in accordance with good oil field practice." He answered this question in the negative, and accordingly held that the lease had expired.

The Court of Appeal reversed this decision. What saved the lessee in this case was the "shut-in" clause in the lease. This is a type of clause, found in every freehold lease, which provides for the payment of small annual "shut-in" payments during years in which all wells on the lands are not producing.

This particular shut-in clause provided that if all wells are "shut-in, suspended or otherwise not produced" during a lease year, the Lessee shall pay the Lessor the shut-in payment and "each such well shall be deemed to be a producing well hereunder".

By a 2:1 majority, the Court of Appeal held that compliance with the shut-in clause was enough to keep the lease alive. It made no difference whether or not the well had been shut in for a cause which was "in accordance with good oil field practice".

This will not be the result in every case. In fact, in the Lady Freyberg case decided in 2005, the same court came to the opposite conclusion because of a differently worded shut-in clause. In that case (as in Kensington), all yearly shut-in payments had been made. However, the Freyberg shut-in clause echoed a requirement found in the habendum that the well be shut-in for lack of an economic gas market. The Court in Kensington distinguished Freyberg because no such requirement appeared in the Kensington lease.

The Court of Appeal sounded a cautionary note, which is a common refrain found in the case law:

Even so, Kensington may be good news for lessees. The clauses in the lease at issue were ambiguous and were quite capable of being construed to favour the position of either the lessee or the lessor. In a number of earlier decisions, the courts have seemed to be quite ready to strike leases down - in some cases even where the lessee has been producing oil or gas for many years and paid substantial royalties to the lessor. The Court of Appeal's decision in Kensington appears to serve as an indication that the courts will be at least neutral in disputes over the continuation of freehold leases.

Alberta Court of Appeal Decision:
http://canlii.org/eliisa/highlight.do?language=en&searchTitle=Search+all+ CanLII+Databases&path=/en/ab/abca/doc/2008/2008abca151/2008abca151.html

Ontario Implements Smart Grid Forum
By: Michael Morrison

Eleven prominent members of Ontario's electricity sector have agreed to serve on Ontario's Smart Grid Forum. The broad-based industry group aims to build on the investment on smart meters that is already underway by developing a vision for a provincial smart grid that will provide consumers with more efficient, responsive and cost-effective electricity service. The forum will consider how a smart grid could deliver significant operational, environmental and consumer benefits.

"The development of a smart gird in Ontario will foster more consumer engagement in the market and enable effective integration of distributed renewable generation", said Paul Murphy, President and CEO of the Independent Electricity System Operator and Chair of the Ontario Smart Grid Forum. He further stated that, "Enabling technologies will provide consumers with the tools and information they require to actively manage their electricity consumption."

Forum Objectives include:

• Educating involved industry leaders about emerging drivers, technologies and opportunities related to the smart grid;
  
  
• Developing a high-level vision of the future in Ontario served by a smart grid;
  
  
• Describing and quantifying the benefits that will be possible through a wide range of smart grid technologies;
  
  
• Identifying enablers and barriers to the construction of the smart grid; and
  
  
• Identifying the actions needed to overcome barriers so that the benefits of the smart grid may be realized.
  
  

A smart grid will use advanced information-based technologies to increase grid efficiency, reliability and flexibility. It will enable better use of existing delivery infrastructure and offers benefits for both the consumer and the environment. In addition to enhancing system reliability, a smart grid is likely to reduce the environmental footprint of Ontario's power system by reducing the need to expand existing infrastructure.

Members of the forum include:

• Paul Murphy, President and CEO, Independent Electricity System Operator and Chair, Ontario Smart Grid Forum;
  
  
• David Collie, President and CEO, Burlington Hydro Inc.;
  
  
• Norm Fraser, Chief Operating Officer, Hydro Ottawa Limited;
  
  
• Anthony Haines, President, Toronto Hydro-Electric System Limited;
  
  
• Wayne Smith, VP, Grid Operations, Hydro One Inc.;
  
  
• Paul Shervill, VP, Conservation and Sector Development, Ontario Power Authority;
  
  
• David McFadden, Chair, Ontario Centres of Excellence;
  
  
• Michael Angemeer, President and CEO, Veridian Corporation;
  
  
• Dr. Jatin Nathwani, Professor and Ontario Research Chair in Public Policy and Sustainable Energy Management, Faculties of Engineering and Environmental Studies, University of Waterloo;
  
  
• Peter Wallace, Deputy Minister, Ministry of Energy; and
  
  
• " Alack Dadson, Chief Operating Officer, Ontario Energy Board.
  
