I. Offshore Drilling in Canada
Canada is the world’s sixth largest producer of petroleum and the largest supplier of crude oil imports to the United States. In fact, Canada currently supplies approximately 19% of those imports. Nevertheless, drilling for petroleum off the country’s lengthy coastlines has yet to be commenced on a large scale. There are only three offshore rigs currently in operation, as opposed to the thousands operating in the Gulf of Mexico, even though Canada appears to have large offshore reserves. These vast deposits are believed to exist off both the East and West Coasts and in the Arctic. However, drilling in the Arctic is difficult and expensive, the proven East Coast reserves are almost 350 miles offshore and in some very deep waters, and drilling off the West Coast is currently prohibited as the result of the federal government’s moratorium on oil and gas exploration off the coast of British Columbia in the early 1970s in the wake of the oil spill near Santa Barbara, California in 1969. The depth of the waters and the narrowness of the straits were thought to pose great dangers to the environment.
In recent years, the Government of British Columbia has been trying to persuade the federal government to allow exploration in some offshore areas to promote economic growth despite the continuing opposition of strong environmental organizations and public concerns. It argues that the West Coast is being deprived of economic opportunities by the only federal moratorium on offshore drilling. The federal government has considered the possibility of allowing some West Coast exploration, but has not formulated any plans to open up areas off the West Coast to private companies. In fact, in the aftermath of the Gulf of Mexico disaster, the federal Minister of the Environment announced that the moratorium will not be lifted “anytime soon.”
In the Arctic, one license to drill offshore was granted by the National Energy Board, but there is no oil currently being produced in the offshore areas of Canada’s far north. Licensing of companies to explore the region has commenced in recent years, but a number of companies that have submitted bids and been awarded exploration licenses have asked the federal government to relax its safety standards in order to make drilling in the Arctic more economically competitive. Some regulations have been amended in recent years. A critic with the World Wildlife Fund stated that “the federal government has shifted away from a prescriptive regulatory framework to one that encourages industry to meet soft regulatory outcomes” and that “this shift is a leap of faith that industry will put the public-interest in front of self-interest and shareholder profits.” However, it appears that Canada still requires companies to be prepared to immediately construct a relief well in the event of a blowout while the industry has been contending that technological advances no longer make this necessary. These companies have also argued that the short drilling season in the Arctic makes the immediate construction of a relief well extremely difficult, if not impossible, in most cases. However, Prime Minister Harper has repeatedly stated that the requirements respecting the construction of relief wells will not be relaxed since they recently came under intense scrutiny. Critics contend that these requirements are inadequate and support the reintroduction of the rule that relief wells must be drilled at the same time primary extraction wells are drilled in the ocean floor.
The region in which significant offshore oil production is underway is off the coast of Newfoundland. Three large projects are already in production and more exploration was approved prior to the Gulf disaster. While oil and gas production in the Arctic falls entirely under federal jurisdiction, responsibility for regulating oil and gas drilling off the coast of Newfoundland is shared under an agreement with the province. A federal-provincial board has been established to manage the offshore petroleum resources of Newfoundland.
The Gulf disaster recently elicited a response from the Canada-Newfoundland Offshore Petroleum Board. The Board had already approved exploratory drilling by Chevron in the Orphan Basin, about 430 kilometers northeast of St. John’s, and operations commenced this month. The project is known as Lona O-55. At 2,600 meters (1.62 miles) below sea level, it will reportedly set a record for the deepest offshore project drilled in Canada.
On May 20, 2010, the Board announced it was imposing “special oversight measures” on the project “in light of the situation unfolding in the Gulf of Mexico and heightened public concern over drilling operations currently underway in the Newfoundland and Labrador offshore area.” The Board stated that “prior to penetrating any of the targets, Chevron must hold an operations timeout to review and verify, to the satisfaction of the chief safety officer and the chief conservation officer, that all appropriate equipment, systems and procedures are in place to allow operations to proceed safely and without polluting the environment.” Under the new measures, Chevron must provide daily reports on its drilling program to a team of board members and must meet with the oversight team every two weeks. The Board’s actions have been summarized as follows:
Chevron also must provide field reports regarding the rig’s blowout preventer and all associated backup equipment. The company will be expected to monitor the massive oil spill caused by a blowout at the Deepwater Horizon rig in the Gulf of Mexico, and report any “lessons learned” from the incident.
