Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 10 - Evidence - June 22, 2010
OTTAWA, Tuesday, June 22, 2010
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 6:25 p.m. to study the current state and future of Canada's energy sector (including alternative energy) (topic: Canadian offshore oil/gas exploration and drilling: the current status of operations/applicable regulatory rules and regulations).
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good evening, everyone. This is a meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our study on the current state and future of Canada's energy sector, including alternative energy. In view of the mounting terrible events in the Gulf of Mexico, which started on April 20, we paused in our overall investigation of the energy sector to hold focused hearings on the offshore drilling exploration and production industry in Canada because we had heard that some public opinion polls indicated Canadians were concerned, and that 50 per cent or more felt we should have a moratorium on all drilling, exploration and production in offshore Canada.
From the work we have been doing to date, we know that there is no drilling or exploration being done off the West Coast of Canada or currently in the Arctic, although there is some planned for there, and that there were activities on the East Coast, although we were not sure to what extent. We felt that it was important that the facts be brought out for all Canadians so that they would understand and be well aware of —
[Translation]
We want to ensure that Canadians are well informed regarding the current state of drilling and other Canadian offshore projects. That is why we have decided to focus on this issue.
[English]
We have been waiting with bated breath to hear from the National Energy Board of Canada, NEB, which is the principal federal regulator of matters related to energy, including parts of the offshore industry. We have with us the Chair and CEO, Gaétan Caron, who has been with us on our overall energy study, and the board's technical leader, Brian Nesbitt, who is in charge of the engineering, operations business unit.
After hearing from these gentlemen, we will hear from representatives of the Canadian Association of Petroleum Producers.
I know that you have a statement, Mr. Caron, which you kindly supplied to all members of the committee.
Mr. Caron has been following our hearings carefully and probably knows better than we do what we have heard to date.
We began our study on May 27 because, at that time, the extent of the situation in the Gulf was becoming known to Canadians and they were worried. We were getting calls and emails, and we felt there may be an over-reaction. Some representatives of industry said that an overreaction could set the industry back 20 years.
We were told that the reaction to the Piper Alpha incident, which was a significant oil rig disaster, put the industry ahead 20 years, because so many things were taken into consideration.
We have heard from the Canada-Newfoundland Offshore Petroleum Board; the Canada-Nova Scotia Offshore Petroleum Board; the World Wildlife Fund of Canada; and the Honourable Christian Paradis, Minister of Natural Resources, and his officials.
We heard representatives from the Canadian Coast Guard and the Eastern Canada Response Corporation. As well, we have heard from Chevron, who are doing a big operation, as you know, in the Orphan Basin, and from representatives of Husky Energy. Last week, we had representatives from Encana, who are in the gas business.
We are pleased to welcome you, gentlemen.
[Translation]
Gaétan Caron, Chair and CEO, National Energy Board of Canada: Mr. Chair, honourable senators, thank you for the opportunity to appear before you today.
[English]
The National Energy Board is the federal regulator for offshore oil and gas drilling and production in Canada. It is our role to administer the Canada Oil and Gas Operations Act, known as COGOA, along with the Canada Oil and Gas Drilling and Production Regulations. This legislation and these regulations have very strong wording. The NEB has the job of making regulatory decisions and ensuring that companies carry out their activities in a manner that is safe and protects the environment.
On May 11 of this year, the board announced that it is starting a review of Arctic safety and environmental offshore drilling requirements. The review will include gathering information and knowledge from Aboriginal organizations, residents of Arctic communities, technical experts, governments, other regulators, industry and other participants. The results of the review will be incorporated in the examination by the board of future applications for offshore drilling in the Arctic.
As part of the review, we will learn from recent events. We will also be looking to identify the latest information about the hazards, risks and mitigation measures associated with offshore drilling activities in the Canadian Arctic. The scope of this review will include drilling safely while protecting the environment, responding effectively when things go wrong, learnings and filing requirements.
[Translation]
This review will be public. It will be transparent. There will be opportunities for people who are concerned about this issue to share their views. The National Energy Board will listen.
There is currently no offshore drilling in the Beaufort Sea. There are no applications for drilling before us. In the 19 years that the NEB has regulated drilling in the offshore, we have authorized only one offshore drilling project. The Devon Paktoa C-60 oil well was drilled without incident in about 11 metres of water between December 2005 and March 2006. This rig was located approximately 45 kilometres from the shoreline of the Mackenzie Delta.
[English]
Under the Canada Oil and Gas Operations Act, companies must obtain an authorization to carry out a drilling project. No project is approved unless the National Energy Board is satisfied that the operator's drilling plans include robust safety, emergency response and environmental protection plans that meet the board's approval. Every single project that is authorized by the board must be safe for workers and the public and must protect the environment.
Applications for offshore drilling projects on the Beaufort Sea are subject to a full and comprehensive environmental assessment under the Canadian Environmental Assessment Act and the Canada Oil and Gas Operations Act. In addition, under the terms of the Inuvialuit Final Agreement, these applications are subject to an environmental assessment by the Inuvialuit environmental impact screening committee.
The environmental assessment is a thorough and rigorous process that considers all relevant factors, including potential impacts from the project, potential impacts from accidents and malfunctions, and measures to prevent, mitigate and monitor these impacts.
The Chair: Excuse me, sir. I hate to interrupt you like this, but you have been talking in this last couple of phrases about the Beaufort and how it is regulated and the experience or lack of experience there. We sometimes use the general term "Arctic." Is it the same thing? Could you make that distinction? People say there is drilling going on in the Arctic and all the polar bears will be covered in oil and it is terrible.
Mr. Caron: Thank you for asking for that clarification. In fact, it is not the same thing. The review that we launched is about drilling in the Arctic, so it covers conceptually the entire Arctic. The Beaufort Sea would be a subset of it, but any learnings that will come out of the review will also be applicable to Arctic islands. We think that applications will be coming first in respect of offshore drilling in the Beaufort Sea. It is only a question of sequencing. Our review is meant to be comprehensive of anything in the Canadian Arctic.
In respect of liability and financial responsibility, any operator issued an authorization under the Canada Oil and Gas Operations Act has full and primary responsibility to anticipate, prevent, mitigate and manage incidents and oil spills of any size or duration. If there is a hydrocarbon spill and the operator is found to be at fault or negligent, they are responsible for paying for all the costs and damages. There is no limit to how much they would have to pay.
If there is a hydrocarbon spill, regardless of fault or negligence, the operator is responsible for paying for the costs and damages up to the limits specified under the Canada Oil and Gas Operations Act and, in locations where applicable, the Arctic Waters Pollution Prevention Act and the Inuvialuit Final Agreement. The specified limit in all cases is at least $40 million for an authorized activity in the Arctic offshore.
Each operator issued an authorization must provide proof of financial responsibility. The National Energy Board decides the amount and form of financial responsibility that is required for any authorization pursuant to COGOA.
NEB-regulated companies have full and primary responsibility to anticipate, prevent, mitigate and manage incidents and oil spills of any size or duration. A critical requirement under the board's legislation is the need for companies to provide a proposed emergency response plan. The board reviews this plan before any authorization to drill will be issued. If there is a spill, it is the company's responsibility to respond, manage the incident and clean up the spill.
The NEB maintains an emergency operations centre in Calgary to coordinate field staff at the incident site, and to provide situation reports to all the other federal agencies and other agencies at different levels of government in the case of an occurrence. The NEB investigates and reports on incidents to help prevent them from happening again.
Our compliance program is focused at this time on oil and gas pipelines and onshore drilling, since there is no offshore drilling taking place. The NEB has a rigorous compliance program to ensure that operators comply with all application regulations along with the project-specific conditions imposed by the NEB in its permits. In 2009, NEB staff conducted 211 compliance activities related to NEB facilities, including 9 emergency exercises, 4 audits and 33 safety inspections. With respect to drilling and compliance, all rigs need to have a certificate of fitness issued by an independent third party. This is specified in the regulations.
[Translation]
If the board is not satisfied that a drilling operator is living up to its commitments, the NEB can shut down the operation or take over the management and control of any spill response. The legislation also provides for a fine of up to one million dollars, imprisonment for up to five years or both. The board can also suspend or revoke an authorization for failure to comply with provisions of the act or regulations, or an authorization.
The National Energy Board has a long history of working with other regulators in Canada, including the two offshore boards, which you met with a few weeks ago, and around the world. We continually take advantage of opportunities to learn from each other.
[English]
For the past 20 years, we have been working with land claim agencies such as the Inuvialuit Game Council and communities potentially affected by Mackenzie Delta and Beaufort Sea drilling. We have more than 350 people on staff, with a combination of experience, skill and know-how to see that the facilities we regulate are safe, secure and operated in a way that protects the environment.
