Canada: Energy Update - Oct 2009

Last Updated: October 14 2009

This is a joint publication between our Energy, Regulatory and Energy Litigation Practice Groups

Regulatory Delay And The One Project-One Assessment Proposal

By Marie H. Buchinski, Kelsey J. Drozdowski, and Celeste M. Hutchinson

In Canada, the federal, provincial and territorial governments have assumed a role in the development and operation of various energy projects, particularly those that have the potential to impact the environment. This separation of jurisdiction between the levels of government, arising in part from the division of powers under the Constitution Act, 1867, has demonstrably contributed to regulatory delays regarding project approvals because of the sometimes difficult task of coordinating the review of the project amongst the levels of government, and even within one particular level of government. Delays in the regulatory approval process can have significant and negative impacts upon industrial development in Canada, with impacts reaching far beyond the proponents of the particular project.

Take, for example, the oft-cited Mackenzie Valley Pipeline, the applications for which were filed with regulators in the fall of 2004 and spring of 2005. While the Joint Review Panel conducting the regulatory review of the project concluded its public hearings on November 29, 2007 – close to two years ago – after 115 days of hearings in 26 communities recorded on more than 11,000 pages of transcripts, and more than 5,000 submissions, the Joint Review Panel has not yet issued its final report, which must be submitted to the federal government and to the National Energy Board for their consideration before further regulatory decisions can be made and the project can proceed. This regulatory delay, along with rising costs and more recent concerns regarding demand for natural gas, has put the fate of the pipeline into question.

The impacts do not stop there. Calgary-based MGM Energy Corp. recently announced that it will cancel its Arctic drilling program this winter, resulting in a $10-million penalty to the Inuvialuit Regional Corp. in August 2010. MGM's press release indicates that the cancellation is due to the uncertainty regarding the Mackenzie Valley Pipeline.

In recognition of the difficulties that can arise from such delays in the regulatory process, recent efforts have been aimed at coordinating the federal, provincial and territorial regulatory processes. In January of this year, the Canadian Council of Ministers of the Environment (CCME) published Potential Models of a One Project-One Environmental Assessment Approach which identifies four potential models for streamlining the environmental assessment (EA) processes in Canada as identified by the Environmental Assessment Task Group. Three of these models (Joint Process Model; Delegation Model; Substitution Model) focus on achieving a single EA process by, in part, adopting a single set of information requirements. The fourth model – the Coordination (Harmonization) Model – contemplates either separate or combined information sets. All, however, are aimed at achieving a more streamlined regulatory process by creating a single, jointly implemented process, having a single jurisdiction or process to conduct the EA process, or by increasing coordination between EA authorities. While these proposals would not require a transfer in the ultimate, decision-making authority, each of these models would require changes to the current EA processes and to existing legislation, which in itself could involve lengthy processes.

The CCME is not the only impetus for change. Canadian federal, provincial and territorial ministers for the energy and mining industries recently discussed regulatory delays at the 2009 Energy & Mines Ministers Conference held on August 31 and September 1, 2009. There, the Canadian Mineral Industry Federation (CMIF) urged the ministers to take action to sustain Canada's exploration and mining sectors and to encourage economic recovery by undertaking regulatory restructuring. The CMIF identified several concerns with the current process, including duplicative regulatory systems, arguing that ambiguity in this and other areas could have the potential to stifle Canada's status as a destination for capital investment.

The current economic state in Canada and the goal of creating economic stability has created additional pressure upon governments to streamline their regulatory processes. Canada's energy and mines ministers agreed that to maintain prosperity and to fully recover from the current economic situation, Canada must continue to be at the forefront in developing and deploying new technologies, advancing research, and developing solutions to regulatory, social and environmental challenges. The ministers affirmed their commitment to immediate action that would improve Canada's regulatory system through the creation of a "one project-one assessment" approach to EAs that would support the competitiveness and sustained growth of the energy and mining industry.

So, what now? What we do know is that the ministers have agreed to task senior officials to work with their counterparts responsible for EAs and related regulatory approvals on fundamentally improving performance, and to report back to the 2010 conference. We also know that recent publications attempt to address the degree of uncertainty that often arises for projects requiring regulatory approvals, including the Environmental Assessment Scoping Guidance for Energy and Mining Projects (July 24, 2009). This document sets out 42 best management practices aimed at reducing the uncertainty that is attributable to the scoping phase of an EA. It is proposed that these best management practices be applied by decision making authorities and technical expert departments in relation to scoping, process management, relationship management, documentation, policy management and guidance. Of note are recommended best practices #24, #25, and #26 related to the establishment of EA agreements for joint panel reviews with other jurisdictions; the identification of one overall coordinator of the EA process; and encouraging the use of one scoping document for multi-jurisdictional EAs to detail the scope of the project and of the assessment for all of the decision making authorities involved. However, the specific ministerial commitments leave unanswered questions as to how the commitment to immediate action will be implemented.

Combined with existing federal-provincial protocols and existing provisions of the Canadian Environmental Assessment Act for governmental cooperation and harmonization respecting EAs, these recent attempts to improve process efficiencies may assist in reaching the ultimate creation of a "one project-one assessment" approach to EAs across Canadian jurisdictions. Considering however the potential fate of the Mackenzie Valley Pipeline and the recent MGM announcement of a $10-million penalty, the question is whether this recent push for regulatory reform will be "too little, too late", at least for some participants in the Canadian economy.

