Edited by Paul Harricks

Contents

  • Alberta Government Announces New Transitional Royalty Rate Program - John Iredale and Chiara Woods
  • Obama's Energy and Environmental Plan - Michael Morrison
  • Alberta's Energy Strategy for the Future - Lisa Jamieson
  • IESO Issues 18-Month Outlook - Neil McCormick
  • Are You Ready for a Visit From an OHS Officer? - Chris Sabat

ALBERTA GOVERNEMENT ANNOUNCES NEW TRANSITIONAL ROYALTY RATE PROGRAM
 By: John Iredale and Chiara Woods

In response to growing global economic crisis, lower commodity prices and decreased investment in Alberta's oil and gas sector, the Alberta Government introduced a new and optional transitional royalty rate program intended to provide relief from the effects of the Alberta Government's New Royalty Framework (NRF) which became effective on January 1, 2009. Aimed at conventional oil and gas producers, the transitional program is intended to free up capital and encourage the development of new drilling projects. However, due to its limited scope, the transitional program is unlikely to have a substantial effect on the majority of oil and gas producers operating in Alberta which were required to shift to the NRF on January 1, 2009. The transitional program will only apply to qualifying gas and some oil wells drilled after November 19, 2008 with the result that there is no relief for existing wells and no financial benefit to producers, under the transitional program for qualifying new wells, until likely 2010 when any qualifying new wells come into production.

On November 19, 2008, the Alberta Government announced that it would offer new transitional royalty rates for companies drilling new natural gas or new conventional oil wells at 1,000 to 3,500 metres in measured depth. The transitional rates are to be available to eligible companies as a one-time option that will apply to production from January 1, 2009 to December 31, 2013. To ensure all preparatory or drilling work planned to begin from the date of the announcement until the end of the year continues as scheduled, wells that were started between November 19, 2008 and December 31, 2008 were also eligible for the transitional rates. Following a five-year transition period, all companies that choose the transitional rates will switch to the NRF. The transitional rates will have no impact on oil sands projects which were required to shift to the NRF on January 1, 2009.

The NRF, which was announced in October 2007, raises royalty rates on conventional oil, natural gas and oil sands production. Under the NRF, conventional oil and natural gas royalties are based on a single sliding-rate formula with separate elements that account for price and production volume. Conventional oil royalty rates range from 0 - 50% and natural gas royalty rates range from 5 - 50%.

The transitional program does not technically impose a cap on royalty rates on conventional oil production but, practically speaking, the transitional rates are capped at about 38%. The transitional program will treat conventional natural gas production more favourably than conventional oil, capping royalties at 30%. For natural gas liquids, the current flat rate royalties of 30% for propane and butane and 40% for pentanes plus are not affected by the transitional program.

Companies electing to participate in the transitional program must choose to have the rates apply to the entire production from a particular well. As a result, the transitional rates will apply to any associated natural gas production from oil wells that are part of the transitional program in addition to the associated field condensate produced by natural gas wells.

Relative to what it would have collected under the NRF, the Alberta Government forecasts that as a result of the transitional program it will forfeit approximately $172 million in royalty revenue in 2009 and $1.8 billion over five years depending on the number of new wells paying transitional rates, production rates and commodity prices. However, royalty revenue losses as a result of the transitional program, particularly for 2009, are likely to be significantly lower due to the fact that the transitional rates apply to production from new wells which are not likely to start producing until next year and the fact that oil and gas commodity prices have been reduced to levels far below prices forecast in assumptions used in the models for the NRF and transitional program.

Since the NRF was announced, Alberta's energy sector has suffered from a marked decrease in investment as a steady stream of capital has continued to flow across Alberta's borders to British Columbia and Saskatchewan in response to the royalty hikes. Speaking to reporters at a press conference in Edmonton, Premier Stelmach explained that the transitional rates are designed to encourage the development of new drilling projects by helping to ensure that companies have access to the cash flow required to invest in new projects. However, due to its limited scope, the transitional program is unlikely to have a substantial effect on the majority of oil and gas producers operating in Alberta, which were required to switch to the NRF on January 1, 2009. The transitional program will only apply to a nominal number of wells drilled after November 19, 2009. As a result, it will offer no relief for existing wells and likely no immediate or significant financial benefit to producers until 2010 when qualifying new wells come into production. In addition, the transitional program does not affect any oil sands projects, which have already been required to shift to the NRF as of January 1, 2009.