The audits and inspections aboard the Stena Carron drill ship, which will drill the well, have been increased to every three or four weeks from every three or four months.
Board spokesman Sean Kelly reportedly stated as follows:
We recognize that there’s a lot of public interest in this, and there’s concern about whether [a spill] could happen here. Part [of] our review is to say, “Well, what else can we do that would help address some of those concerns?”
The federal government also shares regulatory responsibility for oil and gas exploration off the coast of Nova Scotia with the government of that province. However, while natural gas reserves are being tapped off the coast of Nova Scotia, petroleum is not currently being extracted in that area.
II. Oil Spill Liability
A. Insurance Requirements
Section 27 of the Canada Oil and Gas Operations Act (COGOA) provides that companies who apply for exploration or production permits or licenses must provide “proof of financial responsibility in the form of a letter of credit, a guarantee or indemnity bond or in any other form satisfactory to the National Energy Board [NEB], in an amount satisfactory to the Board.” Holders of permits or licenses are required to prove that their letter of credit, guarantee, or indemnity will remain in force for the duration of the work. The NEB can order money to be paid out of the funds available under the letter of credit, guarantee, or indemnity bond in respect of any claim for which proceedings may be instituted, regardless of whether legal proceedings have been commenced. Amounts so paid out are deducted from any subsequent awards.
The federal government has thus decided to give the NEB broad powers to decide what types of financial guarantees are acceptable and what the amount of a particular guarantee should be. There are no fixed insurance requirements.
B. Response Costs
COGOA generally prohibits oil spills and requires all spills to be reported. Persons who are responsible for an oil spill are required to “take all reasonable measures consistent with safety and the protection of the environment to prevent any further spill, to repair or remedy any condition resulting from the spill and to reduce or mitigate any danger to life, health, property or the environment that results or may reasonably be expected to result from the spill.” The Chief Conservation Officer in the NEB can step in to take any actions that he deems necessary. This official can also bring in other parties to do work that is not being done by the polluter. The costs are to be borne by the polluter and constitute a debt owed to the government. Third parties hired by the government are not liable for any damages unless they act unreasonably.
C. Limits on Liability
Persons who cause oil spills are also generally liable for damages caused to third parties without proof of fault or negligence, subject to limits established by applicable regulations. This is the principle of limited strict liability. In Canada, the limits on liability are generally relatively low. In the Arctic and Northern Canada, the general limit on liability to third parties is generally Can$40 million (about US$38.98 million). In non-prescribed areas the limit is Can$30 million. (about US$29.24 million). These limits do not apply to damages caused by fault, negligence, or violations of COGOA. There is a six-year limitation period on the filing of claims.
D. Offenses and Punishments
COGOA provides that the following acts are criminal offenses:
- (1) Making false statements, reports, or documents;
- (2) Knowingly destroying, mutilating, or falsifying any report, record, or other document;
- (3) Contravening the Act or regulations;
- (4) Producing oil under an amended agreement that has not been filed;
- (5) Undertaking unapproved work; and
- (6) Failing to comply with a direction, requirement, or order of a safety officer.
All of the above offenses are punishable with a fine of up to Can$100,000 (about US$97,256) and imprisonment for up to one year if they are prosecuted in summary proceeding. The same offenses are punishable with fines of up to Can$1 million (about US$972,930) and imprisonment for up to five years if they are prosecuted by way of an indictment. The distinction between summary and indictable offenses is similar to the distinction between misdemeanors and felonies in the United States. The decision as to whether an accused should be tried summarily or by way of an indictment rests with the government.
