Green Mandate, Red Tape

Energy projects that have taken years to reach approval stage now face an additional obstacle — new regulation imposed by a federal government with a powerful environmental mandate

RISK IS A FUNNY THING. It can come from the most unexpected places. When you think about the risks faced by the large energy companies, you probably think of political instability, the risk of not being able to replace dwindling reserves with new ones, commodity-price volatility, the risk of rising operating costs, the accessibility of capital. But who thinks of plain-vanilla process risk?

Energy companies doing business in Canada do. In fact, the single most important issue for the corporations that sponsor the large multi-billion-dollar projects that cross municipal, provincial and First Nations land is regulation. It doesn’t matter whether it’s oil and gas, electricity or even wind farms. Companies can spend many millions of dollars on planning a project; what they can’t do is be sure it will get across the regulatory finish line.

The paralysis stems from the lack of a single cohesive regulatory regime in a large, fractious federation of provinces, peoples and politics that often have competing interests. “Today, it has become easier to do a project in an emerging market than to do a complex project in Canada,” says Erik Richer La Flèche, a partner at Stikeman Elliott LLP in Montréal. “The regulatory risk — and I’m talking about the pipelines, the transmission lines — across borders is quite great.”

In other words, Canada, a country built on energy and natural resources, is one of the slowest in the world in getting energy to market. Consider this: the original documentation for the $7.9-billion Northern Gateway pipeline was filed in 2005. It got cabinet approval in 2014. Normally, that would have been the end of it, but eight First Nations, four environmental groups and a labour union launched legal challenges against the government approval. The BC Court of Appeal revoked the approval on the last day of June. That’s 11 years spent on process, instead of building anything or moving any oil or gas to port for export.

While Canada is not alone in this, it seems to be moving in a different direction from other major jurisdictions. In the United States, for example, the Federal Regulatory Energy Commission is considering a 12-month deadline for its “public convenience and necessity” certificates for gas pipelines and electrical transmission that use its pre-filing system. The European Commission has ordered that similar projects that cross countries in the European Union should take no longer than 3.5 years to receive all regulatory approvals. In Canada, “I think the federal government is trying to figure out how to move forward,” says Richer La Flèche. But even when the approval finally comes through with scores of conditions, energy companies still can’t be certain they can start to build. Look at what happened with Northern Gateway.

So the No. 1 problem, he says, is that “we don’t have a regulatory path for very large interprovincial projects that involves several governments. What are executives supposed to do?”

ONE WAY FOR THE PRIVATE sector to mitigate the risk is to run projects through sympathetic provinces and communities. It’s called social licence, or social acceptability, and it’s a concept first used in the developing world where, faced with the lack of strong regulation, first-world mining companies often went above what was required by law to ensure their project would meet the local community’s needs, helping to ensure buy-in.

The concept is no longer confined to the third world. The whole notion is starting to dominate the debate around not just pipelines but shale gas, oil-sands projects and even wind farms, says Anne Drost, an energy practitioner at Blake, Cassels & Graydon LLP in Montréal. That means the decision over where to locate a pipeline, route transmission lines or build a wind farm can’t be left to the engineers or scientists anymore.

In Québec, for example, Drost says the discussion now is that projects must obtain social acceptability for the regulators to approve them, which she likens to the obligation to consult and accommodate First Nations — even though social licence is for non-Aboriginal communities who have no constitutional protection. She says the notion is being interpreted “almost like we should be having referendums on these projects.”

The problem, from a lawyer’s point of view, is that, absent mandating referenda, the concept of social licence is ill-defined, which makes it tough for companies to know whether or not they have it. That didn’t stop the province’s Ministry of Energy and Natural Resources from adopting a green paper earlier this year that, while still a working document, suggests Québec legislation may be amended to incorporate the notion of social licence. “For me,” says Drost, “I find this a very ambiguous and potentially problematic concept.”

One thing that was never ambiguous was the Liberal government’s strong commitment to the environment. And since last fall’s election, it has wasted little time on fulfilling its pledges. In the oil patch, especially, many businesspeople and corporate lawyers are on edge, saying more difficulties are being layered on to an already troublesome process.