We also have a board of professional and independent board members with expertise in a variety of disciplines, including environmental protection, law, economics, engineering, geology, business and Aboriginal matters.
We have heard about Greenland planning to drill on their side of the Canada-Greenland border. They have requirements in place to ensure that exploratory offshore oil and gas activities are undertaken in a manner that protects people and the environment. We understand that last week Greenland authorized the drilling of two offshore wells in the Davis Strait this year. We are in the process of developing a memorandum of understanding, MOU, with the Greenland Bureau of Minerals and Petroleum, which is the authority in Greenland that is our equivalent. The MOU will guide both regulators as we seek opportunities to cooperate and share information and best practices in the safety and environmental regulation of offshore drilling activities.
In addition to the MOU, the board and the Greenland Bureau of Minerals and Petroleum will outline how the NEB will be present on the drilling rigs this summer, as observers, at key times of the drilling process. Any learnings obtained by the NEB will be fed into the board's Arctic review process.
The Chair: We read in the media, either last week or the week before, that the Minister of the Environment, Minister Prentice, went to Greenland. May we assume that you or the people who work for the NEB were part of the delegation, or would that be a wrong thing to do?
Mr. Caron: It is a correct assumption. Our vice-chair, Sheila Leggett, was present as part of the overall event in Greenland. It is on the ground that the concept of an MOU was discussed in Greenland and quickly embraced by the Greenland authorities and us. As we speak, we are negotiating the fine print of an MOU that we hope to implement as soon as possible.
The Chair: This is an important part of our study because we heard some suggestions that there are currents in Davis Strait and in the areas that Greenland will be doing its activities that could affect Canadian territory.
There may have been a press release or not after that ministerial visit to Greenland, but I think Canadians want to know what was decided. Feel free to elaborate on that.
Mr. Caron: Your point is well taken. It is one of the key motivators for us to want to be partners with Greenland in the sense of knowing what is going on in their regulatory regime — what we can learn from them and possibly what they may want to learn from us. To be on the ground, on the drilling rigs to observe at key times how operators on the Greenland side of this area conduct themselves is a very powerful source of knowledge that we fully intend to tap into.
The Chair: The relations are good. You have told us before and others have told us that Canada, and I think seven or eight other offshore-operating countries, have strong cooperative relationships with the regulatory agencies of those countries. Is that correct, and is Greenland one of them?
Mr. Caron: It is an emerging one; that is correct. There is Norway, the U.K. and now Brazil moving into the kind of regulatory regime that is now applicable in Canada.
We have a community of international regulators who are keen to learn from each other in terms of what is going well, and very keen to learn from each other the explanation for when things go wrong. When things go wrong, what do we do now in terms of quick response to minimize the damage to the environment and the impact on communities?
What you observed, Mr. Chair, is exactly correct. It is the notion of knowledge management, which we used to talk about a few years ago, applied to regulatory practitioners around the planet. It is a good thing, and the board is committed to learning from everyone else, especially in the tragic moments we are living in right now, where we know exactly what the worst-case scenario looks like.
Until recently, it was a tab in a binder for me. Now you watch TV and you see the worst-case scenario in front of your eyes. Our learnings will incorporate best practices in terms of regulating well and having operators that perform well; and when things go wrong, learning from that as well.
Safety regulators must always be ready for both. We need to promote safe and environmentally sound outcomes and we must be equally ready for that rare moment when things go wrong. A safety regulator cannot deal with only one side. You need to be always ready for both.
The Chair: You are not the only one observing out there, as you say. Every person who turns their TV on CNN or other stations, 24/7, can see this big gusher of oil pouring out, even to this very moment. You can imagine how the hysteria can build up and how important we feel it is for the Senate to take this initiative to try to put some balance and have a set of perceptions that are closer to the reality.
Mr. Caron: This is one of the key motivators for us to undertake the public review of Arctic drilling. If you would allow me, I am almost done with my introduction. This is exactly what I was going to say in terms of setting the record straight. Much is being said in terms of information out there about what is going on, and I would like to set the record straight on some of these information pieces.
First, and most importantly, I would like senators to be assured that the new drilling and production regulations that have been in place since December 2009 are stronger and more effective than any regulations we have had in place in the past. They are comprehensive and they have clear legal objectives regarding safety and environmental protection. They combine the best of prescriptive elements and goal-based requirements, defining the outcomes of good regulation.
The old regulations represented an out-of-date, one-size-fits-all system, sometimes labelled as "check-box regulation." The new regulations require companies to demonstrate that they can operate safely in specific situations, using the most advanced technology tailored to their circumstances. The onus is on industry to demonstrate to us that they can protect their workers, the public and the environment. If the operator cannot demonstrate this, they cannot drill.
In their day-to-day actions, the 350 people at the National Energy Board of Canada can promote safety and environmental protection effectively, thanks to the effective tool box Parliament has given us in the Canada Oil and Gas Operations Act. Canada has a robust and modern regulatory framework for offshore oil and gas drilling, and we are the ones accountable for implementing that act in the Arctic.
The Chair: At the end, you say setting the record straight and to clear up misconceptions, but you have not told us what those misconceptions are. This has been one of the great challenges for us. The Ottawa Citizen was running a series of daily articles on the subject, which were along the lines of just when we are about to do the deepest deepwater well off Newfoundland and Labrador, Canada had slacked off.
I believe that is one of the misconceptions. I am putting you on the spot because I think you had a headline here, "setting the record straight."
Mr. Caron: I am using positive language to remain positive. The fact is that the regulations we have now in effect are stronger; they are not weaker. They are no longer the kind that you would find several years ago — check-box regulation, where you codify in regulations very prescriptive elements that codify very well solutions of the past, related to circumstances that may or may not apply to the situation you need to resolve as a regulator.
The Arctic Ocean is not the Gulf of Mexico. It is not the Gulf of St. Lawrence. A regulator constrained by check-box regulation is forced to apply solutions of the past. As a modern regulator — like Norway, like the U.K. and many others — the movement is clear.
The more enlightened regulatory agencies of the world are moving toward strong regulators holding accountable the industry for specified outcomes. There is some flexibility on the means of achieving the outcomes — some flexibility, but not complete flexibility.
The way I would characterize our regime is goal-oriented regulation, in that it combines prescriptive elements and stipulations in the regulations where you specify the outcome with some flexibility. As an example of the prescriptive requirements, if you want to calculate the wall thickness of a pipeline connecting to an offshore platform, there is a first-degree linear equation in the CSA, Canadian Standards Association, code that specifies exactly the wall thickness of the piece of pipe you can install to ship the gas or oil.
This is part of our regulations. We incorporate, by reference, CSA standards. Those are very prescriptive elements. That applies where prescriptive requirements are adapted, and where we do not want flexibility to be given to operators.
In other cases, we ask for a safety plan to be filed that demonstrates how the workers will be kept safe, and then we have a series of requirements that give some direction to the operators as to what we are looking for, but it is up to them to demonstrate that they can achieve the outcome of workers going home after their shift, safe and enjoying life beyond the shift on the platform.
I am done with my opening statement.
The Chair: Thank you. Mr. Nesbitt, will you say some words or are you here for the question period to support the chief?
Brian Nesbitt, Technical Leader, Engineering, Operations Business Unit, National Energy Board of Canada: I am here to support the chief, yes. I have no additional words.
The Chair: Senator Lang is the first questioner this evening.
Senator Lang: Thank you, Mr. Chair, and thank you for coming out this evening and for your patience because we are a little bit later than what we were supposed to be, obviously.
You referred to your new drilling and production regulations. Are the drilling and production regulations for offshore the same in place for offshore Newfoundland as well?
Mr. Caron: They are technically different in terms of the definition of the board but the contents are identical.
Senator Lang: The specifics are identical. I will start with, and obviously you referred to it and so did the chair, what is happening down in the Gulf, and it goes back to what has been permitted to take place as far as drilling is concerned in that area and the blowout preventer that has been discussed by all parties involved. The present rig that is in trouble had one blind shear ram, contrary to others that were required to have a double blind shear ram so that there would be another safety possibility that could come into play, if necessary.
Up in the Beaufort and referring over to Newfoundland with the new drilling and production regulations, will all deepwater rigs be required to have a double blind shear ram?
Mr. Caron: The regulations are clear that there has to be a level of redundancy, so the general answer to your question is, yes.
How the specific configuration of a blowout preventer would look in an Arctic environment, the onus would be on the industry to specify in their application to us what they have provided for in terms of level of redundancy. In so doing, you can expect us to ask as the first question what they have learned from the configuration in effect in the Gulf of Mexico on April 20, 2010.