  

Update On Imperial Oil's Kearl Project
By: Lisa Jamieson and Ethan Sinclair

Having received Authorization from the Ministry of Fisheries and Oceans, Imperial's Kearl Oil Sands Project was put on hold in March, 2008 as a result of a Federal Court decision holding that a Federal-Provincial Joint EIA Review Panel had failed to provide reasons for its conclusion that the mitigation measures proposed by Imperial would prevent significant adverse effects to air quality. The Panel provided an addendum to its original decision in which it provided reasons on that issue. In a second decision, the Court held that the original Ministerial Authorization was null and void, since it was based on the Panel recommendations which had been quashed. However, on June 6, 2008 the Ministry issued a new Authorization for the Project, allowing it to proceed.

As reported in the March 26/08 issue of energy@gowlings, earlier in March, 2008, the Kearl Oil Sands Project (the Project) of Imperial Oil Resources Ventures Limited (Imperial) was put on hold as a result of a decision of the Federal Court. The decision concerned the adequacy of the reasons given by a joint review panel established by the Alberta Energy and Utilities Board and the Government of Canada (the Panel), which had recommended that the Project receive authorization. The court held that the Panel had failed to provide reasons for its conclusion that the intensity-based mitigation measures proposed by Imperial would prevent significant adverse effects to air quality, specifically with regard to greenhouse gas (GHG) emissions. The court sent the matter back to the Panel with direction that it supply the missing reasons. The Panel provided such reasons in an addendum to its initial report, EUB Decision 2007-013, issued on May 6, 2008.

In the addendum, the Panel stated that considerable evidence had been presented on air emissions and that a significant amount of the evidence presented by Imperial demonstrated a regional assessment which mainly focused on the pace of development in the area rather than on an individual project basis. It further noted that Imperial's air quality cases were considered to be quite conservative and likely over-predicted the potential exceedances and effects of the Project. Evidence submitted by Alberta Health and Wellness supported the conclusion that the assumptions built into Imperial's EIA, including the guidelines and model input parameters used, were conservative. The Panel further noted that the Project's GHG emissions are estimated to be about 3.7 million tonnes of GHG in CO_2e per year, or .051 per cent of national GHG emissions and about 1.7 per cent of Alberta's annual total GHG emissions. The Panel concluded that:

The Panel further stated that it continued to be of the view that the environmental effects of the Project on air quality are unlikely to be significantly adverse. On March 20, 2008, fifteen days after the initial Federal Court decision, the Minister of Fisheries and Oceans (the Minister) advised Imperial of his opinion that the previously granted Authorization was a nullity as a result of the Federal Court decision. The same day, Imperial launched an application before the Federal Court seeking an injunction restraining the Minister from implementing his opinion. Prior to this, Pembina Institute for Appropriate Development, the Prairie Acid Rain Coalition and the Sierra Club of Canada had brought an application to quash the Minister's prior Authorization.

On May 14, 2008, Mr. Justice Campbell rendered his decision in a consolidated judicial review dealing with the applications brought by both Imperial and the environmental groups. The following issues were raised before the court:

1. What was the effect of the Federal Court's March 5, 2008, judgment on the validity of the Authorization issued by the Ministry on February 12, 2008?
   
   
2. If the Authorization was not rendered a nullity by the Federal Court's March 5, 2008, judgment, should the Authorization by quashed?
   
   
3. If the Authorization remained legally valid, did the Minister have the legal authority to revoke or rescind the Authorization?
   
   

With respect to the first issue, Justice Campbell held that the Panel's lack of reasons supporting its conclusions regarding GHG emissions resulted in the original report being incomplete. Consequently, the new report, inclusive of the reasons, required a new approval by the Governor in Council. The secondary effect of the incomplete report was that the original Authorization granted by the Ministry was issued without jurisdiction and was therefore null and void. Having found the original Authorization null and void, Justice Campbell deemed the second and third issues moot.

On May 15, 2008, the Panel's amended report, inclusive of the reasons, received approval from the Governor in Council. Subsequently, Imperial announced on June 6, 2008, that it had received a new Authorization from the Ministry to proceed with the Project.

