Developing the North: Poised to expand, but challenges are complex

Resource projects in northern Canada are poised to expand. The challenges for companies – and their law firms – are complex

The Northwest Territories' third energy boom might just be taking shape right now, with geologists, drillers and lawyers in the vanguard. But lawyers who work above the 60th parallel say long-awaited, oil-driven economic activity may be headed for a collision with regulatory and Constitutional law. By now, the pattern of uncertainty is familiar.

Since the days of Robert Service and the Yukon gold rush, the North has been the on-again, off-again frontier of hurry-up-and-wait, where Southerners rush in, make money and get out again as fast as transportation permits.

Energy development has been little different. The North's first energy boom came during the late 1960s, following the North Slope oil discoveries in Alaska. But it dwindled away when no extension was found on the Canadian side of the Beaufort Sea.

The second splurge came in the late '70s and early '80s, when Ottawa announced a tax-driven “super depletion allowance,” which assured a 120-percent investment recovery on drilling in the North (or East Coast offshore).

Tuktoyaktuk became a flourishing, if small, seaport and supply depot, as oil companies rushed to explore both on land and in the Beaufort Sea. Gulf Canada and Dome Petroleum built major offshore drilling fleets and Calgary briefly ranked as Canada's leading centre for ship design. Gulf discovered the massive Amauligak oil reserve in shallow waters not far from Tuktoyaktuk, while Imperial Oil, Shell and Gulf (now ConocoPhillips) logged about six trillion cubic feet of gas reserves in the Mackenzie Delta. But ballooning pipeline cost estimates, plummeting commodity prices and concerns for impacts on the North precluded development.

Oil companies mothballed their fleets and, after a few years, northerners gave up waiting for the companies to return.

Today, as devolution transfers federal powers to territorial governments and a new set of resource plays emerges, John Donihee of Willms & Shier Environmental Lawyers LLP in Toronto says it's little wonder northerners take a keen interest in negotiating local benefits agreements for every major project. They know from long experience that, in a land where the environment actively tries to kill you, southerners tend to stick around as long as the money lasts.

All this matters right now because the massive shale oil and gas plays that have revolutionized the energy industry in North America appear very likely to extend into the Sahtu region of the Central Mackenzie Valley, near Norman Wells and Tulita, NWT. The NWT government estimates recoverable reserves in the Canol shales between two and three billion barrels, while some company appraisals go much higher. So far, Shell, Imperial Oil, ExxonMobil, Husky Oil, ConocoPhillips and tiny MGM Energy have secured leases that commit them to spend $637 million on exploration by 2017. While MGM is now defunct, Husky has approval for an airstrip, an all-weather road to its leases and two 75-person drilling camps, while Conoco plans a 100-person camp.

At the same time, Imperial has applied to the National Energy Board (NEB) to drill a deep-water well in the Beaufort, the first in decades, while Chevron and Statoil have run a big seismic survey on nearby acreage. And there's a plan to ship crude from the oil sands by rail to the port of Churchill, Man., and from there by tanker through Hudson Bay to refineries on the East Coast and in Europe.

“You've got to have a sense of place,” says Donihee, who specializes in northern development. By this, he means that would-be developers have to understand local context. Northerners want development and jobs but they also want a say in how projects proceed. He says the high cost of living and the seasonal nature of many jobs mean a large proportion of northerners rely on hunting to supplement their incomes.

“They go out and hunt to put meat on their tables and feed their kids. So, when they say, ‘We don't want you to go there in the fall because that's where we hunt for moose,' they mean it.” Environmental concerns go far beyond traditional hunting and trapping, he says, but his point is, people's connections to the land are real and deeply felt. Northerners expect companies to thoroughly consult local communities and, Donihee says, local land and water boards make that happen.

He says companies that try to rush the local approvals process typically get sent to environmental assessments (EAs) that take up to two years and potentially cost millions, while companies that take time to build local credibility almost invariably avoid this hurdle. In 2012, MGM Energy wanted quick approval for a horizontal well but eventually withdrew its application after being sent to an EA. Husky and Conoco “took careful note” and have taken pains to meet the Sahtu Land and Water Board's expectations around community consultation, he says.

