Modernizing Liability for Offshore Oil & Gas Explorations and Operations

Written By Alexander Rozmus

This past June, the government of Canada announced plans to implement legislative changes to the four principle Acts which govern oil and gas activities in the Atlantic offshore and Arctic: the Canadian Petroleum Resources Act (CPRA), the Canada Oil and Gas Operations Act (COGOA), the Canada-Newfoundland Atlantic Accord Implementation Act, and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (otherwise known as the Accord Acts). The federal and provincial governments of Nova Scotia and Newfoundland and Labrador will be amending offshore regulations for oil and gas exploration and operations to include:

• Raising absolute liability for companies operating in the offshore to $1 billion from $30 million;
• Allowing governments to pursue financial compensation for environmental damages from operators responsible for oil spills;
• Requiring the public release of environmental and emergency preparedness plans;
• Providing the Canada-Nova Scotia Offshore Petroleum Board and the Canada-Newfoundland and Labrador Offshore Petroleum Board (collectively known as the Offshore Boards) with the authority to levy administrative and monetary penalties for non-compliance with laws, regulations or orders; and
• Providing the Offshore Boards with the necessary tools to conduct environmental assessments under the Canadian Environmental Assessment Act 2012.

These amendments form part of the government's plan for Responsible Resource Development, which aims to modernize and strengthen Canadian oil and gas safety operations and ensure reliable transportation on both mainland and offshore infrastructure. The National Energy Board, and corresponding National Energy Board Act, have already been amended with stronger environmental laws and standards to ensure a nation-wide pipeline safety regime.

Canada's Atlantic offshore oil and gas industry is regulated by the Offshore Boards, the focus of which is to ensure that operators and drilling contractors comply with the statutory and regulatory requirements of the Accord Acts. Liability for contravention of the Accord Acts is premised on the "polluter pays" principle. Although not explicitly referenced in legislation, the polluter pays principle is implicitly recognized as the threshold standard for imposition of fault or wrongdoing when environmental damage results from operator negligence. Currently, there is unlimited liability should parties be found at fault or negligent for a spill. In addition, there is an absolute no-fault liability set at $30 million for the Atlantic and $40 million for the Arctic. The aim, regardless of fault or negligence, is to ensure that operators have allocated resources set aside for clean-up costs and damages without requiring proof of fault or costly litigation. Current financial capacity requirements typically range from $250 million to $500 million, of which $30 million is required as a deposit for working in the Atlantic offshore and $40 million in the Arctic. Deposits are held in trust by the Offshore Boards as a letter of credit, guarantee or bond, and serve as security that proponents can cover financial liabilities that may result from a spill.

The government of Canada has expressed a commitment to ensuring responsibility, and corresponding liability, rests with operators to take all reasonable measures to clean up, remediate, and address environmental damages in the event of a spill. Canada's offshore liability regime will also mandate improved transparency from operators in an effort to ensure clarity of operations. Legislation slated to be amended includes the CPRA, the COGOA, and the Accord Acts. Highlights of the proposed changes are as follows:

• The principle of "polluter pays" will be explicitly enshrined in law as part of the Accords Act and COGOA, forming the cornerstone of the liability regime;
• Reiterating that at-fault or negligent liability of operators for damages will remain unlimited;
• Absolute no-fault liability will be increased to $1 billion in both the Atlantic offshore and Arctic for operators irrespective of any proof of fault or negligence;
• Proof of financial capacity, in the form of operator assets, will also significantly increase to $1 billion to match absolute liability;
• Ministerial discretion can be exercised to reduce the absolute liability limit, financial capacity or deposit to reflect demonstrably lower risk upon the recommendation of the Offshore Boards in respect of proponents with smaller scale operations;
• Deposit amounts will be increased to $100 million for individual operators or a pooled fund of $250 million for operators who carry out offshore activities jointly;
• Deposit funds will be accessible by regulators, directly and unfettered, to conduct clean-up activities or to assist with compensation in remediation efforts, and funds drawn upon by regulators are required to be replenished by operators;
• The Attorney General of Canada or a provincial Attorney General will be able to seek compensation for environmental damages resulting from a spill, namely a claim for damage to national parks, uninhabited shorelines, or species;
• The Offshore Boards will make emergency plans, safety plans, and environmental effects monitoring reports filed by operators publicly accessible and readily available for viewing;
• The Accords Act will be amended to create an administrative and monetary penalty regime permitting the Offshore Boards to levy fines against operators that violate legislation, decisions, permits, orders, licenses or certificate conditions intended to promote safety or environmental protection; and
• The Offshore Boards will be empowered to conduct environmental assessments under the Canadian Environmental Assessment Act 2012, inclusive of the authority to establish a participant funding program and to conduct Aboriginal consultation.

The federal government is proposing to work closely with the governments of Nova Scotia and Newfoundland and Labrador to finalize these proposed legislative changes over the coming months. Once amendments are finalized and declared in force by Order in Council, operators and proponents conducting oil and gas exploration, exploratory drilling, and production operations in the Atlantic offshore and Arctic will need to adjust operational practices and business expectations to coincide with, arguably, a stricter regulatory environment geared towards greater operator accountability in exchange for the right to make use of public natural resources.