New Pipeline Rules won’t Deter Projects, Advocates say
New federal regulations designed to ensure that pipelines have “readily accessible” funds on hand to deal with oil or gas spills will have little impact on major pipeline projects, but could spell trouble for smaller companies, lawyers say.
The rules come as several major Canadian pipeline projects are in various stages of development, including Enbridge Inc.’s Northern Gateway, Kinder Morgan’s Trans Mountain Expansion and TransCanada Corp.’s Energy East.
“I would absolutely not expect the regulations to be a deterrent to major pipeline developments, neither chilling nor boosting the risk profile significantly,” says Allison Sears of Stikeman Elliott LLP in Calgary. “It is the smaller pipeline producers with lower capacity infrastructure who may struggle to meet some of these requirements.”
The regulations, which apply to all federally-regulated interprovincial pipelines, follow the Pipeline Safety Act, which came into force in June. They are designed to ensure that pipeline companies are adequately prepared to cover response, remediation costs and liability claims in the event of an unintended or uncontrolled release from their pipelines.
“The Pipeline Safety Act (PSA) is government’s answer to public criticism of operators’ response to large spills at a time when there are several large pipelines going through the regulatory process,” says Terri-Lee Oleniuk of Osler, Hoskin & Harcourt LLP in Calgary.
The PSA gave the National Energy Board (NEB) power to assume control of pipelines in the event of a spill. It also made pipelines carrying at least 250,000 barrels of oil a day liable to the tune of $1 billion for any spills, regardless of whether the pipeline operators were at fault. The determination of these “absolute liability” limits for other pipelines, however, was left to future regulations.
These were released in late September. They established a $300-million, no-fault liability limit for companies operating one or more pipelines with capacity of at least 50,000 but less than 250,000 barrels of oil daily. Companies with lesser capacity are subject to a $200-million limit.
The rules also divide gas companies into three classes based on their risk value. Those with risk values of one million or more have a $200-million limit, those with a risk value of less than one million but more than 15,000 are assessed at $50 million, and the smallest companies are subject to a $10-million limit.
Companies can comply with the limits in a variety of ways, including insurance policies, escrow agreements, letters or lines of credit, pooled funds, parent company guarantees, surety bonds and cash.
The kicker, however, is that the latest regulations require all these companies to have five per cent of their absolute liability limit “readily accessible.” And the options for complying with this requirement are narrower, limited to a line or letter of credit, a pooled fund or cash.
“For the large companies, the ‘readily accessible’ requirement is not really an additional burden, because they already had a $1-billion limit financial requirement in place,” Oleniuk says. “In fact, the general consensus is that the regulations are reasonable and won’t have much of an impact on operators except for those who are cash-strapped or having difficulty accessing cheap credit.”
For her part, Sears cites smaller oil and gas producers who operate interprovincial pipelines on a single shipper basis or with a few other shippers as the types of companies who are already struggling in the current pricing environment and whose weak financials may make it difficult to take advantage of some of the permitted financial instruments under the regulations.
But it’s not as if the legislation was a complete surprise to the industry.
“Such financial requirements were already finding their way into the conditions imposed by the NEB in any event,” Sears says. “Overall, these regulations are best understood as bringing certainty and confidence, particularly to the Canadian public, that funds will be immediately available in the event of a spill or release.”
Still, environmentalists are unhappy with the five per cent requirement for readily accessible funds.
“The government started with 10 per cent in mind, then took it down to five per cent when they were convinced that this was a more accurate reflection of upfront costs involved in a spill,” Oleniuk says. “But environmentalists maintain that’s not acceptable.”
It remains to be seen whether provincial governments will enact similar requirements for intraprovincial pipelines. If they don’t, the current state of the law likely means these operators won’t be obliged to start paying for the consequences of spills unless and until their degree of fault is established.
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