While provinces typically each have one regulator for oil and gas projects, the Sahtu Board is one of four regional land and water boards in the NWT, each created as part of a First-Nations land claims settlement. And there was potential for two or three more boards, if and when other First Nations settled their claims with Ottawa. In the case of the Sahtu Board, three of five board members must be local, two of them Sahtu, while federal and NWT governments each appoint one representative.

Each of the four boards was negotiated into being as a central condition of a land claims agreement, and each of those agreements has been embedded in s. 35 of the Constitution Act, 1982.

Now all that is about to change under Bill C-15, the Northwest Territories Devolution Act, says Sarah Powell of Davies Ward Phillips & Vineberg LLP in Toronto. The Act, which came into effect April 1, 2014, transfers powers from Ottawa to the NWT — and creates a single new Mackenzie Valley Land and Water Board, effective April 1, 2015. The new “super board” will have 11 deliberating board members, including one appointed from each of the settled land claims areas. Regional regulatory offices will be preserved as monitors of community consultation.

“The speed at which this has come about is, to me, just amazing,” Powell says of the Devolution Act. “I just couldn't believe it was going to be April 1, 2014.” She says the Tlicho, Sahtu and Gwich'in have all voiced strong opposition to the elimination of their local regulatory boards and any resulting court challenges could leave development applications in uncertain territory.

Before the Act received Royal Assent, Tlicho Grand Chief Eddie Erasmus told Parliament's Aboriginal Affairs and Northern Development Committee the Tlicho will oppose dissolution of their Wek'eezhii Land and Water Board.

“Canada better prepare industry for the reality of opposition [from] the land claims settlement people and the probable systematic delays that this will cause,” Erasmus said on Jan. 27. “Canada has returned to the old colonial way of thinking, that they know what is best for us. They are silencing our voice. This is not the Constitutional promise made in the Tlicho [land claims] agreement. We need to be equal in decisions about the use of land and water in the Wek'eezhii. To the Tlicho, there is nothing more important than this.”

Three days later, Ethel Blondin-Andrew, Chair of the Sahtu Secretariat Inc., told the Senate Standing Committee on Energy, the Environment and Natural Resources, her people reject C-15 changes to the regulatory structure.

“We have not asked for these amendments and do not support them. These amendments are proposed to address the interests of others, not the Sahtu,” Blondin-Andrew told the committee.

Neil McCrank, former head of the Alberta Energy and Utilities Board and now a regulatory expert with Borden Ladner Gervais LLP in Calgary, says he was asked by the federal government in 2007 to review northern regulatory regimes, and particularly those in the NWT, due to concerns about the efficiency, effectiveness and consistency of rulings. Critics of the current system have noted that members of the four land and water boards outnumber Members of the Legislative Assembly. And a territorial government statement calls the four-board system, “complex, costly, unpredictable and time-consuming.”

McCrank says his first recommendation to all jurisdictions was for the priority completion of land use plans in each of the land claims areas. His second recommendation was the creation of a single, professional, quasi-judicial regulatory agency for the NWT.

“Everybody agrees that development in the North should be consistent with community expectations,” McCrank says. “Northerners want to ensure that the development that takes place is consistent with their values and culture.” Under his preferred model, he says, detailed land use plans, based on local aspirations, would set conditions for development and thus provide political legitimacy for regulatory rulings. A single, regulatory agency, chosen for professional and technical qualifications, could then rule on whether projects fit within the terms of land use plans.

As a possible alternative to a strict single-agency set up, he suggested local boards could be turned into regional offices of the new regulator and empowered to handle over-the-counter administration of licences and permits.

McCrank says Bill C-15 looks a lot like his second alternative.

Donihee says the super board eliminates one of the three keys of land claims settlements in the North, that is, local boards. Beyond land concessions and monetary settlements, he says, boards are far more than sources of local employment. The local land and water boards are the product of long negotiations to lock in the co-management of resources by residents and government.

“Once [land] claims are settled, there's a fair degree of confidence in the system,” he says. “People have trust in systems they've set up themselves. It's a big part of the social contract in the North.”

On the plus side, he says, Bill C-15 eliminates the need for regulatory approvals to be counter-signed by a federal minister. The territorial government will assume that role and will be motivated to authorize good projects that create territorial revenues to support the development of infrastructure.

Erasmus says the super board is far from a sure thing. He says the Tlichos' land claims settlement expressly requires their agreement prior to any changes in its terms, including changes to the Wek'eezhii Land and Water Board.