III. Offshore Petroleum Regulatory Regime
1. The National Energy Board
Canada’s National Energy Board (NEB) has broad responsibilities in the field of oil and gas exploration. The Board has described its role as follows:
The Board regulates Frontier lands and offshore areas not covered by provincial/federal management agreements.
Responsibilities include the regulation of oil and gas exploration, development and production, enhancing worker safety, and protecting the environment. Other Frontier activities include the calculation of discovered and undiscovered hydrocarbon resources, the development of emergency environmental contingency plans, and fostering research programs which support and complement the Board's regulatory responsibilities.
In short, the NEB is primarily responsible for establishing drilling standards outside of the offshore areas adjacent to Newfoundland and Nova Scotia.
2. Indian and Northern Affairs
The Department of Indian and Northern Affairs (INAC) also has important regulatory functions in the area of offshore oil and gas exploration in the Arctic. The Department has described its role as follows:
Oil and gas exploration and development are key to Canada’s economic well-being. One quarter of Canada’s remaining discovered resources of conventional petroleum is in the North as well as one third to one half of the country’s estimated potential.
INAC works in partnership with Northern and Aboriginal governments and people to:
- govern the allocation of Crown lands to the private sector for oil and gas exploration;
- develop the regulatory environment;
- set and collect royalties; and
- approve benefit plans before development takes place in a given area.
Benefit plans define oil and gas operators’ policies and activities to maximize employment and training prospects for Northerners. The plans also ensure that Northern businesses have opportunities to supply goods and services on a competitive basis.
In short, INA is also involved in the approval of licenses to drill for oil on gas. Its major field of concentration is on economic development.
3. Environment Canada
Environment Canada is Canada’s federal environmental protection agency. Its role in preventing and addressing oil spills is described under subsection C, below .
4. Canadian Coast Guard
The Canadian Coast Guard is an agency in the Department of Fisheries and Oceans. The Coast Guard has primary responsibility for managing and cleaning up oil spills from tankers and ships. These responsibilities have been described as follows:
The Canadian Coast Guard is the lead federal agency for the response component of Canada’s Marine Oil Spill Preparedness Response Regime. The Environmental Response program monitors or manages the clean-up efforts for any ship-source or mystery source pollution incident in waters under Canadian jurisdiction.
ER’s specific mission objectives are to:
- Minimize the impact of marine pollution incidents on public safety;
- Minimize the environmental impact of marine pollution incidents; and,
- Minimize the economic impact of marine pollution incidents.
5. Canadian Wildlife Service
The Canadian Wildlife Service coordinates the rescue and treatment of migratory birds and endangered species The Service also assesses damages caused by oil spills to wildlife and habitats to help determine whether responsible parties should be prosecuted and the costs that they should bear. Studies are also conducted to determine the status of recovery efforts.
6. Canada-Newfoundland Offshore Petroleum Board
The Canada-Newfoundland and Labrador Offshore Petroleum Board describes its responsibilities as follows:
The Canada-Newfoundland and Labrador Offshore Petroleum Board has the responsibility to ensure that offshore oil and gas industrial activities proceed in an environmentally acceptable manner. The Environmental Affairs department of the Board plays a key role in carrying out this mandate by evaluating the effect of the offshore environment upon the safety of offshore activities and by ensuring protection of the environment during the conduct of these activities.
Working in close consultation with the C-NLOPB’s Operations and Safety department, Environmental Affairs assesses the potential effects of environmental conditions (such as winds, waves and ice conditions) in the Newfoundland offshore area upon the safety of operations that are proposed for that area and of the facilities that are proposed to do the work.
The two departments also work closely together in reviewing operational procedures such as ice management plans, and in monitoring the conduct of offshore operations that are in progress. In addition, Environmental Affairs reviews operators’ plans for collecting the weather, oceanographic and ice data that they are required to measure at offshore drilling and production sites.