In addition, the significant decrease in oil and gas commodity prices has adversely affected the economics of production rates of return and caused producers to reduce drilling activities.

OBAMA'S ENERGY AND ENVIRONMENTAL PLAN
 By: Michael Morrison

The White House has posted President Obama's energy and environmental plan. While the plan only contains high level statements, it notes that dependency on foreign oil "doesn't just undermine our national security and wreak havoc on our environment -- it cripples our economy and strains the budgets of working families all across America." There is no comment on whether the White House considers oil from other parts of North America to be domestic or foreign (Although the third point below may be construed such that the White House views domestic oil as all North American oil since it only lists the Middle East and Venezuela).

The plan proposes spending on alternative and renewable energy, ending the United States "addiction to foreign oil", addressing the global climate crisis and creating millions of jobs. The following are highlights from the plan:

  • Help create 5 million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future;
  • Provide short-term relief to American families:
    • Crack down on excessive energy speculation.
    • Swap oil from strategic petroleum reserve to cut prices;
  • Within 10 years, save more oil than we currently import from the Middle East and Venezuela combined by;
    • Increasing fuel economy standards;
    • Getting 1 million plug-in hybrid cars on the road by 2015;
    • Creating a new $7,000 tax credit for purchasing advanced vehicles;
    • Establishing a national low carbon fuel standard;
    • A "use it or lose it" approach to existing oil and gas leases; and
    • Promoting the responsible domestic production of oil and natural gas.
  • Ensure 10 percent of our electricity comes from renewable sources by 2012, and 25 percent by 2025;
  • Deploy the cheapest, cleanest, fastest energy source - energy efficiency;
  • Weatherize one million homes annually;
  • Develop and deploy clean coal technology;
  • Prioritize the construction of the Alaska Natural Gas Pipeline;
  • Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050;
  • Make the U.S. a leader on Climate Change.

ALBERTA'S ENERGY STRATEGY FOR THE FUTURE
By: Lisa Jamieson

On December 11, 2008 the Province of Alberta released its energy strategy Launching Alberta's Energy Future (the Energy Strategy)1. The Energy Strategy discussed the provincial government's plans for the future development of the energy industry and incorporated a number of goals that the province has set. Two such goals are to incorporate clean energy into provincial energy production and to change energy consumption behaviour in the province as part of an overall strategy. Although the province expressed an intention to incorporate more forms of green energy as part of its long term plan, it also stressed the important role that Alberta's current energy economy plays in the province and as part of Canada's economy as a whole. Although the report attempts to set the record straight with respect to criticisms surrounding issues of environmental sustainability and climate change, it is admittedly short on details as to how the province will implement its strategy.

The three main outcomes the province is seeking to achieve as part of its energy future are: 1) clean energy production, 2) wise energy use, and 3) sustained economic prosperity. Consequently, the Energy Strategy begins with a discussion of the diversity of resources available in Alberta, including Alberta's natural gas, conventional oil, bitumen and coal and the important role they play in the economies of both Alberta and Canada. Although the Energy Strategy includes a discussion of the importance of development of alternative sources of energy such as wind power, solar power, and biomass, it clearly states that Alberta's future will remain heavily reliant on the production of its plentiful, and generally hydrocarbon-based, natural resources.

Challenges Facing Alberta's Energy Industry

The Energy Strategy also identifies some of the main challenges that the province and the energy industry will face in the future. These include issues surrounding climate change, the emergence of global markets, technology, labour shortages, energy use and conservation, and awareness and understanding of Alberta's energy industry as a whole. With respect to climate change, the Energy Strategy notes that although, Alberta has made some reductions in emissions intensity, greenhouse gas emissions will remain tied to energy production. As demand is not likely to decrease in the near future, the province acknowledges that emissions reductions must come from the development of cleaner forms of production. It also confirms the experience of many in Alberta that energy markets are beginning to open globally for Alberta in places like China and India. The province wants to ensure that Alberta is well positioned to take advantage of any opportunities that may arise to expand its markets internationally.