“It's entrenched in the Canadian Constitution,” he says. He concedes that a court challenge may be expensive, but it's better than seeing their agreement undermined. “It's already cost us $26 million and 13 years of negotiations to get where we are.” He adds that Gwich'in, Sahtu and Dene Nation leaders have all promised to provide lawyers to support a court appeal of Bill C-15.

Tlicho legal counsel Bertha Rabesca Zoe told the Aboriginal Affairs Committee that the Tlicho worked with federal representatives on technical changes to improve the timeliness of regulatory processes, but their concerns about the super board were never addressed. She said they proposed a “collaborative process” as early as 2011 “but that was totally rejected” and they were never consulted on the super board provisions of the Devolution Act. “Canada has chosen to unilaterally embark on the path they have embarked on, adding insult to all this by bundling it all together under Bill C-15,” she told the committee.

Powell says that federal lawyers would have had legal grounds for the course they have taken but adds that the devolution timetable has been “extreme.”

“If [the Tlicho] want to protect the integrity of their land claims settlement and they feel [C-15] isn't consistent with the agreement, I'm not surprised they want to take a run at it.”

She says the spectre of regulatory delays will undoubtedly add a level of risk to project development, but energy and mining companies are experts at risk management and they will proceed, delay or adjust as necessary. Meanwhile, Ottawa's objective in initiating regulatory reform may be getting lost. “The whole purpose of what the federal government was trying to do was streamline and make the regulatory process more clear.”

In the Beaufort, project reviews and approvals remain with the National Energy Board (NEB) — yet certainty remains elusive.

After BP's Macondo well exploded in the Gulf of Mexico in 2010, killing 11 rig workers and spewing 4.9 million barrels of oil, the NEB reviewed its offshore regulations, particularly those for ice-bound Arctic waters. The board reconfirmed its requirement that, before being allowed to drill, explorers must show capacity to complete a relief well and kill a blowout before the close of the same drilling season.

Oil companies have responded that, while the same-season standard is good in principle, completing a deep-water relief well during the four months of open water in the Beaufort would likely prove impossible.

Wylie Spicer, maritime law expert with Norton Rose Fulbright Canada LLP in Calgary, says companies have asked to be allowed to submit drilling plans that would be equivalent to same-season relief wells, but more practical in the deep-water Beaufort, and the NEB has indicated it will entertain submissions.

“You can't deploy 5,000 fishing boats the day after a loss,” as was done at Macondo, Spicer says. “There's no infrastructure up there.” Accordingly, both blowout capping and cleanup of oil under the ice would be huge concerns and that's the reason for the NEB's stringent standards. Since 2010, two industry co-operatives have sprung up to build massive emergency well-capping units and position them strategically around the world. But these “capping stacks” weigh 80 to 120 tonnes each and Spicer says getting one quickly positioned over any Beaufort blowout would be very difficult.

Instead, Imperial has proposed an elaborate blowout preventer stack on the seafloor, with multiple, independently wired control panels on the rig and redundant hydraulic fluids reservoirs to drive both annular rams, that control formation pressure, and shearing rams, that kill the well in an emergency.

Spicer says other companies have suggested various well-control systems and it's likely that each drilling application would involve an extended hearing on what is now called “same-season-relief-well-equivalency.” And, of course, each such hearing would require platoons of lawyers from companies, various levels of government, native organizations and environmental groups.

“Overall,” he says, “there's lots that's going to happen in the North in the near future. The message for law firms is, get tooled up so that you can understand the business of your [northern] clients.”

In addition to energy developments, there are four big mining projects in the NWT and another four in Nunavut that have approvals in hand and construction materials on site, awaiting final corporate sanction. Donihee says the four Nunavut projects are “teetering on the edge of go or no-go decisions” and those four mines could, by themselves, lift the territory out of have-not status in Confederation. Meanwhile, six other proposals are making their way through the approvals process.

In Nunavut, Christine Kowbel of Lawson Lundell LLP in Vancouver explains, all land claims have been settled through a single agreement and all Inuit land is held by the Nunavut Tunngavik Inc. on behalf of three regional groups.

So far, so good. But, she says, Nunavut's “integrated system” includes varying terms of access onto lands of the three signatory groups. In addition, Nunavut has an Impact Review Board, a Surface Rights Tribunal, a Surface Rights Appeal Board, a Water Board and a Planning Commission. Indeed, a government map of the project application process stretches to six pages, with a score or more of boxes on each page.