The Board reviews proposals for all physical activities offshore—from seismic surveys to production projects—to identify their potential effects upon the natural environment or upon other users of that environment (such as the fishery). It also evaluates measures that are proposed to prevent or mitigate these effects. This activity includes reviewing operators’ contingency plans for environmental emergencies—especially oil spills—to ensure that adequate response measures, people and equipment are in place in the event of an accident.
In all these reviews, the Board’s Environmental Affairs department also consults with a number of environmental advisory agencies in the federal and provincial governments, and occasionally in other Canadian or international jurisdictions. In the case of large projects, it also helps to design and implement the process through which the public may participate in the review.
The Board also reviews, and monitors the operation of, the “nuts and bolts” of environmental management offshore—the systems and procedures that make environmental protection happen in an offshore operation. The number and complexity of these may vary depending on the scale of the project or activity itself. For a production project, they include:
- Waste treatment and compliance monitoring equipment and procedures;
- Offshore chemical selection and management procedures;
- Waste management plans;
- Field programs to detect effects upon the natural environment;
- Compensation programs for those affected by accidental events; and
- Exercises and drills of environmental emergency response plans.
The C-NLOPB’s Environmental Affairs department acts as a source of information on any or all of the above matters for the general public, government agencies, and industry, and provides advice on behalf of the Board to government and industry bodies that conduct environmental research and development relating to the Newfoundland and Labrador offshore area.
Thus, offshore drilling off the coast of Newfoundland is regulated by a joint federal and provincial board that establishes its own rules, standards, and guidelines. This regulation extends to all aspects of a drilling project, from the granting of licenses to explore, to production permits, to monitoring of operations. However, there is considerable overlap between the federal laws applicable to the Arctic.
B. Distinctions Between Deep and Shallow Water Drilling
The regulations pertaining to offshore drilling established by the National Energy Board for the Arctic and the Canada-Newfoundland and Labrador Board do not establish special rules for drilling in deep waters. However, regulatory authorities can take the depth of drilling into account in determining whether the proposed safety standards to be followed are adequate in reviewing a license to drill.
In light of the BP disaster in the Gulf of Mexico, Canada may adopt stricter rules specifically for deep water drilling. On June 10, 2010, the National Energy Board issued a news release in which it stated as follows:
The National Energy Board (NEB) is inviting participation in its public review of Arctic offshore drilling requirements.
The NEB, which has regulatory oversight for offshore drilling in the Canadian Arctic, announced on 11 May that it would be looking into Arctic safety and environmental offshore drilling requirements. The NEB expects to complete this review before receiving applications for drilling in the Arctic offshore.
A preliminary scope of the review is available on the NEB website at www.neb-one.gc.ca. The preliminary scope includes topics such as drilling safely while protecting the environment, responding effectively when things go wrong, and lessons learned from major accidents elsewhere.
C. Division of Responsibilities in Responding to Oil Spills
The Environmental Emergencies Program (EEP) of Environment Canada is responsible for responding to environmental emergencies and the uncontrolled or accidental release of hazardous substances. The program is implemented through the Environmental Emergencies Division, which has its central headquarters in the Ottawa region and regional offices in five provinces. The EEP response unit, the National Environmental Emergencies Centre, assists the regional emergency offices in providing and coordinating responses.
Canada’s Environmental Science and Technology Centre (ESTC) is the agency within Environment Canada that is primarily responsible for responding to oil spills and other pollution emergencies, and which corresponds most closely with the U.S. Minerals Management Service (recently renamed the Bureau of Ocean Energy Management, Regulation, and Enforcement). ESTC is involved in the development of decontamination technologies. Research and development is cost-shared. ESTC shares national and international technologies with Canadian companies and develops prototype equipment for water treatment.
In response to the possibility of an oil spill, ESTC has developed in situ countermeasures. This includes the development of treatment guidelines and evaluating treatments and their effects with respect to their effectiveness and toxicity. ESTC tests protocols and performance standards and burning technologies.
The Western Office of ESTC is responsible for developing technologies and transferring technologies on the cleanup of oil on shorelines even though there is a moratorium on offshore drilling off the coast of British Columbia. This Office also evaluates oil spill countermeasures, biomediation, and the environmental effects of spilled substances.
