Liquefied Natural Gas (LNG) Regulation In British Columbia - Oil, Gas & Electricity

II. INTRODUCTION

In an increasingly competitive global market for natural gas, the race to export LNG to Asia is on. With continued demand for LNG in Asia, Canada is vying with the United States, Australia, Russia and countries in East Africa and the Middle East to rapidly build the infrastructure required to move LNG to key markets in Japan, Korea, Taiwan, China and India. By positioning the LNG industry in B.C. as a key driver for economic and job growth over the next few years, the B.C. government is sending a clear message: The time to act is now.

Not long ago, declining supplies of conventional natural gas meant that the North American marketplace was focused on LNG imports from other jurisdictions. However, advancements in technologies for recovering shale gas (natural gas produced from the fractures, pore spaces and physical matrix of shales) and for horizontal drilling, as well as an increase in hydraulic fracturing, have shifted the market to LNG exports.

B.C. is particularly well suited to unconventional gas production, with shale being the most commonly occurring sedimentary rock in the northeast part of the Province. In the wake of the commercial success of shale gas in the United States, the nascent LNG industry in B.C. is attracting significant interest from investors as an economically feasible venture.

B.C.'s natural gas industry has been operating safely for over half a century. As early as the 1930s, evidence of the significant benefits that can be derived from natural gas extraction has proliferated. B.C. has many advantages for companies seeking to establish LNG facilities: vast supply, proximity to Asia, a skilled workforce and a stable business environment. B.C. also has the advantage of having a predominately cold weather climate, making LNG projects in B.C. more efficient than, for example, those situated in Australia and Africa.

Unlike projects outside of North America, Canadian LNG projects will likely be able to access the United States debt capital markets to raise some or all of the debt on terms that are competitive with commercial bank financing. As has been seen on some of the United States LNG projects, the commercial bank market also has a very large appetite for LNG projects. While export credit agency financing will likely be needed for the largest projects (and may be attractive on cost terms for all Canadian LNG projects), the ability to finance using the bond or commercial bank markets is a significant advantage to Canadian LNG projects over projects outside of North America.

Because B.C. LNG projects will be starting from scratch, project proponents have an invaluable opportunity to think about government policies and infrastructure-sharing arrangements that could dramatically reduce the project's cost and make them more competitive. B.C. has built on the advantages noted above by creating a competitive policy and fiscal framework for LNG investment. The robust regulatory framework in B.C. demonstrates regulators' strong commitment to fostering a safe, profitable and beneficial LNG industry. In short, B.C. provides a highly favourable business and regulatory environment for investors.

However, as LNG project proponents are discovering, there are many layers of policy and regulation underlying the development of the LNG industry. Project proponents need a legal team with specialists in energy, environmental, taxation, regulatory, commercial, finance, Aboriginal, labour, international trade, intellectual property, and other areas of the law. This publication examines the principal components of the current policy and regulatory framework for the development of LNG projects in B.C., as well as some of the challenges facing project proponents.

III. CURRENT POLICY SETTING

The cornerstone of B.C.'s LNG policy was released in February 2012 as an accompanying strategy to the provincial government's overall natural gas strategy. The Province's LNG strategy sets out a goal of achieving three LNG facilities by 2020, based on three priorities: (1) keeping B.C. competitive in the global LNG market; (2) maintaining B.C.'s leadership on climate change and clean energy; and (3) keeping energy rates affordable for families, communities and industry. In June 2013, the B.C. government established the new Ministry of Natural Gas Development, tasked with implementing the LNG strategy.

To foster the growth of B.C.'s LNG industry, the provincial government continues to shape the policy landscape by adjusting incentives to grow new markets in Asia, focusing on LNG-related job opportunities and training, promoting the use of natural gas and ensuring efficiency in EA review processes. As of July 2016, there were 20 proposals for LNG projects in B.C. in various stages of feasibility assessment and project planning, although none have reached a final investment decision.

On February 16, 2016, the provincial Ministry of Natural Gas Development released an updated Service Plan for 2016/17 – 2018/19. The plan forms an integral part of the Ministry's mandate, which is to guide responsible development and ensure maximum economic benefits to British Columbians from the Province's natural gas resources, new export markets related to interprovincial pipelines, oil projects and value-added natural gas products, and the Province's next new major industrial sector—the LNG industry.

