Canada: Bill 12: Preserving Canada's Economic Prosperity

Last Updated: April 24 2018
Article by Brendan Downey

The scope and application of Bill 12

On April 16, 2018, the government of Alberta tabled Bill 12 (the Bill) for its first reading.1 Officially titled, Preserving Canada's Economic Prosperity Act,2 the Bill seeks to give the Alberta government a framework to regulate Alberta exports of:

  1. crude oil, but not crude bitumen;
  2. refined fuels, which means gasoline, diesel, aviation fuel, locomotive fuel, or any other fuel or component used to produce refined fuels; and
  3. natural gas, which includes field condensates and various other gas products, such as ethane, propane, butanes, pentanes plus and sulphur.3

It achieves this purpose by installing a licensing regime, backstopped by a set of strong enforcement provisions and general regulation making authority.

With respect to the targeted petroleum products, the Bill's definition of crude oil suffers from some ambiguity and warrants further discussion. For the purposes of the Bill, "crude oil" means a mixture mainly of pentanes and heavier hydrocarbons

  1. that may be contaminated with sulphur compounds,
  2. that is recovered or is recoverable at a well from an underground reservoir, and
  3. that is liquid at the conditions under which its volume is measured or estimated,

and "includes all other hydrocarbon mixtures so recovered or recoverable except natural gas or crude bitumen."4

Despite the fact that crude bitumen is expressly excluded from the scope of the Bill, the inclusion of the language, "a mixture mainly of pentanes and heavier hydrocarbons" may capture certain kinds of diluted bitumen.5 If crude bitumen is a "heavier hydrocarbon", the process of mixing it with a condensate or diluent comprised of pentanes or pentanes plus could bring diluted bitumen within the scope of the legislation. But the requirement that the "crude oil" be "recovered or...recoverable at a well from an underground reservoir" may mean that bitumen recovered through oil sands mining is excluded, notwithstanding subsequent dilution. Regardless of the ambiguity, it remains noteworthy that crude bitumen—and possibly certain varieties of diluted bitumen—are exempt from the Bill and can be exported freely.

The jurisdictional question

The Alberta government introduced the Bill against the backdrop of a pipeline dispute among the Alberta, British Columbia, and federal governments. Specifically, BC opposes the expansion of the Trans Mountain Pipeline, despite the fact that the federal government has jurisdiction over the project.6 Ignoring the stated and actual political issues, the dispute has been framed as a disagreement over the division of legislative powers between federal and provincial governments concerning the pipeline and inter-provincial trade and projects.

In seeking to regulate the export of certain petroleum products and refined fuels, the Alberta government relies on s. 92A of the Constitution Act, 1867, which gives each province the power to make laws in relation to its non-renewable natural resources.7 Under this section, the provinces are empowered to

...make laws in relation to the export from the province to another part of Canada of the primary production from non-renewable natural resources and forestry resources in the province and the production from facilities in the province for the generation of electrical energy, but such laws may not authorize or provide for discrimination in prices or in supplies exported to another part of Canada.8

To comply with this provision, the Alberta government has indicated that the purpose of the Bill is not to act in a discriminatory manner, but to maximize "the value of Alberta's natural energy resources for Canadians" and ensure "the interests of Albertans are optimized" in the production and marketing of Alberta's resources outside of the province.9

Reading between the lines, it appears that pipeline exports of crude oil and diluted bitumen may receive priority over refined products during periods of pipeline capacity constraint. This could optimize the export of crude oil and diluted bitumen products by securing all pipeline capacity for those products and, as a corollary, increase transportation costs (by rail or truck) for refined products displaced from the pipeline.