Alberta's Position on Renewable Energy

Alberta did address the need for more clean energy production in the province. It stated that the continued development of renewable energy sources will assist in reducing the province's greenhouse gas emissions. Production of these renewable resources would be expected to "enhance Alberta's diversity of energy supply, stimulate regional activity, and fortify collaboration across industry sectors."2 However, readers are reminded that global and local demand will not be met by renewable energy alone and, therefore, the demand for Alberta's non-renewable resources will remain strong.

The Energy Strategy noted that Alberta already has "almost three times the national average of electricity generation capacity from wind power."3 It also states that by 2030, "the world is expected to be consuming more than 50% more energy than it consumes today"4 and that many experts expect that the supply to meet that demand will be derived largely from fossil fuels. It reiterates the province's intention to invest in and foster the development and implementation of new forms of technology and processes that will reduce greenhouse gas emissions including the utilization of gasification technology and carbon capture and storage to improve emissions intensity within the province. Alberta intends to work with the federal government to ensure that any climate change regime that is implemented in the future will not negatively affect the development of Alberta's energy. Alberta is wary of any mitigation measures that will result in a redistribution of Alberta's wealth or that will negatively affect Alberta's competitiveness at home or abroad, such as a carbon tax or a cap-and-trade system.

The province stated that it will apply energy and environmental technological leadership to other environmental issues confronting fossil fuel development, such as water consumption and tailings pond management. It also intends to provide incentives for cleaner industry behaviour by maintaining the Specified Gas Emitters Regulation. The province suggests that changes to regulations may be required to account for the pricing of carbon emissions for large emitters that may evolve over time. It has also expressed its intention to implement a renewable fuel standard that will be consistent with similar initiatives in other jurisdictions within Canada.

How does the Province Plan to Accomplish its Goals?

The province expressed its commitment to encourage further development and provide a market for renewable energy. It also intends to research and explore the possibility of nuclear power development and engage the public as to its feasibility in Alberta. The province intends to manage the environmental footprint of the energy industry by managing and monitoring the cumulative effects of the energy industry on a regional basis. This was also expressed in the province's recently released Land-Use Framework, released on December 10, 2008. It notes that a large measure of the Energy Strategy going forward will incorporate philosophies of conservation and energy efficiency.

Albertans are encouraged to become more mindful of their individual and collective energy use and develop a culture of energy conservation. The steps the government intends to implement include improvements to measurements of consumption, the "greening-up" of transit, improvements to building designs to ensure a smaller environmental footprint, and improvements to urban planning that will allow for increased density within Alberta's cities and towns.

The Energy Strategy is filled with a 'wish list' that addresses the many issues facing Alberta's energy industry. It seems clear that Alberta intends to continue to maximize its energy production to meet local and international demands while implementing technological improvements where possible. It is committed to advancing Alberta's position locally and globally as a leader in technological advances in areas of unconventional gas development, water use efficiency, groundwater protection and beneficial re-use, water storage, tailings pond management/use, and integrated resource management. It acknowledges that it is unrealistic for Alberta to become a master of all matters of energy research and, therefore, will monitor international developments.

IESO ISSUES 18-MONTH OUTLOOK
 By: Neil McCormick

Ontario's Independent Electricity System Operator (IESO) released its most recent Ontario Reliability Outlook report (Outlook). The Outlook shows that Ontario's efforts to renew its electricity infrastructure and to meet its environmental targets have resulted in an improved reliability outlook in the near term. Still, new challenges to reliability are emerging as Ontario moves towards a cleaner supply mix. The Outlook identifies three priority areas for the province's electricity system: the changing supply picture; the challenges of operating a cleaner electricity system; and the continuing need for transmission enhancements.

Ontario's Changing Supply Picture

There is no doubt that Ontario's supply picture is changing. According to the Outlook, the Ontario Power Authority is currently managing almost 10,000 MW of new generation and demand management projects. These new resources include 3,000 MW of nuclear refurbishment, 5,400 MW of natural gas generation and more than 1,400 MW in renewables. With these projects scheduled to be completed by 2013, the Outlook predicts that Ontario will be well-positioned to support the elimination of coal-fired generation by the end of 2014.