I will ask Mr. Nesbitt to elaborate on the technical configuration aspects that might be relevant to your question. You are asking the extent to which the physical configuration observed today at the bottom of the Gulf of Mexico will have the same physical configuration and could be allowed by the NEB for the Arctic Ocean.
Senator Lang: And for Newfoundland because they are one and the same.
Mr. Caron: We cannot speak for them, but you can expect comparable philosophies of implementing the same regulations.
Mr. Nesbitt: The drilling regulations themselves do not have specific requirements of how you stack your BOP, blowout preventer, and how many elements are in, or even types. There are requirements for the company to determine what the hazards are and come up with the mitigation to address those hazards, so specific to that situation in the Arctic, they would have to come up with the solution for that BOP stack as a well barrier. They would have to demonstrate to us that the solution is effective, and that it is not just minimally effective. I will quote from section 19 of the drilling regulations:
The operator shall take all reasonable precautions to ensure safety and environmental protection.
That means they have to go that step further. They do not just achieve a level of safety. They look to what all the mitigation options are, even additional ones, and look at the reasonableness of that and then apply that. They would not just take a standard stack off the shelf. They would have to address it specifically.
Mr. Caron: I would add that, if what I read in the media I accept as fact, this is not something the board will authorize.
As a safety regulator, we have to be diligent that, when we assess a situation, we assess it as a safety investigator would do so, based on evidence. Right now, we do not know what the hardware looks like at the bottom of the Gulf of Mexico. We have not seen the witness testimony, the statements of witnesses. An accident investigator must refrain from speculating as to what caused an accident because, if you start to speculate, you close your mind as to what might have caused the accident. If the reports are accurate, and maybe they are, this is not a situation the board would allow.
Senator Lang: This goes back to the root of the questioning, and the comfort Canadians are looking for of what minimum is required when we are going to this offshore drilling, especially in deep water. It is clear that, at one time, they had single blind shear rams, and they now have gone to double shear blind rams. Is that a minimum for our offshore drilling whether in Newfoundland or, if it ever happens, in the Arctic?
Mr. Caron: What you describe as the minimum did not work, so minimum is above that. We have evidence that whatever configuration was in effect in the Gulf of Mexico for this particular accident was not fail safe.
Senator Lang: I agree. There is no question it was not fail safe.
Mr. Caron: Our minimum is above that, senator
Senator Lang: We are trying to get to how can we help and assist ensuring there is comfort to Canadians, and to continuation of the offshore oil industry to be successful. It was clear in the Gulf they should have had at least, as a minimum, a double blind shear ram, and they did not have it. Who will enforce that and put that in play, and ensure that is a minimum from our point of view?
Mr. Caron: The National Energy Board is accountable to Canadians to actually only authorize drilling that meets the requirements that Mr. Nesbitt read. Those are outcome statements, but the board will have an obligation to examine. Once we have the facts, once they have retrieved the pieces of metal from the bottom of the ocean, once we have access to the statements of witnesses on the platform who witnessed the event, we will have an obligation to figure out what went wrong. All we can do is speculate and we do not know. Until we know, we do not know what level of additional requirements we will impose, but we will do better than what you have seen.
The question is what is the other definition of a worst-case scenario, and we do not know that yet. Our public review of Arctic requirements is about attracting the best knowledge of the world to that question because the stakes in the Arctic Ocean when things go wrong are too high to not expend the effort we have initiated by launching the public review.
Senator Lang: I appreciate the fact that the review is under way. Perhaps you could tell us how long that inquiry will take.
I have another area that has to do with the response to an oil spill. Previous witnesses indicated to us they never really had a demonstration done of a plan in place on a third-tier response to see if it would work.
In view of what has happened down in the Gulf of Mexico, will we demand that, not only when a plan is filed that that plan has to be demonstrated to the best of their ability to meet what the NEB would like to see to be able to cope with a disaster like we are facing down in the Gulf?
Mr. Caron: The eleventh issue of our public review is about filing requirements. We will listen to the experts. We will listen to Arctic communities, and we will decide after hearing from everyone to the extent, as you said, of our ability what we need to anticipate a worst-case scenario, and have an on-the-ground exercise to practise the skills and behaviours required to respond to that worst-case scenario. Until we have the review completed, until we have heard from Arctic communities, it is a question left to be answered.
Senator, the duration of the review will be as long as it takes to do it well. We have given the date of July 16 for people to identify their interest to participate in the review, and we have floated a draft scope of the review, so we will be welcoming comments on the scope until then. I have the full board mobilized on that. All 11 board members are working on this. Once the board has decided on the scope, we will then look at it from a project management standpoint to see what communities we will visit and the format of the review. Some of it will be informal; some of it will be scientific. To emphasize the duration, it will take the time that we need to do it well.
Senator Neufeld: Thank you for being here today.
I want to expand a bit on the questions asked by Senator Lang. I am not sure that I was comfortable with the response regarding the BOPs. I appreciate that everyone will listen to the factual information about what happened in the Gulf of Mexico. I also understand that something of that magnitude will not happen by next Saturday, or by a year from Saturday, or probably two years from Saturday. It will take a long time.
I guess what Senator Lang talked about is not a secret, it is true. There was one set of cut-off line ramps. If we are drilling in the Arctic, the conditions are different because of the ice and of the inability to get in there sometimes in the dead of winter. It is a little different from going out in the Gulf of Mexico. You understand that as well as me. I live in the North; I know it is more difficult to get out into the Arctic than to get out into the Gulf of Mexico. Would we not take extra precautions ahead of time without waiting for the reports that happened in the Gulf of Mexico? I am not saying that we should not respond to them, but should we not pre-empt them a bit with some things that we would put in place in Canada that says, "There are some other redundancies. There is the mud and the cement." I understand that. Then, there are the BOPs and one set of line ramps. Maybe we need to think of two sets of line ramps or three simply because of the harsh environment in the North compared to the Gulf of Mexico. The Gulf of Mexico has hurricanes that we do not have, but I cannot imagine that we would not think automatically about this. I think you have to be a bit prescriptive once in a while. I do not think we just listen to what the industry says and think that it is good enough for us.
I think we are hearing a bit of that from down in the Gulf. Why would we not take that extra step now and pre-empt some of that? I know there is a multitude of other things, but there is one thing we can do. Drilling for mud and cementing are two redundancies before we get to the BOPs. Are we doing that? I did not get the comfort from your answer to Senator Lang that we are thinking seriously about it. I think we should be doing that if we are going into the Beaufort. Can I get some comfort here, please?
Mr. Caron: I am grateful for the question and I will give you the comfort that you are seeking: We are doing exactly that. We are going to be proactive and precautionary. The famous question of risk is, probability times consequence equals impact. Even if someone could suggest that the probability of an incident in the Arctic Ocean is small, when you multiply a small probability with a very high consequence, you need to have an outcome that is acceptable to society. That requires doing exactly as you suggest, senator.
We are not suggesting that we wait until all the investigations in the Gulf of Mexico are over — that will probably be 10 years from now. The best of the learning will come out about six months after they have been able to stop the leak. I am guessing a bit, but within six months, when people have been given a break and do not have to prioritize their time on stopping the leak, then they can talk about what happened when they retrieved the pieces of mechanical equipment at the bottom of the ocean. When they start to analyze it, like our Transportation Safety Board analyzes pieces of airplanes after an accident, this will happen. This will take a long time and we need not wait for that.
We have advanced knowledge in Canada. To date, we have drilled 89 offshore wells in the Beaufort Sea. We already have a wealth of knowledge about the environmental impacts in shallow waters. We do not have it in deep waters, but we have that. We know what a fail-safe device looks like when it fails. We can apply our engineering talent right now and devise a BOP or something better than a blowout preventer that actually works, or we feel or hope or calculate or determine is the case.
Our review is the driver to gain that knowledge. Our information requirements will come out of that. If you want to persuade the NEB that you need to drill in the Arctic Ocean, then this is what you have to provide. Some of it will be highly prescriptive; some of it will be in the form of goals. I hope this is some comfort to you, senator, because I think your thinking is in line with ours.
Senator Neufeld: It makes me feel better that we will be proactive in those kinds of things. If double sheer rams on BOPs is the last thing that you can do, then I am comfortable with that. There are things that we can do other than blowout preventers, as you said. The other thing is the drilling mud and the cementing. Those are things that come to my mind. In my limited experience, those things tell me that they have to be looked at seriously.
As you said, there are 89 offshore wells in shallow water in the Beaufort. Are there 4, 5, or 10,000 wells in the Gulf of Mexico? If we had one spill in the Arctic, even a small one, that would end the industry in the Arctic. We do not want to do that — not just for that reason, but for the damage that it would cause to the environment. I know you are keen about that.