The first goal of the new Service Plan sends a clear message about the Province's commitment to supporting LNG projects: ensuring a "globally competitive Liquefied Natural Gas export industry in B.C. that supports a prosperous economy and benefits all British Columbians." In order to achieve this goal, the Minister described several key strategies:

implement a competitive fiscal and policy framework that supports LNG investment in B.C;
work with project proponents to secure signed Project Development Agreements that will lead to financially secure arrangements for both LNG developers and taxpayers;
work with the Ministry of Aboriginal Relations and Reconciliation and the federal government to develop specific First Nations negotiation mandates along the pipeline corridors, LNG plant locations and marine traffic routes in order to facilitate rapid investment in LNG facilities;
work with the MFNLRO to ensure that Crown land disposition processes support LNG investment and the development of linear infrastructure, including pipelines, roads and electricity required for new LNG facilities;
work closely with the Ministry of Jobs, Tourism and Skills Training, and the federal government, where appropriate, to develop and implement programs that address skills gaps and meet the labour needs of the LNG and natural gas sectors;
work with BC Hydro to ensure an adequate supply of clean, affordable electricity is available from the grid to support new investments in LNG, and in electrification opportunities to support upstream natural gas and oil exploration and development; and
build global investor awareness through inbound and outbound international trade missions and LNG in B.C. International Conference.

In addition, the Minister acknowledged the fact that LNG facilities require large amounts of energy. Accordingly, electricity supply and grid interconnection agreements must be in place before final investment decisions on LNG projects can be made. The Ministry, therefore, has committed itself to increasing the number of power supply agreements reached with LNG project proponents. To that end, BC Hydro has concluded one electricity supply and grid interconnection agreement with an LNG proponent and anticipates further agreements.

The Province also intends to enter into Project Development Agreements with project proponents in order to provide certainty for LNG development with respect to costs within provincial jurisdiction. These agreements will provide proponents with long-term certainty about the fiscal and policy framework that will apply to their projects once they have reached an FID and proceed with construction. The agreements cover a range of matters including B.C.'s LNG tax legislation, B.C.'s corporate income tax and carbon tax, municipal taxes, B.C. greenhouse gas emissions benchmarks, upstream benefits and representations regarding B.C.'s positions on skills and jobs training, engagement with First Nations and federal-provincial issues. One of these agreements has been concluded with a major proponent.

On July 21, 2015, the Liquefied Natural Gas Project Agreements Act, which provides the legislative authority for government to enter into LNG Project Agreements and which allows for the ratification of the first LNG Project Agreement, received Royal Assent.

The Minister emphasized the importance of ensuring a robust regulatory framework that supports environmentally and socially responsible LNG development in B.C. The Minister cited several strategies aimed at achieving this objective:

continue to work with the OGC, permitting agencies, local authorities and the EAO to ensure streamlined, integrated and robust regulatory and permitting processes;
work with the Ministry of Aboriginal Relations and Reconciliation to develop and implement policies that result in First Nations' meaningful engagement specific to the development of an LNG industry;
in consultation with the Climate Action Secretariat and the federal government, implement world-leading GHG emission benchmarks that ensure B.C. LNG facilities are the cleanest in the world, while providing strong incentives for the use of clean energy from the BC Hydro grid;
work with the MOE and, in consultation with the federal government, implement air emission standards and interim ambient air quality objectives that protect health, are consistent with leading jurisdictions and encourage clean LNG facilities;
work with First Nations, communities and the federal government to ensure best practices are in place to guide marine traffic and the safe shipment of LNG to export markets; and
work with the federal government and the Port of Prince Rupert to ensure that the regulation of LNG facilities and related pipeline projects on federal lands in the Port of Prince Rupert occurs in substantially the same manner as other projects in the Province.

IV. PERMITS AND APPROVALS

The regulatory and permitting process for the development of LNG projects in B.C. is complex and requires the project proponent to interact with federal and provincial authorities. The following section provides an overview of the regulatory and permitting framework in B.C. for (a) natural gas exploration, development and production; and the construction and operation of (b) pipelines and gas processing facilities and (c) LNG facilities.