The changing supply picture presents a number of challenges for the IESO. First, the transition away from coal requires the careful management of transmission operations. For instance, the loss of the key voltage support provided by the coal-fired Nanticoke Generating Station, will require the installation of shunt capacitor banks and interim reactive support from Nanticoke. Second, as gas-fired generation moves to replace coal, the IESO has been working to ensure the adequacy and security of Ontario's natural gas infrastructure. This has involved working to develop communication protocols with partners in the natural gas and electricity industries. Third, the need to retire, replace or refurbish Ontario's aging nuclear units will require intricate planning and important decisions as facilities are taken out of service while others are reintroduced or commissioned.

Operating a Cleaner Electricity System

With an Ontario Government target to put in place 22,000 MW of renewable resources and conservation efforts by 2025, it is clear that renewables will occupy a more prominent role in Ontario's supply mix. New renewable resources, however, have different operating characteristics than the large-scale generating facilities at the core of the traditional electricity management system. Adapting the system operations to meet these new operating characteristics presents a number of challenges for the IESO.

Integrating additional wind generation capacity into the province's electricity system is an example of one such challenge. Wind power is well-positioned to grow in Ontario, and a number of potential sites have already been identified. The intermittent output of wind facilities, however, requires a constant balancing of the supply mix to meet the needs of the province and its interconnections. Moreover, wind, like other renewables, is often an embedded or distributed generation source and is therefore outside of the traditional control of the IESO.

In response, the IESO believes that there is a need for centralized information gathering and coordination. Other jurisdictions with large renewable energy portfolios often have such system controls in place. These 'smart grids' are used to track production and consumption activities at the local level, and if necessary, move to direct large-scale generation facilities to meet any remaining demand. Ontario's smart metering initiative is a step in this direction, since the information collected will be used to signal producers and consumers when generation and demand response is needed. The IESO is currently leading the Ontario Smart Grid Forum to develop a vision for a smart grid in Ontario and its report will be released shortly.

The Continuing Need for Transmission Enhancements

The third priority area identified in the Outlook concerns the continuing need for transmission enhancements to revitalize the province's transmission system. New infrastructure is needed on the one hand to replace aging transmission facilities and, on the other, to support changes to the supply mix. Hydro One, for instance, has identified $600 million in capital investments to be made in the next two years to maintain the reliability of existing infrastructure. In addition, new transmission lines will need to be built to support renewable generation in areas that are either congested or located away from existing transmission facilities. These transmission lines will be in addition to other new and proposed transmission infrastructure, such as the Ontario/Quebec interconnection.

These changes to the transmission system will require careful outage planning, since changing one part of the transmission or generation system affects the capabilities of the other parts of the system. The IESO, therefore, proposes to work closely with Hydro One and other partners to ensure the reliability of the system while these significant changes are taking place.

ARE YOU READY FOR A VISIT FROM AN OHS OFFICER?
 By: Chris Sabat

Fines under Alberta's Occupational Health and Safety Act (OHSA) hit an unprecedented high in 2008. The Upstream Oil and Gas (UOG) industry was one of the industries targeted. Moreover, a recent court decision against a well services company may have eased the task of the Crown in securing convictions in cases where a worker has been injured.

According to Alberta Workplace Health and Safety (WHS), the provincial ministry responsible for enforcing Alberta's OHSA, 2008 was the third consecutive year that record penalties have been imposed.

In 2007 there were only 12 completed prosecutions under the OHSA, with fines totalling $1,720,000. In 2008 this number almost doubled to 22 completed prosecutions. But the more formidable statistic is the amount of total fines levied in 2008 - a whopping $5,073,000 - an increase of 294% from the previous year. Also worth noting is the increase in the average fine per completed prosecution, which went from $143,000 in 2007 to $230,590 in 2008.