I want to talk about cleanup — and Senator Lang also talked about it — if, heaven forbid, there ever was a spill. I also read newspapers. I do not always believe everything they say, but sometimes, when you read between the lines, there is a glimmer of truth there. My experience onshore has not been good, but who really commands? Who says what will happen? We have had some conflicting information given to us. In the Gulf of Mexico, the Coast Guard is doing things that are not beneficial, for example, saying, "We want the ships inspected before you can go and suck the oil up." With some things, you have to get out there and get it done.
I would like you to make me feel comfortable and make Canadians feel comfortable, through this hearing, that there is someone in command. We understand from the industry that they are in command. We have heard different things from the Coast Guard and then there is the NEB, Environment Canada and DFO, Department of Fisheries and Oceans. There are probably another 50 organizations and groups. Who is in control? Who says: "This is what we will do?"
Mr. Caron: The answer is very clear: The National Energy Board is the only lead authority from the government standpoint to say this is what will happen.
As I read in my opening statement, we have some blunt powers of taking over management of an operation, if necessary. Our strategy, in being where the buck stops, is to demand that industry takes care of the spill so that, in the unlikely case that a spill has occurred, if you multiply it by the consequence — and this is a huge deal — we expect of industry to take care of the entire spill. We know that in cases of emergencies, everyone wants to help.
Even between companies, the competitive spirit disappears in times of emergency. We see that now in the Gulf of Mexico, where Canada and everyone else wants to help. The NEB will hold industry responsible for cleaning up the spill. The NEB is the lead authority to coordinate all discussions between federal agencies. Have you heard about the regional environmental emergency teams, where the Coast Guard has equipment stored? The NEB is the emergency control room in the event of an emergency. Everybody has been practising for many years. We will ramp up the practices. The NEB will be the lead authority and all information will flow in and out of that control room. If necessary, we would take control of the operator's actions. That is as short as I can put it. I hope that is the subject matter you were asking about.
Senator Neufeld: Yes. I understand you to say that DFO and the Coast Guard respond to what the National Energy Board says. They do not take over control. They do not decide what they will do. They work in concert with the NEB under the direction of the NEB. Is that correct?
Mr. Caron: Yes. We have experienced small to moderate spills along pipelines. In an emergency, people are grateful to know that someone has the lead. The NEB is always ready to do that. There is no power struggle because people want us to help. Instead of calling the shots, we help people to collaborate and achieve outcomes. We do that well. We have seen that in action in the case of oil pipeline incidents, and we would see that in the low probability basis if it happens in the Arctic Ocean.
Senator Neufeld: You said that you have been reading the committee transcripts.
Mr. Caron: Every one of them, senator.
Senator Neufeld: That is very good. I appreciate that.
The Chair: They have been following your testimony, senator.
Senator Neufeld: That is a bit of a joke. He wants to swear me in once in a while but so far I have refused.
We need to do a report out of this and we want to be responsible. As I said, some red flags have come up about cleanup and who is in charge and what the standards are.
Have you read things in our transcripts that the committee might recommend? Did something strike you as a red flag?
I will give you an example of a red flag, other than the things I talked about earlier: Cleanup crews on the East Coast, not the Beaufort.
The Chair: It is the East Coast Response Corporation.
Senator Neufeld: It is fully owned by the oil and gas industry. At least that was testimony we got.
The Chair: Correction: It is the Eastern Canada Response Corporation, ECRC.
Senator Neufeld: A number of oil companies own the ECRC. That kinda says to me that the oil company puts together a plan and the cleanup company, which they wholly own, is told what to do, and the National Energy Board accepts that plan. I would be more comfortable if there was a kind of Chinese firewall or if someone else owned the response team — and not the government either. If someone on the cleanup team says this does not seem quite right to me, he should feel comfortable saying it. Otherwise, they are talking against the owners of the company who is the owner of the drill ships and the offshore operation.
That is one small red flag. Are there other things that you have found or am I looking for something that is not there?
Mr. Caron: No, I follow your logic very well, senator. I will answer your question in a few seconds about recommendations that Mr. Nesbitt and I might want to make. I am holding that on the side.
On the question of whether there should be a northern version of the ECRC, I am torn because it is only fair to ask industry to pay for cleaning up the effects of the spill. I do not know why Canadians generally should expect otherwise.
Senator Neufeld: Do not misunderstand me —
Mr. Caron: I know. The ECRC is a response from industry to pool the money. Some is derived from the shipping industry, about which I am not an expert. The concept of money being set aside by industry, under legislation or otherwise, to be ready for the future does not offend me, per se.
I understand why it looks like the regulator might be just okay with industry saying they will have something ready that they hope will work. It is not presented but perceived as such. If I have a recommendation to make to your committee for your report, it is related to your point, senator. There has been a bit of dialogue in the media that it is a good idea for the regulator like the NEB to be strictly focused on safety and environmental protection. The MMS, minerals management service, was in the business of that but also had commercial aspects and benefits to Americans. Recently, we have seen clearly that the administration has moved toward splitting the MMS into logical arms, one of which will be like the NEB is today.
Senators would know more than I about how often you have a statement of purpose in an act. Section 2.1 of the Canada Oil and Gas Operations Act requires the NEB to be guided by only a few things: safety, environmental protection and conservation of the resources. They are all grounded in public interest.
If there is any move afoot to actually change by legislation this very concept of a pure mandate toward safety, I recommend that you think about it because, while all the regimes can work, the NEB is the ultimate authority to respond to a spill. As the lead agency, we are the ones looking in the whites of the eyes of the operator and asking him to tell us about their emergency plan and why it works, and auditing them to ensure that, when the time comes, they have the financial, human and equipment resources to intervene promptly. This is our only job and everything else about leases, et cetera, is someone else's business. The board performs this function very well because of its pure safety, environmental and regulatory role. If you change that through legislation, I would ask you to look at the benefits of what you have today.
Senator Banks: Thank you for being here, gentlemen.
I understand that you are in charge and determine what will happen with respect to offshore drilling in the Arctic, but not off the East Coast. Is that right?
Mr. Caron: That is right.
Senator Banks: There are two sites off Newfoundland and Nova Scotia. Would you also be in charge if the moratorium on drilling off the West Coast was lifted?
Mr. Caron: That is correct. The West Coast, the Gulf of St. Lawrence, Nunavut, the Northwest Territories, offshore Yukon devolution, I think, applies for Yukon onshore. They are federal responsibilities.
Senator Banks: Yukon devolution removes —
Mr. Caron: — for the onshore part, I would think. NEB is clearly accountable for offshore.
Senator Banks: You are it, except for offshore Newfoundland and Nova Scotia.
Mr. Caron: That is right.
Senator Banks: You said that the drilling rigs are identical for those places. Correct me if I am wrong, but surely an event in the Arctic would not only be different, one assumes, but also it would be exponentially more difficult to deal with because of the landscape and general environment. The implications would be exponentially greater. The consequences could be exponentially greater; at least, that is my perception. Would I be right or wrong in that, and if so, is it okay that the drilling rigs are the same? Am I making a disconnect here?
Mr. Caron: Your analysis is entirely correct. When we assess the hazards and risks of conducting drilling, there are things in common — for instance, the depth of water through which the drilling bit must go before it reaches the bottom. There would be things that are very different.
For instance, off the East Coast, offshore Newfoundland and Labrador and Nova Scotia, I would suggest that waves are a bigger factor than in the Arctic Ocean where waves are typically less intense. The North has no icebergs to worry about but lots of ice, some of it permanent and some of it that lands fast. There is all kinds of ice.
Senator Banks: The mere fact of oil on the top of water underneath ice is a complication that you do not even want to think about.
Mr. Caron: You are totally correct. The new regulations we have are in keeping with the movement by most leading-edge regulators around the world, including Norway and Greenland, which is moving in the same direction, as well as the U.K. There are a lot of people using the philosophy of combining the best of drilling requirements, such as wall thickness and linear equation, and cannot spend a lot of time calculating how much steel the wall must contain in order to comply with NEB requirements, Norway requirements or other requirements. You must demonstrate that you know the hazards and risks in drilling at that particular location.
I am okay with the concept that the regulations we administer today on behalf of Parliament under COGOA are sound because they give us all the flexibility we need to allow innovation, to respond to the unique conditions of the North, and to allow us to effectively be able to hold industry accountable for specified outcomes. The old regulations could do that; they were not broken, but they were an expression of how we dealt with problems in the past.
Senator Banks: Now they are better.
Mr. Caron: We have had only one well in the Beaufort Sea in 19 years. If I relied on the expense of one well in 19 years, I could go back to the 1970s or the 1980s and up to 1989, but then you are talking about the technology of the 1960s and the 1970s.