Federal cabinet approval:
http://www.pco-bcp.gc.ca/oic-ddc/OIC-DDC.asp?lang=EN&txtOICID= &txtFromDate=&txtToDate=&txtPrecis=Kearl&txtDepartment=&cboDepartment= &txtAct=&txtChapterNo=&txtChapterYear=&txtBillNo=&rdoComingIntoForce= &DoSearch=Search+%2F+List&OICKey=71397

Federal Court decision: http://decisions.fct-cf.gc.ca/en/2008/2008fc598/ 2008fc598.html Joint Panel Report inclusive of rationale for conclusions regarding air emissions: http://www.acee-ceaa.gc.ca/050/docHTMLContainer_ e.cfm?DocumentID=26766

Bill C-5 Update
By: Terry McNally

Parliament adjourned for summer recess on June 20, 2008 without completing its debate of Bill C-5 An Act respecting civil liability and compensation for damage in case of a nuclear incident (Nuclear Liability and Compensation Act). This Bill was the subject of third reading debate by the House on May 28, May 29 and June 19, 2008. Based on this debate, it appears that the Bill now has the support of a majority of the Members of Parliament.

It is anticipated that third reading debate will close shortly after the House reconvenes on September 15, 2008 following which the motion for the Bill will be put to vote. Upon its passage by the House, Bill C-5 will go to the Senate for further consideration. Hopefully the support that the Bill appears to have garnered in the House will carry forward in the Senate, paving the way for speedy Royal Assent and the enactment of this important legislative change for the nuclear industry.

For earlier discussion on this proposed legislation see:
http://www.gowlings.com/resources/enewsletters/energy/Htmfiles/V6N01_20080123.en.html#a

Gowlings Opens London, U.K. Office
By: Graeme Scothmer

Gowlings is pleased to announce the establishment of a new office in London, United Kingdom. The London office will initially serve Gowlings energy and infrastructure clients throughout Europe and across the globe. Gowlings CEO and Chair, Scott Jolliffe remarked that having a base of operations in London would allow for closer ties with European professional service firms to better serve the needs of clients. "Our London office will support Canadian businesses who increasingly look to foreign markets for expansion and growth," said Jolliffe.

Heading up operations in London will be UK business lawyer Andrew Gray. Andrew has worked closely with Gowlings in the past. He will be joined by others as operations begin to start over the upcoming months. Andrew is confident that the London office will greatly aid clients in international energy and infrastructure markets, stating; "we look forward to growing our presence in these dynamic sectors of the global economy with a strong Canada-UK link."

Fourth Edition Of Ballem's The Oil And Gas Lease In Canada Released
By: Paul Edwards

The fourth edition of The Oil and Gas Lease in Canada by John Bishop Ballem, QC LID of Gowlings' Calgary office was formally launched on May 28, 2008. Long recognized as the standard work on the topic, The Oil and Gas Lease in Canada discusses the legal document that determines the process by which a freehold mineral owner may grant oil companies the right to search for and produce minerals. Since the first edition was published in 1973, this text has been relied upon by what now amount to generations of energy lawyers, including those in private practice and in house, in academia and in the judiciary. This book and other writings by Mr. Ballem have frequently been cited by the Courts. In one such case, Acanthus Resources Ltd. v. Cunningham (1998), Mr. Justice Dennis Hart (himself a distinguished oil and gas lawyer before his appointment to the bench) described the third edition of this book as a "well known and highly authoritative text".

Subjected to ongoing litigation and governmental regulation, the lease continues to evolve as the body of common law surrounding it grows and develops. The substances covered by the lease are unique in that their occurrence is uncertain until discovery, and they are capable of moving from place to place within a reservoir. These unique qualities have led to the development of new legal concepts, basically creating a separate and distinct branch of the law.

The fourth edition of The Oil and Gas Lease in Canada guides the reader through the complexities of the lease and the legal issues attached to it. John Ballem brings the text up to date on recent developments, including changes and additions to the terms of the lease, the effect of recent court decisions, and the growth of coal bed methane as an energy source. Of particular interest is his examination of what takes place following a lease's involuntary termination. The book deals with specific examples of this situation, detailing its consequences for both individual mineral owners and oil companies, as well as for future judicial pronouncements.

Mr. Ballem is counsel in Gowlings' Calgary office practising in energy law. He has been accepted as an expert witness on issues pertaining to Canadian oil and gas law and practice by a number of courts and tribunals in Canada, the United States and overseas. He is listed in The Best Lawyers In Canada 2008 (Woodward White). He continues to be available as counsel, as an arbitrator or as an expert witness.

The Oil and Gas Lease in Canada is published by University of Toronto Press. In addition to the U of T bookstore, it is available at most bookstores in Calgary and at specialty bookshops across the country.

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.