The federal proposal for a "one project-one assessment" approach to EAs is not the only current initiative seeking to streamline regulatory approval processes. The Alberta Environment Ministry is considering an option that would remove certain in-situ oil sands developments from the mandatory list for environmental impact assessments. Rather, a "code of practice" would be developed that industry would agree to abide by, in an effort to create a more efficient and streamlined regulatory process, reducing the potential for lengthy regulatory delays.

Pending implementation of further rationaliz-ation/streamlining initiatives, it will continue to be critical for project proponents to utilize existing EA harmonization tools, and to develop project teams, including legal, that are able to advance projects on a multi-front jurisdictional basis. In other words, to the extent that there is potential for delay, ensure it is not self-inflicted.

The Narrowing Of Non-Operator Set-Off Rights?

By Chris D. Simard

Current financial conditions have renewed industry focus on the various rights of parties in the context of insolvency proceedings and the steps exposed parties might take to mitigate various credit risks. A recent case arising from the SemCAMS insolvency suggests that set-off rights non-operators might have thought they had may be narrower than expected. That finding was based upon a characterization of the operator as a "trustee" of the owners of the plant. As a result, parties to traditional construction, ownership and operation (CO&O) agreements may want to consider taking additional measures to protect themselves from an insolvent operator.

Facts

On June, 30, 2009, the Court of Queen's Bench of Alberta issued a decision in Re: SemCanada Crude Company, 2009 ABQB 397. On August 19, 2009, the Court of Appeal of Alberta dismissed an application for leave to appeal the decision (2009 ABCA 275). The decision arose in the context of the SemCanada Companies' Creditors Arrangement Act (CCAA) proceedings.

Trilogy Energy L.P. sold gas to SemCAMS ULC pursuant to an Inlet Purchase Agreement. SemCAMS also provided transportation and processing services to Trilogy, in SemCAMS' capacity as operator of a number of gas processing plants. Trilogy was a joint owner in some, but not all, of the plants. There were other joint owners.

SemCAMS became insolvent and obtained Court protection under the CCAA in July 2008. At that time, it owed Trilogy approximately $4 million relating to its purchases under the Inlet Purchase Agreement. Both before and after the commencement of the CCAA proceedings, Trilogy was indebted to SemCAMS under various CO&O and gas processing agreements for gathering, transportation and processing services provided by SemCAMS.

Trilogy wanted to set-off the amount it was owed for the gas purchases against the fees that it owed to SemCAMS.

The Law

Under the CCAA, creditors' set-off rights existing at law, or by virtue of their contracts with the insolvent debtor companies, are generally preserved. In this case, Trilogy argued that it was therefore entitled to set-off the cross-claims by way of contractual, legal or equitable set-off.

The Court's Decision

Prior to determining Trilogy's entitlements to set-off, the Court commented on the nature of the relationship between SemCAMS and other joint owners of the plants. Madam Justice Romaine of the Court of Queen's Bench reviewed the contractual provisions in the CO&O agreements and found that, based on those contractual provisions and also the characteristics of the relationship, SemCAMS was a trustee as operator of the plants. In this regard, Justice Romaine specifically made reference to the Bank of Nova Scotia v. Société Générale (Canada) (1988) 87 A.R. 133 (C.A.) decision. The Court found that, similar to the case of an operator of a well under a CAPL joint operating procedure, SemCAMS was a trustee for its joint owners in the plants.

Contractual Set-Off

In the Inlet Purchase Agreement, the parties had agreed to a very broad set-off clause, which entitled Trilogy to set-off any amounts owing under that agreement against any amounts owing under "any other agreements" between the parties. The Court found that this contractual provision was not broad enough to cover agreements (like the CO&O agreements) in which SemCAMS was contracting as an operator or in trust for other joint owners. Trilogy was therefore not entitled to contractual set-off.

Legal Set-Off

The requirements for legal set-off are that the cross-claims be liquidated debts and that they be mutual (mutuality is said to require claims "between the same parties and in the same right"). Romaine J. found that there was no mutuality in this case, because SemCAMS, in the CO&O and gas processing agreements, was contracting not in its individual capacity, but rather as a trustee for its joint owners. Because SemCAMS and Trilogy were not "liable solely to each other", mutuality was therefore not established.

Equitable Set-Off

There are a number of factors that courts consider in deciding whether to exercise their discretion to grant equitable set-off, but the most important is that the two cross-claims must be "so clearly connected" with each other that it would be "manifestly unjust" to allow one party to enforce payment without taking into consideration the cross-claim. The obligations were not found to meet these requirements. In this case, the obligations between Trilogy and SemCAMS did not arise out of the same contract but, instead, out of 29 different contracts that had been entered into over a period of 10 years. The lack of mutuality between the parties was also a factor that the Court considered in determining that it would not be appropriate to grant equitable set-off.

As noted, the Court of Appeal of Alberta did not grant leave to appeal, so this case will not be reviewed by a full panel of that Court.

The case is a warning to industry participants to be aware of the capacity in which their counterparties are acting, as this may affect their ability to rely on set-off rights that they have agreed to or believe are otherwise available by contract, at law or in equity. This is an especially important consideration in the oil and gas industry, where so much contracting takes place via "trustee-like" or representative parties. Non-operators may want to consider taking additional measures to protect their exposure. These measures might include additional contractual agreements to effect contractual set-off, the taking of security or more sophisticated cash management strategies.

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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