I much prefer a regulatory regime that allows the regulator to be able to be situational, to take into account the specific hazards and risks, and to take into account the operator's safety record. How they have performed in the past is a factor in how many times we will inspect and audit a company.
We have a lot of information about pipelines, so we can be targeted in terms of pipeline inspection. With respect to offshore, eventually with more wells, we will also obtain knowledge as to how well they are performing. Until we have that, everyone is equal.
I have already given you a long answer, but in short, I think we are well positioned to hold the industry accountable for results. Your committee and the National Energy Board have the tools to enforce that people do what they say they will do.
Senator Banks: It is correct to assume — please correct me if it is not — that the incidents we have had in the past — we have not had anything remotely like the Gulf, but we have had little blowouts before — came from a different kind of problem? They did not include, if not result from, the fact that the drilling stem from the water down to the seafloor broke, fell over and bent, and put holes in itself. That did not happen before and there is a possibility, at least, that if that event on the surface of the drilling rig had not happened — wherein the drill stem had not become disconnected and fallen down — there is a good chance the blowout preventer might have worked.
Has that possibility now been taken into account? Is that the kind of thing where you would say that is a lesson you have learned, and it is a new possibility we have to look at now that we did not look at before because it did not happen before?
Mr. Caron: In a moment, I will ask Mr. Nesbitt to tell you more about past incidents, not in Canada because, you are right, we have not had many. However, we did observe an incident in Australia in 2009, and Mr. Nesbitt might have a good memory of it. He can describe the situation and whether it involved the same failure of the pipe between the bottom of the ocean and the platform.
In terms of the answer to your question, definitely, we have a new fact. We know what this particular worst-case scenario looks like, and we have a duty as a safety and environmental regulator to determine what happened there.
Senator Banks: What happened there was not a well problem; it was a drilling rig problem. That is what started it.
Mr. Caron: Yes. Like any catastrophic failure, it is a combination of very unlikely things that compound. You ask how it happened. Low probability multiplied by low probability is not impossible. Someone will win $50 million. The chance is one in so many millions, but there will be one. It is the same thing in the Gulf. Therefore, we have to be ready as a regulator for that low probability happening perhaps one day, and be able to get there immediately and minimize the losses to a level acceptable to society.
I would like Mr. Nesbitt to tell you more as to what he recollects from incidents around the globe that may resemble, at least in part, what we observed in the Gulf of Mexico.
Mr. Nesbitt: In relation to the Australian incident, it was also a loss of well control. Barriers failed, cement failed and the BOPs obviously did not function the way they had hoped, similar to the Gulf of Mexico. It was an issue of those defences in depth that we put in place to keep wells under control and keep them from losing control. If all of those defences fail, you end up with oil in the sky or on the ocean. Our regime is built to put those defences in depth in place.
I know you are concerned, and I have heard concerns here about setting the minimums, and the discretion about prescriptive versus objective based, and I think there is a bit of a misunderstanding as to how that works. What would happen under this set of regulations and this regime and why I think it is better is that the minimums are higher depending on the circumstances. We do not set a minimum and expect to hit the minimum. Companies tend to determine that is all they have to do. They do not look at the situation as to how bad it could get and where the minimum should be.
Under our regime, the minimums are higher in response to the complexity of the situation. Therefore, to your initial question of how a set of regulations could apply to the Arctic and to offshore Newfoundland, that is the answer. The way they are structured is to set it so that the onus is upon the company to establish what the hazards are, what the appropriate solution is, and basically raise the bar to the complexity and to the risk associated with that. I hope that was helpful.
Senator Banks: Yes.
Senator Lang: I would like follow up on those questions from Senator Banks because I think it is important. It is one thing to have the regulations, and it is one thing to have the industry who does not want to have a mishap. We can start from that premise. However, I think it is important for us to know from your complement of staff in the NEB whether we have people who actually have hands-on experience in offshore drilling when they look at a plan, when they look at all the information that is submitted, have worked with it, have studied and understood it so they can make the recommendations that are necessary to ensure what is being done meets what we need.
Mr. Caron: We have the resources we need right now, and we will be ramping up towards a level of activity that will evolve naturally as the industry prepares to file.
Mr. Nesbitt is a prime example of someone who has been in the business on the regulatory side for more than 20 years, since the early 1980s. Mr. Nesbitt has been involved in drilling, mostly offshore, and has visited Scandinavian countries for training. We have several people like him.
More generally, senator, the board is approximately 350 people, if you talk about full-time equivalents. About 100 of them are involved in what I call "physical regulation of pipelines and drilling." Those are engineers, environmental specialists, geologists, geophysicists, socio-economic specialists and specialists in land.
I would say about between 15 per cent and 20 per cent of them are specifically administering COGOA. The others are administering the NEB Act, but the skills are very transferable. If it is about holding a company accountable through auditing of a management system, there is much in common between pipelines and drilling. For what is not transferable, I believe we have the kind of people and the amount of resources to take care of business today.
Right now, the business is about three wells per year, onshore. We have been planning to receive applications for offshore drilling, and some deep shore, in the years to come. We are naturally ramping up towards a capacity. The Gulf of Mexico has put the spotlight on our already-planned efforts. I hope this is at least partly responsive to your question, senator.
The Chair: Senator Banks, are you satisfied; were you done? The gentleman beside you from Halifax has a supplementary.
Senator Dickson: No, no, it is not a supplementary. Complete your line of questioning.
Senator Banks: My next question would require a longer answer. I will go to the second round. I will tell you what the question is, though.
The Chair: You can ask it. However, I want the witnesses to recognize that we have the gentlemen from CAPP after, so we must all keep questions and answers crisp.
Senator Banks: Describe as briefly and concisely as you can in layman's term the scoping process — when do you do it, how long does it take, and is it done globally for everyone, or is it done on a per-occasion basis?
Mr. Caron: It is scoping for the review. It is a one-shot deal. We want to hear from people. We think we have it right, but we want to hear from others. They have until July 16. Within weeks after that, we will have the final scoping and we will get going with the public review.
Senator Brown: You gentlemen and I talked a little bit before this meeting started. I thought for a while I had a hold on prevention, but it seems you have many questions on blowout preventers.
I would like to carry it one step further. As I understand it, in the Gulf, they were a mile deep in water. That is 2,200 psi, pounds per square inch. They went 18,000 feet and I think that adds maybe 10,000 pounds of pressure.
I wonder if they did not just go beyond the ability of the steel that they were working with. Whether it is the blowout preventers or the drilling stem, there has to be a limit to where they could go with it. Sooner or later, the pressure will either twist off the drilling stem or it will prevent a blowout preventer from actually working.
I was suggesting to you that maybe you could stack them horizontally or vertically. If we reached a point where the steel is not sufficient to handle the kind of pressure we were putting on it, then we need testing to see what kind of prevention things we can make. Maybe they have gone beyond anything they have ever used before and maybe the regulations should specify some new testing of some kind for new blowout preventers.
I think the Gulf cost of $20 billion which BP has had to put up would look cheap if we had to do a lot of testing and we had to create some brand new blowout preventers. I wonder if, instead of minimums, there should not be multiples of what is required. Even if these things cost $10 million each, it seems like peanuts compared to what is happening in the Gulf.
Mr. Caron: Mr. Nesbitt will give you a bit more of a technical discussion of the concept of redundancy, but among the key things we have already learned from the Gulf of Mexico is that redundancy is a good idea, and lack of redundancy is catastrophic. I would like Mr. Nesbitt to speak more about the concept of redundancy and how it can apply to blowout preventers.
The Chair: Does it include relief wells? Redundancy has different meanings to different people, but we understand it in this context. They are extra preventive measures, so you are using it in the general sense.
Mr. Caron: Mr. Nesbitt can answer the more specific aspect and I will talk about relief wells.
Mr. Nesbitt: I have heard two good suggestions there.
The Gulf of Mexico has brought up and perhaps even opened the eyes of many people in terms of what purpose we thought the BOP served. They way they served the system is not achieving the results in this instance. The redundancy, reliability and fitness for purpose of these things need to be looked at. In our review, that is one of the areas we need to delve into to ensure those questions and suggestions that you brought up are looked into.
The second thing I heard was about looking at whether we are at the limits. Have we reached the limits of our technology; are we pushing the technology beyond the limits? That is a second thing that needs to be introduced into that review so we can assess whether we have gone too deep at this point.
Senator Brown: Thank you.
Mr. Caron: The concept of a blowout preventer is about redundancy so that things do not go wrong to the point of having an impact on the environment. The board remains committed to the concept of relief wells. The three chairs of the two offshore boards and I made the unusual move of writing to the editor to clarify that this remains a regulatory requirement the National Energy Board of Canada and the two offshore boards.
The Chair: Are you referencing your letter to the Ottawa Citizen?