A. EXPLORATION, DEVELOPMENT AND PRODUCTION

1. PROVINCIAL

a. Petroleum and Natural Gas Tenure

Most PNG resources in B.C. are owned by the provincial Crown, with small percentages privately owned or held by the federal Crown. The PNGA and its regulations provide the framework for the administration of Crown-owned subsurface PNG rights. PNG tenures provide time-limited rights to hold or occupy land and are intended to facilitate the sustainable and efficient development of PNG resources. Crown-owned PNG rights are granted through three forms of tenure under the PNGA: permits, drilling licences and leases. Permits and drilling licences are exploratory forms of tenure. Leases are the only form of tenure giving a right of production. Because permits are rarely granted, the rest of this discussion will focus on drilling licences and leases.

Drilling Licences

Pursuant to the PNG Drilling Regulation, drilling licences convey the exclusive right to explore for PNG in a defined area. Drilling licences are acquired through a monthly Crown disposition auction process and are convertible to leases in proportion to a licensee's exploratory drilling effort. The auction process is generally initiated by industry when the offering of specific PNG rights is requested, and the decision to dispose of the specific PNG rights is determined at the discretion of the Ministry. Each bid received for a parcel is adjudicated and the tenure typically goes to the highest bidder as long as the bid is acceptable to the Province. A licence grants the exclusive right to apply for exploratory drilling for PNG resources. Drilling licences have terms of three, four or five years, depending upon which part of B.C. the tenure is in.

Drilling licences are intended to stimulate exploration and infrastructure investment through the requirement to drill "earning wells," which provide credits toward converting the drilling licence to a lease. The drilling licence is the primary form of exploration tenure held in B.C.

Leases

Drilling licences are typically converted into leases, which grant the exclusive right to produce PNG resources. A lease is the only form of tenure that gives a right of production, the issuance of which terminates the underlying licence. Leases are acquired either directly through the Crown disposition auction process or by conversion from permits or drilling licences. Leases convey the exclusive right to explore and produce PNG in the defined area. A lease acquired through a Crown disposition must coincide with the boundaries of the natural gas spacing area grid, but otherwise does not have restrictions on its size or shape.

Drilling licences do not have annual work requirements. However, to convert part or all of a drilling licence to a lease, licensees must drill one or more earning wells on their drilling licence or on a nearby drilling licence to "earn" the area to be converted into a lease. Generally, this requires the drilling of an "earning well" that generates well reports and well data that, in the opinion of the director, sufficiently evaluate a zone in a gas spacing unit. If the Energy and Natural Resources Department believes a lease location is not being developed sufficiently, the Minister may (except during the three years after the date of issue of the lease) require the lessee to submit a plan for the development of the lease location. If the lessee does not comply, or if the Minister believes that a development plan submitted is not adequate for the purposes of developing a lease location, the Minister may give notice to the holder, requiring the lessee to begin the drilling of a well on the lease location.

b. Oil and Gas Activities Act

Pursuant to the OGAA, the OGC is the principal regulator of oil and gas activities in B.C., including the regulation of specified provisions of the EMA, the HCA, the Land Act, the Forest Act and the Water Sustainability Act. B.C. has a "single window" approach to the regulation of oil and gas activities, meaning that the OGC has broad authority under a wide variety of acts and regulations in order to regulate oil and gas activities.

The OGC's core roles include reviewing and assessing applications for industry activity, consulting with First Nations, ensuring industry compliance with provincial legislation and cooperating with partner agencies. The public interest is protected through the OGC's objectives of ensuring public safety, protecting the environment, conserving petroleum resources and ensuring equitable participation in production.