Reassuringly, Kowbel explains that as far as she knows no application has ever been taken to appeal with the Surface Rights Tribunal. Overall, she says, “it's certainly a more complex regulatory jurisdiction in which to do business than most jurisdictions in Southern Canada.”

A client company's typical first request of her is a simplified map of the approvals system, she says. Developers also need to know that the system tends to be “more proscriptive” than in the South, with very specific application requirements and a greater number of permits required for specific activities, often including fairly precise time limits on account of weather windows.

In addition to securing lawyers with experience in Nunavut, she says, project proponents need to thoroughly understand the logistical limitations imposed by the climate, which she says apply more to materials movements than to actual construction.

“If you miss your permit by a day, you can be 10 months behind your schedule” because of seasonal restrictions. She says specific resource deposits usually have a history of previous development attempts, which need to be thoroughly studied to avoid pitfalls. And developers should also look ahead to operating-permit requirements in order to identify any potential constraints.

She says northern files make up as much as 80 per cent of her own work at various times and 100 per cent of the work of five partners in the Yellowknife office. “We've been working on Northern projects since the 1960s.”

Asked about special requirements of practising law in Nunavut, Northern veteran Teresa Meadows of Shores Jardine says, “a parka.” Next in importance is reading the land claims agreement.

“If you understand the land claim it makes it a whole lot easier to understand the details of the regulatory process and Nunavut, itself,” Meadows says. And the North has its own priorities.

“From a lawyer's perspective, procedural fairness looks very different in Nunavut than it does in other jurisdictions.” Community consultation is usually out of the question in summer months because “people are out on the land, doing traditional activities” from May to August. She says hearings must accommodate seasonal caribou migrations, the random appearances of narwhal in Frobisher Bay and the wisdom of elders.

“When there are narwhal in the bay, I've seen hearings suspended — because the hunters have to be out there. And when an elder wants to speak, an elder will speak,” regardless of lawyers' carefully planned order of evidence. It's often “disorienting” for lawyers new to the territory. But perhaps more disorienting is the Surface Rights Tribunal regulation that says elder testimony must be treated as expert evidence. “It's something that comes as a bit of a surprise to lawyers who've not practised in this area before,” Meadows says.

Carmen Diges, of Miller Thomson LLP in Toronto, says project developers sometimes find themselves fighting history. Companies and Aboriginal groups can often agree on terms for development. But unsettled land claims or paternalistic federal legislation have frequently thwarted progress, she says. Devolution of powers to territorial governments will help but she says “the system doesn't support quick solutions” in such cases.

Diges says sometimes protracted negotiations can be compounded by changes in Aboriginal and government leadership that necessitate backtracking or starting over. And a company's reluctance to reveal terms of a benefits agreement with one group can stall negotiations with another.

“Everyone's got to get up the education curve” and she says education is one of the important roles of a lawyer in the North.

Pressed to estimate how long it takes to launch a successful resources project in the North, she answers carefully. “I say four to 10 years from discovery to initial production and that's kind of a ballpark.” Obviously, she adds, companies heading into the North need to be well capitalized.

Ultimately, Donihee says, companies can't do it all and the struggle for northern development is really a chicken-and-egg question.

“I was in Iqaluit three days ago and they want mining — but [there are logistical challenges there],” he says. “Iqaluit needs a harbour” and other areas need roads. If infrastructure were built to enable more projects to proceed at less cost, the government investment would be very quickly recouped, he says. “The calculus is not that complicated and it could rescue a generation from welfare.”

When it comes to changing the rules for P3 projects, he explains that rules for federal funding of public/private participation projects on Aboriginal land make reference to Treaties — but, while First Nations have Treaties, the Inuit do not, which obviously presents a policy problem.

The current federal government has promised icebreakers for the Northwest Passage, but more recently scaled that back to patrol boats, which opposition critics have called “slushbreakers.”

“Promises come and they go,” Donihee says. He recalls being excited, as a young articling student, when Joe Clark, then Secretary of State for Foreign Affairs, promised Canada would build a Polar 8 icebreaker to back Canada's northern sovereignty claims. “I've been practising law for 30 years and we still don't have an icebreaker,” Donihee says. “We talk a good game and then we do nothing.”

Brian Burton is an energy and legal-affairs writer in Calgary.