Mr. Caron: That is right. That relief well is redundancy in the sense of being ready for that if things have gone wrong — when killing the well has not worked and the blowout preventers have not worked.
We can plan as much as possible to prevent something from happening so that the probability remains almost infinitely small. Just as someone might win $50 million in the lottery, we need to be ready for that low probability thing. The relief well is the best-known method so far of when things have gone wrong and are out of control. What do we do now? We drill the relief well and we have to be on stand-by ready to start drilling it as soon as possible.
Some will argue drill it at the same time as the main well. This is being debated in the media and in the literature right now. These are important questions that need to be answered. We believe the public review will be a good place to discuss this and to provide elements of answers based on science and people's acceptance of risks.
Senator Brown: When you talk about a relief well, you obviously have to drill deep enough into the stem that is already there in order for the cement to weigh more than the pressure you are looking at.
Your relief well could be quite a ways down before getting to the point where you are happy with the solution filling with cement.
Mr. Caron: That is exactly what is happening now. The two relief wells being drilled in the Gulf of Mexico will hit target in August, I think is what the media is saying. Maybe they can accelerate it. I do not know.
This is the point. We do not want to use the relief well but the current regulatory requirements are that a relief well is required as part of the NEB regulatory framework.
[Translation]
Senator Massicotte: I want to come back to what you said in response to Senator Lang's question. You said that your department had a number of specialists. My concern has to do with the objective.
I accept the argument. The ball is in the oil companies' court to prove that their system is safe, operational, and effective and efficient, but the assumption that goes along with that approach is that your department's expertise is equal to that of the oil companies. But, as we have seen in Louisiana, even the most powerful and wealthy country in the world does not have the skills or the expertise to control the situation. And that does not surprise me, given how technical it is.
That being said, tell me why the situation would be managed better here. These global oil companies are very competitive. Why should we have confidence in your 50 employees, who make about 20 per cent of what the oil company experts do?
Mr. Caron: Much of the reason, I think, has to do with the culture. I do not think it is necessary for NEB employees to be able to recreate all the engineering behind a drilling platform or to calculate the components, the metal deformations and stresses, or the interactions of the metal with the other structural components. Because the act of Parliament requires us to put the safety of workers and the protection of the environment first and foremost, the specific skills within our organization allow us to challenge operators, to determine whether they have taken safety and the environment into account.
What motivates people in the private sector is not what motivates a public servant. People who choose to work for the National Energy Board of Canada are dedicated to protecting the public interest. They choose to work for the NEB because that is what drives them, what they are passionate about. And they have the authority to look for problems in an operator's application and to ask the operator about them.
I see it as a sort of creative tension between the operator, which has the onus of convincing us to grant the authorization, and the board, which can challenge the operator at any level of detail it chooses. Our employees have the ability to conduct checks by means of information sharing.
I would even go so far as to say that if you gave us more employees, Senator, we would be able to redo what had already been done —calculating the wall thickness of a pipeline, for example —but that does not really do much. That is a linear equation that any CEGEP student could figure out.
So when I talk about culture, when I talk about the level of specific requirements for a given site, that is when the operator and the NEB look one another in the eye, when we can see that a management system exists, one that very clearly indicates that the company must focus on safety. When I do an internal verification, do I encounter people in private industry who know the procedure, who believe it is real and who do what needs to be done?
Senator Massicotte: What is the average salary of those 50 experts?
Mr. Caron: We have around 100 employees who deal with the physical regulations, rather than the financial regulations, which we also oversee, with respect to the National Energy Board Act, rates and tariffs, because we protect consumers using pipeline services. We perform a financial function in terms of protecting the consumer. The salary of employees working in physical regulation is comparable to the salary of those working in general positions in downtown Calgary, but less than that of the highest paid workers in the energy sector.
I meet all the new employees, one after the other, every month. I meet the five or six new employees who join the board. Without even asking them why they want to work for the board, I always hear the same comments: they are interested in working for the board because they hear about it and they have a true passion for protecting the public interest.
Senator Massicotte: I hope so. You have to admit, the culture argument is a bit vague, but I will continue with my question. When it comes to liability, if there is ever a disaster — and we should not delude ourselves, it will happen — there are major consequences, as we see in Louisiana. If I understand you correctly, there is no limit on the liability of oil companies in terms of cleanup and recuperation costs. It is unlimited.
Mr. Caron: Yes.
Senator Massicotte: But there are limits when it comes to the damage caused to third parties if the companies have been negligent or incompetent or whatever the case may be in carrying out their responsibilities. Is that an accurate summary?
Mr. Caron: Almost. That is almost right, senator. In the Arctic, there is absolute liability up to a maximum of $40 million. The board is the one that administers that money. It covers the costs associated with the consequences of the event or the losses suffered by third parties without having to assess proof of negligence. The board can access that $40 million quickly, as stipulated in the regulations. That amount may be increased pursuant to recommendations received from the Inuvialuit people; under their historic 1984 agreement, the amount can be supplemented. There is no requirement to prove anything.
Senator Massicotte: So if there is no negligence, they are liable for all the cleanup costs, but there is a $40-million limit on the other losses?
Mr. Caron: That is not quite the difference. I will try to explain it in simpler terms. The $40 million is intended for quick access, regardless of liability.
Senator Massicotte: The $40 million is cash, if you will.
Mr. Caron: The NEB can decide on the financial instrument of its choosing. It can use the money to make repairs, recover the oil, or cover the damages suffered by third parties or anything else, without having to show guilt on anyone's part.
Senator Massicotte: The NEB or the oil companies?
Mr. Caron: The NEB requires the company to set aside that amount.
Senator Massicotte: It is for safety, but there is a limit on the liability?
Mr. Caron: No, except that it must be proven, in the event of a disagreement.
Senator Massicotte: If there is no negligence, is there a limit?
Mr. Caron: Yes, $40 million or more, depending on the agreements.
Senator Massicotte: So if there is no negligence, liability is limited to $40 million?
Mr. Caron: That is correct.
Senator Massicotte: If that is the case, then, knowing that the consequences can add up to billions of dollars and that the oil company is liable for only $40 million, are we not encouraging risks that are not responsible?
Mr. Caron: I better understand your question. Over and above the $40 million, which is an absolute level, the NEB has total discretion in requiring the company to prove its financial responsibility. The amount is determined by the NEB at its discretion under the current regulations.
Senator Massicotte: So that $40 million does not come into play?
Mr. Caron: The $40 million is there solely for quick access to financial resources when there are no grounds for asking who is at fault. When it comes to financial responsibility and potential blame, the NEB is authorized to take into account the impact on the environment, the cost of oil recovery, the impact on aboriginal communities in the Mackenzie Delta or along the shores of the Arctic Ocean, on a case-by-case basis. The NEB has total discretion. The offshore boards administer funds in the amount of $250 million, and that may be increased.
Senator Massicotte: So just to make sure I understand correctly, if there is no negligence, is there a limit on their claim risks?
Mr. Caron: If there is no negligence on their part?
Senator Massicotte: Yes.
Mr. Caron: That depends on the point of view.
Senator Massicotte: Of course, a court may have to rule on the matter one day, but generally speaking, I assume there are human or calculation errors, as you say. No one makes a mistake on purpose. But let us assume there is no negligence and that the cost is $10 billion, is there a limit on that liability?
Mr. Caron: That is an area where the provisions of the act and the regulations are a bit complex. It would be our pleasure to provide you with a one-page explanation in plain language on how financial responsibility works, if that would be helpful.
Senator Massicotte: I am trying to wrap my head around it. Is there a limit? If the limit is minimal, that will still encourage risks. We are talking about private companies who are focused on profit.
Mr. Caron: If there is very serious environmental damage as a result of a leak, I do not see how a company could say it was not at fault. The Canada Oil and Gas Operations Act is very clear: the operator is responsible for any impact arising from a leak over which it has control. It is a requirement in the act.
The Chair: Senator Massicotte, I want to cut short this line of questioning because you have tried 10 different ways to get a legal opinion. The witness is not stupid; he offered to answer your questions by other means. A number of other witnesses have explained the system with respect to limits on liability. It is now 7:50 p.m., and we are supposed to hear from another witness and three other senators would like to ask questions.
Senator Massicotte: Frankly, we have received different reports on the same issue. Perhaps a one-page summary would be helpful. If it could be more fact-based, it would be more accurate.
Mr. Caron: The short answer is that there is no limit. If there was a leak, it would be difficult to prove that it was not their fault. The NEB and civil society can seek financial damages.
Senator Massicotte: I will listen to the chair's suggestion. If there is no limit, is there a concern in the near future? We are talking about making them responsible, but I know that they are starting to talk about it in the financial markets. If the risk were $10 billion or $20 billion, companies might not be interested in drilling. They might say that the risk was too high and ask governments for concessions or lower limits; otherwise they would not undertake such a venture. Is that a concern on our end?