The Drilling and Production Regulation under authority of the OGAA addresses well permits along with well spacing, well operations, well abandonment, well data, safety, pollution prevention and production operations. In particular, it includes sections on fracturing operations, hydraulic isolation, fracturing fluids records, produced water and water source wells. The OGC will consider environmental issues when issuing a well permit, particularly if a drilling activity is located in an environmentally sensitive area. Before making a determination on a well permit application, the OGC will perform technical reviews on areas such as archaeology, land and habitat.

c. Heritage Conservation Act

An AIA and an HRIA may be required under the HCA. If archaeological or culturally significant resources exist at the project site, the AIA will confirm this and recommend mitigation measures. A permit may also be required under the HCA in respect of investigative work in order to identify any archaeological or historical resources that may be located within project areas. Such permits are also issued by the OGC in respect of oil and gas activities.

d. Water Use

The British Columbia Government has finally brought into effect portions of the long awaited WSA. The WSA, which was passed by the Legislature in April 2014, came into effect on February 29, 2016. The WSA replaces many parts of the old Water Act and creates a new regulatory regime for water management within British Columbia.

The WSA seeks to make improvements in seven key areas: (1) protecting stream health and aquatic environments; (2) considering water in land use decisions; (3) regulating and protecting groundwater; (4) regulating water use during times of scarcity; (5) improving security, water use efficiency and conservation; (6) measuring and reporting large-scale water use; and (7) providing a range of governance approaches. One of the biggest changes that the WSA makes is to the regulation of groundwater. Under the WSA, all groundwater users (except domestic wells) will require a water licence to divert water from an aquifer (unless the diversion is otherwise authorized under the regulations). Groundwater licence applications can be submitted through FrontCounter BC.

The Province is taking a phased approach to the enactment of the WSA. While the majority of the WSA came into effect at the end of February, section 18, which provides for quick licensing procedures, has yet to be brought into force. The Province predicts the next phase of the regulations and policies will be brought into effect in late 2016. This phase will include regulations relating to measuring and reporting, livestock watering, water objectives, planning and governance. Along with the WSA, the following regulatory scheme also came into effect on February 29, 2016:

the Water Regulation under the Water Act was repealed and the Water Sustainability Regulation was enacted under the WSA;
the Ground Water Protection Regulation under the Water Act was repealed and a new Groundwater Protection Regulation was enacted under the WSA;
the British Columbia Dam Safety Regulation under the Water Act was repealed and a new Dam Safety Regulation was enacted under the WSA;
the Water District Regulation was enacted under the WSA;
the Water Sustainability Fees, Rentals and Charges Tariff Regulation was enacted under the WSA;
the Sensitive Streams Designation and Licencing Regulation under the Fish Protection Act was repealed; and
the Violation Ticket Administration and Fines Regulation under the Offence Act was amended to add offences and fines under the WSA.

The WSA governs licensing of surface and sub-surface water use, which may be required for drilling activities. While the MFLNRO is responsible for issuing long-term water licences, the OGC administers water licences for short-term use under the WSA. The WSA and the corresponding Water Sustainability Regulation also require approval of "changes in and about a stream". These approvals are also administered by the OGC in relation to oil and gas activities.

The OGC administers authority over subsurface water through water source wells, water injection wells and water disposal wells. Operators must report water withdrawals, injections or disposals into associated wells on a monthly basis. This reporting is done in the same manner in which oil and natural gas production is reported.

e. Contaminated Sites

Contaminated sites in the context of oil and gas activities are managed by the OGC and the MOE under the OGAA and the EMA. The EMA and the corresponding CSR establish what is a contaminated site, who is responsible for remediation and how remediation must occur. The category of persons responsible for remediation of a contaminated site includes current and previous owners or operators of the site and producers and transporters of the contaminating substance. An owner is defined broadly as a person who is in possession of the site, has the right of control of the site, or occupies or controls the use of the site. An owner also includes a person with a legal or equitable interest in the site. An operator is a person who is in control of or responsible for an operation on the site.

Under the EMA, persons responsible for remediation of contaminated sites are absolutely, retroactively and jointly and separately liable for any costs reasonably incurred to remediate the contaminated site. This means that if a project site is contaminated, the owner and any other responsible persons will be responsible for the cleanup of the site. Responsible persons are also liable for contamination that has migrated off-site to neighbouring properties.

f. Reclamation and Remediation

All wells must be restored according to the requirements under the OGAA. When a PNG site is no longer productive, the operator is required to:

remove hazards and reclaim the site in accordance with the OGAA;
maintain the surface lease or surface land tenure at the site until a certificate of restoration has been obtained from the OGC;
conduct an environmental site investigation to identify the presence of any contamination and submit a report detailing how the contamination has been managed and the site remediated; and
hire a qualified reclamation specialist to verify that the surface reclamation meets all provincial requirements.

g. Waste Discharge

The EMA and the associated WDR are the principal pieces of regulation that govern pollution management in the Province. The administration of the EMA falls primarily to the MOE. The EMA prohibits prescribed industries from introducing waste, such as effluent, litter and refuse, into the environment unless such activities are otherwise authorized by the EMA and any applicable permitting or approval requirements, orders, regulations or waste management plans. Oil and gas activities are generally subject to this prohibition.