These numbers are a product of several factors. First of all, there have been more OHS officers enforcing Alberta's OHS laws and more crown prosecutors handling OHS files. Further, "creative sentencing" provisions under the OHSA allow judges to direct portions of fines to organizations that will improve health and safety standards for Albertans. Judges have been taking advantage of this opportunity. In 2008, 88% of all fines went to organizations like STARS (air ambulance service), Red Deer College, Northern Alberta Institute of Technology, and the University of Alberta. Perhaps most importantly, Alberta's work-related fatality rate has not seen a significant improvement since 2003. This has garnered a great deal of public concern and media attention, especially in both of Alberta's major newspapers, the Calgary Herald and the Edmonton Journal. As a result, WHS may be feeling increased pressure to ensure that employers are deterred from unsafe practices. Whatever the reasons, the latest prosecution statistics are eye-opening to say the least.

There is no end in sight to this trend. WHS' Targeted Employer Program, which has been in place and has been successful since 2002, will be continuing in 2009. This program identifies employers who have injury frequency and severity rates higher than the provincial average and subjects them to a certain number of proactive inspections by an OHS officer within a 12-month period. Orders are the likely result of these inspections if any contraventions of Alberta's OHS laws are identified. In 2007/2008 the Targeted Employer Program resulted in more than 5,000 inspections and the issuance of more than 3,000 orders. Of these, 1,357 inspections and 644 orders related to employers in the UOG industry. The UOG industry continues to be targeted in 2009.

Because the UOG industry is being closely monitored by WHS, it is more important than ever for employers in this sector to ensure that supervisors and workers, who will likely have contact with an OHS Officer, are properly equipped to handle an inspection or an investigation. It is these supervisors and workers who may unnecessarily incriminate their employers, or the contractors and prime contractors that have hired them. Providing this training is a new focus of Gowlings OHS Practice Group in Calgary.

Not only has the likelihood of a visit by an OHS Officer increased, along with the likelihood of orders being issued as a result of these visits, but a recent Court of Queen's Bench decision may have increased the ease with which WHS is able to obtain convictions under the "general duty clause" of the OHSA. The general duty clause requires employers "to ensure, as far as it is reasonably practicable to do so, the health and safety of workers".

Prosecutions under the OHSA commonly include allegations of a "specific" nature, such as the failure to provide fall protection equipment, along with an allegation that the general duty clause has been contravened. This can lead to suspicions that the general duty is being used as a "catch all" or as insurance, in case the Crown is unable to prove the "specific" offences beyond a reasonable doubt, or if the employer is able to establish due diligence in relation to the specific offences.

The general duty clause was considered in the decision of R. v. Rose's Well Services Ltd., issued in January 2009. In Rose, the defence argued that, based on the wording of the general duty clause, the Crown must establish the failure to take all reasonable steps, a standard equivalent to negligence. Generally, this would involve specific allegations by the Crown as to the manner in which the defendant's OHS Management System was inadequate. The Crown would then be obligated to establish this inadequacy beyond a reasonable doubt. The Crown argued that the accident itself established the offence, requiring the onus of proof to shift to the defendant to establish due diligence. The Court of Queen's Bench endorsed the notion that "the Crown may stop at the facts of the incident" as proof of the offence.

Rose represents the first appellate decision to endorse the notion that the accident itself establishes an offence under the general duty clause and that the Crown must establish no specific failure or act on the part of the employer to ensure, as far as it was reasonable and practicable to do so, the health and safety of a worker. This may result in more difficult and time-consuming defences to these charges and increase the expense and uncertainty for employers.

All of this recent OHS activity in Alberta raises a very important question that all employers should be asking themselves: "Are we in compliance with Alberta's OHS laws?"

Complying with Alberta's OHS laws minimizes the risk of having work-related incidents, which significantly decreases the likelihood of being targeted by WHS. This further decreases the likelihood that orders will be issued or a prosecution will be commenced. It has become more important than ever to invest in OHS proactively, in order to prevent the human, economic and legal costs associated with work-related incidents, rather than deal with the uncertainty of a prosecution and the skyrocketing fines under Alberta's OHSA. The Gowlings OHS Practice Group in Calgary is committed to assisting clients in this endeavour.

Footnotes

1.Launching Alberta's Energy Future: Provincial Energy Strategy, located at http://www.energy.gov.ab.ca/Initiatives/1437.asp, printed December 11, 2008.

2. Supra, at page 10.

3. Supra, at page 23.

4. Ibid.

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.