Whether the Bill passes constitutional muster is uncertain. A number of questions remain in need of answers. For example, given the language of s. 92A, it remains unclear how the interaction of the Bill and s. 92A will apply to international exports. Additionally, the Alberta government's attempt to capture refined fuels within the ambit of the Bill may exceed the scope of s. 92A, which concerns "primary production".10

How the regime will work

Under the new regime, the Alberta Minister of Energy (the Minister) has the discretion to require those who own natural gas, crude oil, or refined fuels (petroleum products) at the time of export to obtain a license authorizing their export from Alberta.11

What is perhaps most interesting about the proposed licensing regime is that it remains predicated on a ministerial order. If the Bill becomes law, the export restrictions attached to a license will not apply automatically. Any export restrictions, in the form of conditions to an export license, will only apply to the extent that the Minister, acting in the public interest of Alberta, exercises her discretion and orders that a person (or class of persons) obtain a license prior to exporting specific petroleum products.

Given the structure of the regime, a person is not obligated to obtain a license under the Bill unless required by ministerial order. While the language in the Bill appears broad enough to enable the Minister to target specific persons, we expect that the Minister would first identify a specific petroleum product to impose export restrictions on, and all persons that export that product would be require to obtain licenses.

Without a license, those affected by a ministerial order cannot, subject to exemptive conditions,12 export the petroleum products that the order concerns.13 Before making an order, the Minister will first decide whether it is in the public interest of Alberta to do so. In coming to this determination, the Minister may consider:

  1. whether adequate pipeline capacity exists to maximize the return on crude oil and diluted bitumen produced in Alberta;
  2. whether sufficient supplies and reserves of natural gas, crude oil and refined fuels are available to satisfy Alberta's present and future needs; and
  3. any other matters the Minister considers relevant.14

These considerations seem to prioritize the efficient transport of crude oil and diluted bitumen. And in the context of the Trans Mountain Pipeline dispute with BC, both (i) and (iii) provide the Minister with significant discretion to ensure an order promotes the public interest of Alberta. The Minister also has the authority to impose any terms or conditions she considers appropriate. Such terms and conditions can specify:

  1. the point at which the licensee may export any petroleum products;
  2. the methods by which these petroleum products can be exported;
  3. the maximum quantities of these petroleum products that can be exported from Alberta during the term of the license;
  4. the maximum daily quantity of these petroleum products that can be exported;
  5. the conditions under which export of these petroleum products may be "diverted, reduced or interrupted"; and
  6. the period for which the license operates.15

Similar licensing restrictions already govern the export of natural gas from Alberta.16 Recognizing this, the transitional provisions contained in the Bill grandfather in export licenses currently held by persons involved in the export of natural gas from Alberta.17

Pipes, trains, and automobiles: the Bill's impact on transporters

Under s. 8 of the Bill, the Minister can order an "operator" to stop transporting certain petroleum products owned by any person (the Infringing Person) that has failed to comply with the licensing regime.18 This provision would apply to a person subject to a ministerial order who exports certain petroleum products without a license, as well as a person breaching the conditions attached to the license.

The term "operator" includes the holder of a license for a pipeline entirely within the province of Alberta under the Pipeline Act, the operator of a railway under the Railway (Alberta) Act, or the registered owner of a commercial vehicle under the Traffic Safety Act.19 It does not include federally regulated pipelines, railways, or trucking services.

By structuring the regime in this way, the Alberta government intends to avoid infringing on the federal government's sphere of legislative authority.20 Indeed, while s. 92A of the Constitution Act, 1867, gives each province jurisdiction over the export of its non-renewable natural resources, s. 92A(3) expressly circumscribes this power, ensuring that the province does not go beyond its constitutional authority. In this case, s. 8 of the Bill clearly exempts export pipelines from the Minister's authority.

The Bill also provides that an order to stop transporting an Infringing Person's petroleum products will not frustrate any agreement between the Infringing Person and the operator of a transportation system for petroleum products, nor will it relieve the Infringing Person of any liability on those agreements. As a result, not only will an Infringing Person face statutory penalties, but they may incur further liability on their contracts, whether for breach or because they retain take-or-pay payment obligations despite not utilizing their transport capacity. This is an area that will need to be considered when drafting and negotiating future midstream agreements.