Mr. Caron: On your end, I cannot say. As a regulator whose sole objective is to ensure safety and environmental protection, we are not concerned about that. Our job is to hold the industry accountable, and the polluter pays. There is no absolute limit in that regard. I hope that part of the answer is clear.
Senator Massicotte: It is not one of your responsibilities.
[English]
The Chair: Senator, we have it clearly. The absolute liability, with or without negligence, is $40 million. As far as the rest is concerned, you have to prove negligence but, to get the contract, they need to prove they are financially responsible people.
On this $20 billion, there is total evidence of negligence in this situation in the Gulf. There are three companies calling each other negligent. I would like to move on. This is a legal question and there is doubt I will give you a legal opinion for free.
Senator Dickson: Gentlemen, very good explanations. I want to follow up on Senator Massicotte's question.
I understood, Mr. Caron, that $40 million, the pot is there and you can access it. What was the max financial responsibility that you ever requested from a company drilling in the Beaufort above the $40 million?
Mr. Caron: That we ever actually did in the past?
Senator Dickson: Yes.
Mr. Caron: I did not speak to that. The most recent case would be Devon in 2005. To the extent that this is not information protected under COGOA, I will ask Mr. Nesbitt to perhaps comment on the specific amounts.
Mr. Nesbitt: The overall amount that they had to demonstrate they had the financial capacity to come up with was $500 million, for a near-shore, shallow-water, full, ice-season winter well.
Senator Dickson: That was near shore. Let us go offshore. What would be the top that you are thinking about now?
Mr. Nesbitt: I think that is one of the questions we need to address. The worst-case scenario has changed here. The issue of going to deep water changes the complexity, the situation and the cleanup situation. We have not estimated or even tried to estimate what that would be.
Mr. Caron: With respect to past experiences, you have to go back 19 years. With inflation and everything, I am not sure the data would be informative of what we should require today. I do not know what regime was in place then.
Senator Dickson: What is the final date for filing your report? Ours is June of next year. Will your report be before or after us? You have many good ideas we would like to plagiarize.
The Chair: Our report on this particular series of hearings on the offshore will be done as soon as possible. If the Senate were sitting on July 5, that is one thing, but at the latest it will be when we come back in the fall.
Senator Banks: We are sitting on July 5.
Mr. Caron: We do not have a target date for the completion. I will repeat, we will take the time to do this well. At the same time, our process will be fully transparent and public so it will be easy to find on our website what the people will be saying.
What you will not have is the board's judgment in terms of what to do with that with respect to issue number 11, the filing requirement for future applications. I would rather not have a target date for that because I keep saying we will take the time to do it well.
Senator Dickson: Was there a response organization in the Beaufort structured somewhat similar to the East Coast?
Mr. Caron: Mr. Nesbitt has better knowledge than me, but there is no northern equivalent to the corporation that you met with last week or the week before.
Mr. Nesbitt will update you on the specifics on the version of that for the Beaufort Sea.
Mr. Nesbitt: It is talking about the past a little, but back in the 1980s when there was high activity, there was a co-op with a lot of spill equipment and capability. In terms of the most recent well, they had to demonstrate they had access to sufficient types and amounts of equipment to respond to the scenarios.
Senator Dickson: Staying with response corporations, when Chevron and the Eastern Canada Response Corporation representatives appeared before us, it seemed that the response corporation would not see the safety plan of Chevron until there was an actual spill. Once the accident has happened, bring me the safety plan, I want to look at it because I have to go to work instantly. There seemed to be a big gap in the process. I am pointing that out. I assume you have the answer to that.
Mr. Caron: We cannot speak to that situation because we do not do business with them. I would say that that corporation, as I understand it — and I could be wrong — is essentially responsible for keeping inventory of equipment and making it available to those who need it as a main contribution to the response. Other than that, we cannot pass judgment on how they are organized. I am sure the offshore boards would be delighted to tell you more about that.
Senator Dickson: Would you or would you not have response corporations in the Arctic?
Mr. Caron: I would like to see evidence, through technical questioning and a serious challenge function, that the corporation will be ready. In the unlikely case of a spill out of control, I would like to see evidence that they will be ready for that, that they will mobilize technical, human and equipment resources in the time necessary to make the final outcome acceptable to society. That is part of the environmental assessment we will do, whenever we get an application. The public review will be a generic version of what companies can expect to be required to file with us when they submit an application to us for approval.
Senator Frum: You have no applications for drilling before you right now and you have only approved one in 19 years. In the interim 19 years, were there applications that were turned down?
Mr. Caron: No, there were not.
Senator Frum: Presumably the reason is that it is prohibitively expensive to get that oil out at this point. It is not because of technical, or is it? Is it technical limitations that prevent the applications? Is it prohibitive environmental regulatory reasons or is it economic reasons?
Mr. Caron: It is a plausible combination of these factors. It is more expensive to drill in the Arctic Ocean. When it happened in the 1970s and 1980s, there were some government programs to stimulate the investment. These are gone now. It is expensive and it takes a lot of homework to persuade the NEB that you may drill safely.
Senator Frum: Do you have any sense of what the price of oil would have to be to make drilling in the Arctic attractive? People want to know, with all this conversation we are having, what the likelihood is of this happening.
Mr. Caron: I really cannot say, senator. I can say that among the first people out of the gate who may want to file an application with us is Imperial Oil. The representative from Imperial Oil said in Reuters on May 26 that they are at least four or five years out from ever drilling in the Beaufort. This is media coverage. I do not know if the person actually said that, but it speaks to the technical challenge and the economics of drilling in the Arctic. Our role, when we look at an application, is strictly about safety and environmental protection.
Senator Frum: Do you have any sense of what the price point in the market would have to be to make it attractive?
Mr. Caron: No. I have to assume that it is higher than now, but higher than now means now is the futures function. I do not know what corporations assume is the future curve of oil prices. I do not know what corporations would set as a hurdle rate to justify an investment. You need to look at the expectation of future prices, discounted today, and discount at the discount rate that is acceptable to their shareholders. I cannot speak to that at this time.
The actual number of applications we receive speaks in part to your question and answers it partially.
Senator Peterson: It is my understanding that permits and drilling licences in the Arctic now are handled by INAC. Does that include the Beaufort as well?
Mr. Caron: Do you mean the front ending of the process to allow for bids? That is right, INAC handles those.
The Chair: For the record, INAC means what?
Senator Peterson: It stands for Indian and Northern Affairs Canada. Do you work with them? Do they require your sign-off before they can issue it?
Mr. Caron: The two processes are separate. We administer the safety and environmental protection. They handle the front end.
Senator Peterson: I am an oil company and I say to them that I want to drill a well. They look at some things and say okay. Then I come to you?
Mr. Caron: That is right.
Senator Peterson: You then determine whether or not I will do it?
Mr. Caron: We determine whether a well can be drilled safely and protect the environment and communities. That is our business. COGOA requires us to do that. We are not involved in the policy decision to open land for bidding or not. We talk with officials from the department about getting ready for contingencies and exercises. A lot of technical dialogue goes on but it is not about helping them do their policy function. They do that independently from us, and they let us regulate independently the safety and environmental impacts.
Senator Peterson: They are the final authority for a licence to issue then?
Mr. Caron: They are the final authority for licences. We are not involved in that. They are the decision makers.
Senator Peterson: Is that after they have consulted with you?
Mr. Caron: Leasing is a policy and allowing bids for specific sections of land is a policy function that the board is not involved in.
Senator Peterson: They do that.
Mr. Caron: Yes.
Senator Peterson: I want to do exploratory drilling; I have to come to you to get authority to do that and meet your regulations. Is that correct?
Mr. Caron: Yes. If you succeed, you would obtain an exploration licence from the Department of Indian and Northern Affairs. If you have an exploration licence, you may try to get the board's approval to drill a specific well. That is our job. We get involved at that stage. That is independent from each other. That is the choice I was talking about earlier. We are a kind of manifestation of where the U.S. wants to go, with the MMS being all things to all people. It looks like the administration has decided that you focus on safety, you focus on commercial, you focus on taxes. I find the way we are set up right now effective because I can tell you that our staff is entirely devoted to protecting safety and environment.
Senator Peterson: I agree entirely. I am pleased to hear it.
Mr. Caron: There is talk about what we are hearing from the people up North and getting ready for spills and exercises. There is a technical dialogue, which is healthy, because what they know and what we know can be combined. They apply that knowledge to their function and we apply our knowledge to technical regulation.