ESTC has one DC-3 and one Convair 580, which are equipped with Laser Environmental Airborne Fluorosensers that were designed by a consortium led by Environment Canada and the U.S. Minerals Management Service. This technology has been tested by ESTC over Santa Barbara, California.
Environment Canada began a special Arctic and Marine Oilspill Program (AMOP) in 1978. In 2008, this program’s annual seminar was combined with two others to create the AMOP Technical Seminar on Environmental Contamination and Response. One of the major purposes of this international seminar is to facilitate the transfer of technology. Operational guides, manuals, and training are all provided to spill responders and others. Research and development priorities are established by Canadian and international government agencies.
The BP Gulf disaster has been followed with great interest in Canada. Because its system for approving drilling and responding to oil spills is similar to those used in the United States, many questions have been asked about the adequacy of Canada’s current regulations and policies. The Prime Minister has stated that Canada has stricter rules and more oversight than the United States. Nevertheless, the largest exploration project off the shore of Newfoundland has been temporarily halted and a review of the regulations pertaining to the Arctic is already underway. Aspects of Canadian law that have been criticized include the low limits on liability for accidents that were not the result of illegality or negligence and the absence of requirements for the simultaneous drilling of primary and relief wells.
Prepared by Stephen F. Clarke
Senior Foreign Law Specialist
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 Peter Overby, BP Sought to Ease Canada’s Policies on Relief Wells, NPR, June 3, 2010, http://www. npr.org/templates/story/story.php?storyId=127381814&ft=1&f=1003.
 Allison Cross & Lynn Moore, Canada Will Not Weaken Drilling Standards: Harper, Vancouver Sun, May 3, 2010, http://www.vancouversun.com/life/green-living/featured-articles/Canada+will+weaken+drilling+ standards+Harper/2981979/story.html.
 Canada: Authorities Stop Chevron Drilling Project Off Newfoundland, Offshore Energy Today.com, May 21, 2010, http://www.offshoreenergytoday.com/canada-authorities-stop-chevron-drilling-project-off-newfoundland/.
 Canada Oil and Gas Operations Act, R.S.C. ch. O-7, § 27(1) (1985), as amended, available at http://laws.justice.gc.ca/eng/O-7/page-8.html#anchorbo-ga:l_I-gb:s_24.
 Id. § 27(1.1).
 Id. § 27(2).
 Id. § 27(4).
 Id. §§ 25(1), 25(2).
 Id. § 25(3).
 Id. § 25(4).
 Id. § 25(5).
 Id. § 25(6).
 Id. § 25(9).
 Id. § 26.
 Regulations Respecting Limits of Liability for Spills, Authorized Discharges and Debris Emanating or Originating from Work or Activity Related to the Exploration For Or Production Of Oil and Gas, SOR/87-331, available at http://laws-lois.justice.gc.ca/eng/SOR-87-331/page-2.html (last visited June 22, 2010).
 Canada Oil and Gas Operations Act, R.S.C. ch. O-7, § 26(2)(b) (1985), as amended, available at http://laws.justice.gc.ca/eng/O-7/page-8.html#anchorbo-ga:l_I-gb:s_24.
 Id. § 26(5).
 Id. §§ 59-60.
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 National Energy Board, Drilling and Production Regulations, SOR/2009-315, http://laws.justice.gc. ca/eng/SOR-2009-315/index.html (last visited June 21, 2010).
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 Press Release, National Energy Board, National Energy Board Invites Participation in the Public Review of the Proposed Arctic Offshore Drilling Requirements (June 10, 2010), http://www.neb-one.gc.ca/clf-nsi/rthnb/nwsrls/2010/nwsrls14-eng.html.
 Environment Canada, Environmental Emergencies: Who We Are, http://ec.gc.ca/ee-ue/default.asp? lang=En&n=FDBFAF6B-1 (last visited June 21, 2010).
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Last Updated: 01/23/2015