Penalties

If a person fails to comply with the licensing regime and any other relevant terms or conditions attached to their license, they may be liable for a fine of up to $10 million (for corporations) or $1 million (for individuals) for each day the offence continues.21

In addition, where a corporation commits an offence, any officers, directors, or agents of the corporation who "directed, authorized, assented to, acquiesced in or participated in the commission of the offence is a party to and guilty of the offence and is liable to the fines provided for the offence, whether or not the corporation has been prosecuted for or convicted of the offence."22

How has the industry responded?

While the Canadian Association of Oilwell Drilling Contractors, the Canadian Association of Petroleum Producers, and the Explorers and Producers Association of Canada have expressed some support for the Bill, they have advocated restraint and caution.23

The Canadian Energy Pipeline Association, however, has been less supportive. The implications of the Bill are far-reaching, particularly for midstreamers. In asserting its authority to control which petroleum products can leave the province, the government also has the power to shape the customer base of midstream operators.

Summary

While not yet law, the Bill represents an attempt by the Alberta government to provide a framework to regulate the export of Alberta's non-renewable natural resources. The Alberta government took pains to ensure the export restrictions do not conflict with the federal government's jurisdiction over interprovincial trade; the Bill only applies to exporters and those involved in the operation of transportation systems entirely within Alberta. Moreover, any export restrictions are discretionary and such restrictions only apply upon ministerial order.

Below are some important points to be aware of:

  • the proposed export licensing regime gives the Minister the discretion to restrict the export of natural gas, crude oil, and refined fuels (but not crude bitumen);
  • on application, the Minister may grant exemptions to the regime;24
  • the Minister has the authority to order pipeline, rail, or commercial vehicle operators to stop transporting the petroleum products or refined fuels of any person that fails to comply with the licensing regime; and
  • significant financial penalties follow non-compliance, including personal liability for the directors, officers, and agents of non-compliant corporations.

Footnotes

1 Legislative Assembly of Alberta, "Daily Bill Activity Report: Session Bill Activity Report for the 29th Legislature – 4th Session" (16 April 2018), online: http://www.assembly.ab.ca/net/index.aspx?p=bills_activityreport&legl=29&session=4.

2 Bill 12, Preserving Canada's Economic Prosperity Act, 4th Sess, 29th Leg, Alberta, 2018 [Bill 12].

3 Bill 12, ss 1(a).

4 Bill 12, s 1(a).

5 According to the National Energy Board's publication, Canada's Oil Sands: Opportunities and Challenges to 2015 (Energy Market Assessment, May 2004): Diluted bitumen is bitumen that "has been reduced in viscosity through addition of a diluent (or solvent) such as condensate or naphtha." Diluent is "any lighter hydrocarbon, usually pentanes plus, added to heavy crude oil or bitumen in order to facilitate its transport on crude oil pipelines"; condensate is "a mixture comprised mainly of pentanes and heavier hydrocarbons recovered as a liquid...." at pp 115 – 118.

6 Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, s 91(2), reprinted in RSC 1985, Appendix II, No 5 [Constitution Act, 1867] [emphasis added].

7 Constitution Act, 1867, s 92A(1)(b).

8 Constitution Act, 1867, s 92A(2).

9 Bill 12, Preamble.

10 See, Sched 6 of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (UK), 1982, c 11.

11 Bill 12, s 2(2).

12 Bill 12, s 9.

13 Bill 12, s 2.

14 Bill 12, s 2(3).

15 Bill 12, s 4(2).

16 Gas Resources Preservation Act, RSA 2000, c G-4; see also: Bill 12, s 12.

17 Bill 12, s 12.

18 Bill 12, s 8(2).

19 Bill 12, s 8(1), referring to: Pipeline Act, RSA 2000, c P-15; Railway (Alberta) Act, RSA 2000, c R-4; and the Traffic Safety Act, RSA 2000, c T-6.

20 Pipeline Act, s 2(b).

21 Bill 12, s 7(2)(a).

22 Bill 12, s 7(3).

23 Lucie Edwardson, "Notley's Bill 12 'shows bold leadership,' say Alberta oil and gas producers", CBC (17 April 2018), online: http://www.cbc.ca/news/canada/calgary/alberta-oil-gas-producers-support-notley-government-bill-12-1.4622717.

24 Bill 12, s 9.

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