As discussed previously, the OGC acts as the single-window regulatory agency for the purposes of oil and gas activities in B.C. This means most of the waste discharge permits for a project will be handled by the OGC. Drilling activities will likely require a waste discharge permit for activities such as wastewater discharge and hazardous waste disposal. Significantly, waste also includes air contaminants such as particulate matter; therefore, air emissions generated by drilling activities may require a permit under the EMA.

A permit under the EMA is the most common form of authorization, and any such permit will set out specific terms and conditions under which discharge may occur. It may set limits on the quantity and quality of waste contaminants, require discharge monitoring and set out reporting requirements.

The Oil and Gas Waste Regulation, under authority of the OGAA, authorizes waste discharges to the environment from oil and gas facilities, including air discharges related to drilling operations and for the injection of produced water and returned completion fluids into approved disposal wells.

h. Species at Risk

The provincial Wildlife Act protects virtually all vertebrate animals from direct harm, except as allowed by regulation (e.g., hunting or trapping). Legal designation as "endangered" or "threatened" under this Act increases the penalties for harming a species, and also enables the protection of habitat in a Critical Wildlife Management Area. In addition, the Wildlife Act regulates the management of wildlife in B.C., other than on federal lands. Although much of it relates to hunting, the Wildlife Act was amended in 2004 to allow the Ministry to create an endangered species list, and to provide protections for listed species similar to those under the federal SARA; however, as of the date of this publication, these amendments are not yet in force. A key difference from SARA, however, is that the Wildlife Act does not allow for critical habitat designation on private land. It also has specific protections for raptors and their habitats.

Activities such as drilling potentially impact species at risk, including caribou and migratory birds.

i. Regulation of Hydraulic Fracturing

The development of shale gas typically uses hydraulic fracturing. Hydraulic fracturing (also called "fracking") is the process of pumping a fluid or a gas down a well, many hundreds or thousands of metres below ground, to a depth considered appropriate for natural gas production. The pressure this creates causes the surrounding rock to crack, or fracture. A fluid (usually water with some additives) holding a suspended proppant (usually sand) then flows into the cracks. When the pumping pressure is relieved, the water disperses, leaving a thin layer of the sand to prop open the cracks. This layer acts as a conduit to allow the natural gas to escape from tight (low-permeability) formations and flow to the well so that it can be recovered. The technology is carefully used and managed to minimize any environmental impacts, particularly on groundwater.

The Canadian Association of Petroleum Producers has released Guiding Principles and Operating Practices for Hydraulic Fracturing, which is recommended for observance by operators employing fracturing techniques. These state, among other things, that operators should commit to the following:

safeguarding the quality and quantity of regional surface and groundwater resources, through sound wellbore construction practices, sourcing fresh water alternatives where appropriate and recycling water for reuse as much as practical;
measuring and disclosing water use with the goal of continuing to reduce the effect on the environment;
supporting the development of fracturing fluid additives with the least environmental risks;
supporting the disclosure of fracturing fluid additives; and
continuing to advance, collaborate and communicate technologies and best practices that reduce the potential environmental risks of hydraulic fracturing.

While these principles are not legally binding, they have arguably become an industry standard and are generally followed and complied with.

Since January 1, 2012, the OGC has required the disclosure of hydraulic fracturing liquids by extraction companies to reveal the additives used in fracking operations. The OGC's FracFocus Chemical Disclosure Registry, a public website, is now in place with uploaded records of wells located in B.C. and other jurisdictions. The uploaded "fracturing records" include information such as the fracture date, well location, operator name and chemical ingredients.

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Canada: Liquefied Natural Gas (LNG) Regulation In British Columbia