The government, for example, is looking at amending the Energy Act and, in the interim, have imposed new obligations on projects to do more to engage the public, Aboriginal groups and other stakeholders. Natural Resources Minister Jim Carr and Minister of Environment and Climate Change Catherine McKenna announced earlier this year that projects such as Kinder Morgan’s Trans Mountain and TransCanada’s Energy East pipelines would be subject to the new interim-review process, which includes consultations with affected communities and indigenous groups on issues outside the National Energy Board’s jurisdiction. The new review kicks in after the NEB report is complete, and includes a separate review of the “direct and upstream greenhouse gas emissions linked to the projects.” It must be completed before the project can be approved by Cabinet.

“I think the effects of both that and the First Nations stuff mean that we’re facing longer and more complicated approval paths for new projects. On top of all that, we have the commodity-price situation, which is not good,” says Donald Greenfield, an energy practitioner at Bennett Jones LLP in Calgary. “Ultimately, what this boils down to is economics, and right now LNG imported into Japan is not fetching enough money to pay for projects in Western Canada.” He expects that will change when commodity prices turn up again. The Liberal government is pinning its expectations on a different horse. It plans to try to shift Canada away from a resource-based economy to one that embraces knowledge-based areas like high-tech, but that’s not going to happen overnight, nor is the need for fossil fuels.

IF OTTAWA REALLY WANTS to get Canada’s landlocked oil and gas to refineries and ports, Greenfield says it is really going to have to “step up” and bring the national position to bear on these projects, making the case for how important they are to the economy. “People say they don’t want pipelines in their backyards but they’re obviously a safer way to transport oil than by rail.”

Provincial governments are also key, he adds. Ottawa could push for more cooperation on individual projects because, as things stand now, energy companies are seeing a maddening increase in federal-provincial regulatory duplication. In January, for example, a BC court held in Coastal First Nations v. British Columbia that the province had to do its own environmental assessment and consult First Nations on the Northern Gateway Project instead of deferring to the federal environmental assessment and consultation processes — which had already been approved by the National Energy Board. The BC Court of Appeal upheld that and slammed the federal-provincial agreement to hold a single environmental assessment process rather than parallel reviews.

Requiring Canadian energy companies to obtain review from the federal as well as provincial governments or face a court challenge is probably good news for the environmental lawyers and litigators, but bad for the energy companies who often have many millions tied up in projects that never seem to come to a close. If large energy projects are so important to the Canadian economy, the public sector — governments themselves — should become the financial sponsors, says Richer La Flèche. Expecting the private sector to spend billions of dollars in such an uncertain regulatory climate, he says, “is, frankly, unfair.”

Fair or unfair, Shawn Denstedt, who practises energy regulatory and Aboriginal law among other areas at Osler, Hoskin & Harcourt LLP (where he is also co-chair) says the immediate issue is how to get Canadian energy to market in larger volumes with all the new requirements stalling things. “They are quite frankly designed to make Canada look more attractive to the world and demonstrate we are trying to be a climate-change leader, which will, in turn, make it easier to get these approvals and help Canada’s economy.”

That may work, but in the meantime, there is a real cost to Canada’s large energy companies. He points to the Kinder Morgan Trans Mountain pipeline expansion as a perfect example. It received National Energy Board approval in May — as long as it meets 157 conditions including, for the first time, providing detailed plans to reduce and offset carbon emissions. The National Energy Board decision went to cabinet, which makes the final call.

Cabinet usually makes its decision within three months of getting the NEB report, several lawyers say. But this time, Ottawa implemented the interim-review process and appointed a ministerial panel to hold a series of consultations with communities and First Nations on issues outside the NEB’s jurisdiction, which will allow Aboriginal groups to comment on the NEB’s report. The consultations started in July and the report will go to Cabinet in November — meaning that, if the company even gets approval, it won’t happen until New Year’s or even spring.

As for the mood in the oil patch, Denstedt says that, with the energy business “pretty beat up” right now, the concern is with certainty. “I think the bigger impact is the investment community. When they look at our processes and don’t understand how they actually work, they seem ad hoc. It’s very difficult to go to Beijing or Tokyo and say Canada has a process that is well understood and provides certainty when it doesn’t.”

The thing is, if important foreign investors start to shrug Canada off due to uncertainty over a moving finish line, the problem moves from big energy companies on to the larger economy — and the backs of all of Canadians. That’s the real risk, and it won’t be pretty.