[Translation]
Senator Rivard: I did not read the questions and answers from the previous meetings. So I look forward to reading the report. But there is one thing that bothers me. We heard about Greenland and how these problems could affect us. I have always thought that currents move from the east towards Europe. For example, the damage in the Gulf of Mexico is in Louisiana and is on the verge of reaching Florida's shores. To my knowledge, South America is not affected by the situation.
If there were a spill in Greenland, do you think it would contaminate the eastern Atlantic and the Arctic?
Mr. Caron: As it happens, the regulatory regime in place in Greenland appears to be equivalent, at least based on what we know from reading and talking about it. The likelihood of an event such as the one you are describing is very low. Could currents push oil into Canadian territory? I do not have that information.
Senator Rivard: That is not likely to happen. Again, correct me if I am wrong, the situation that occurred in the Gulf of Mexico is affecting Louisiana and Florida?
Mr. Caron: Yes.
Senator Rivard: To your knowledge, have the contaminated waters reached South America, namely, Venezuela, Brazil or Argentina?
Mr. Caron: We will know more by watching what happens over time. Some of the oil is being released into the environment by evaporation. The lightest oil components will evaporate. This phenomenon may have an impact on the environment before evaporation occurs. The heavier components, when only residue similar in consistency to molasses remains, can be absorbed naturally by bacteria. In order to know what the medium-term and long-term effects will be, it is necessary to monitor the specific environment in question over time and observe the currents, as you suggested.
The board has not studied what would happen in the event of a leak in Greenland. That issue is not one of our responsibilities. But, since their regulatory regime is equivalent to ours, it is our opinion that the studies that have been undertaken are comparable to what we would do here. The purpose of our memorandum of understanding with the authority in Greenland is to determine whether our basic assumptions are valid. We will know very soon, as we are working on the memorandum of understanding. Next month, NEB employees will be going to Greenland as observers to visit the drilling platform and see its operation. That knowledge will be included in our public review.
The Chair: Senator Rivard, you are here as a substitute, but you have shown your ability to use a very short question to elicit a good answer.
[English]
Senator Banks: Very briefly, going back to where Senator Peterson was, INAC issues a lease, a permission to drill.
Mr. Caron: It issues an exploratory licence.
Senator Banks: They then come to you to decide whether it is okay to drill there and in what conditions. Would it not be a good idea for INAC to get from you or some place a determination whether one can safely drill in an area before they issue a lease?
Mr. Caron: I cannot speak for them, but Ms. Fortier appeared before the House of Commons committee a few weeks ago. INAC, in terms of what I read in various testimony, is taking full advantage of all the strategic knowledge they have accumulated over the last decades in the Northwest Territories and Nunavut. They have been there for a long time, longer than we have been in terms of our regulation of the North.
They engage the northern communities and the Inuvialuit people very meaningfully and it is, based on what I read, their task, when they decide to allow land to be a piece of territory to be the subject of bids, this is the accumulation of that knowledge and the strategic considerations.
With respect to offshore, as I said, what we have so far is the experience of 89 wells in the Beaufort Sea, and 50-some wells in the Arctic islands, so this is significant knowledge, which I read, and I believe they are incorporating in their decisions.
We are there, then, as a pure safety and environmental regulator to go from general to specific, and our degree of involvement in verifying that the well can be drilled safely and can protect the environment is specific, situational to the location, the depth and the company's expertise, and we take care of that business.
In response to one of your questions in terms of my recommendations to you as a committee, if you decide to change that, we would like you to know that the current regime in terms of separation is powerful, if your main goal is safety of workers and the public and protection of the environment.
Senator Banks: Thank you, Mr. Chair. We might do well to have a short representation from INAC.
The Chair: Yes, surely.
Senator Lang: I want to follow up on Senator Banks' question. At the Beaufort Sea and the Arctic islands, are any of the wells deepwater wells versus shallow-water wells?
Mr. Nesbitt: Of those wells drilled in the Arctic islands, 58 are offshore wells and are drilled in between the islands where the ice has been stable for hundreds of years sometimes, and they were drilled from those ice platforms as deep as 1,500 feet.
Senator Lang: That is the water depth?
Mr. Nesbitt: It is the water depth, yes. It depends on how you define deepwater, but 1,500 feet is the amount.
The Chair: The National Energy Board has spoken, and we are grateful to you both. Mr. Caron and Mr. Nesbitt, thank you for coming.
I believe you have undertaken to give some additional information on the legal liability and one or two other issues. In any event, you know the system and our clerk, Ms. Gordon.
Thank you very much.
[Translation]
Mr. Caron, thank you very much for being here this evening. If you wish to stay, I will be available after we hear from the next witness. Otherwise, we can talk by telephone tomorrow.
[English]
We are privileged to have a representative of the oil and gas industry from Calgary, and I would like to introduce David Pryce. He is the Vice President, Operations, Canadian Association of Petroleum Producers. He has worked for over 25 years in the upstream oil and gas industry, having worked for a major oil company as a private consultant and as a regulator with the NEB before joining the Canadian Association of Petroleum Producers 14 years ago.
I take it you left the NEB before Mr. Caron became the president.
David Pryce, Vice President, Operations, Canadian Association of Petroleum Producers: I did, but I became familiar with Mr. Caron over the years.
The Chair: You have to get up early in the morning to deal with Mr. Caron. He is a great chairman.
Please proceed with your opening remarks. I do not want to cut you off, but I would ask you to compress them. We have tried to get the industry association to come in and answer business-type questions, and I think I saw you nodding away and perhaps Senator Massicotte could be enlightened quicker on that legal thing which seems to be confusing to some of us. Over to you, sir.
Mr. Pryce: Thank you. I appreciate the opportunity to come here and speak today. As you and I talked about earlier, I will attempt to abbreviate some of the messages in the notes, and if you want me to delve into them in the notes, I will do that. I had an opportunity to put together a sense of the key themes that I wanted to talk to you, which will help abbreviate.
Industry is motivated to conduct its operations in a safe and responsible manner. We have all seen, as industry, the consequences that have happened in the Gulf of Mexico. Senator Lang mentioned that. Industry does not want to be in that position, and so we want to make sure we are operating in the best way possible.
It is also relevant to understand that industry and the regulators have amassed considerable expertise drawn from the decades of activities around the world that we bring to bear on how we do our business and how the regulator chooses to regulate us. With that in mind, we believe we have a robust regulatory system in place in Canada. However, as you see from my notes, we do not think that is reason to be complacent. We need to ensure we take the opportunity to learn from all the experiences that go on.
As such, CAPP, Canadian Association of Petroleum Producers, certainly supports the NEB's announced regulatory review, and C-NLOPB's, Canada-Newfoundland and Labrador Offshore Petroleum Board's, enhanced scrutiny of the current activity on the operation on the East Coast. We also support this hearing and other initiatives that attempt to gain an understanding. It affords the opportunity to learn from the Gulf incident and also serves to enhance the public confidence in the system.
One of the things that I heard from the previous discussion is a need to understand the premise of goal-oriented, and there certainly has been a shift in the premise of goal-oriented regulation, which CAPP believes has strong merit, and we understand there is a challenge in understanding what that means. I would recommend, coming out of this, that the committee becomes familiar with that and have some comfort and understanding of how that will operate.
The final point of the themes is the three Es of energy security, the environment and the economy are all important considerations for policy development and the regulatory service delivery for the Canadian offshore industry.
With that as the backdrop of the key themes, we support the proceedings. It is important to understand what is happening in Canada, the activity and the oversight, and it is important to reassure Canadians, going forward, that things are being developed responsibly, and the risks associated are reduced and well managed.
That includes dealing with the unlikely event of an incident, should it occur.
Clearly, CAPP and its members are viewing the Gulf of Mexico incident as a tragic and significant event, both from a human and environmental perspective. It is in the interests of the industry and all stakeholders to ensure we collectively take the time to understand what happened and determine what learnings can be brought to bear in that regard.
You have heard previously that there is limited activity in the offshore in Canada currently. There is none in the Arctic, none off the West Coast, and an exploration well drilling now on the East Coast, so that does afford time to understand what is going on in the Gulf of Mexico as we move forward.
I just want to make sure folks understand who CAPP is.
The Chair: We really do. Are Husky, Encana and Chevron members?
Mr. Pryce: Encana and Chevron are; Husky is currently not.
The Chair: Is there a reason Husky is not?
Mr. Pryce: We expect that they will choose to become a member in the coming year.
Before starting, I want to note the context that the committee set for these hearings during the press conference, and that is specifically the importance the committee puts on the need to balance the three-E relationship, that being the supply of oil, demand for energy, and the environmental and economic considerations. We support that perspective, and that is one thing which CAPP brings to the table. We are not a drilling company, so we do advocate for the broader premise of considerations around policy. We believe we need to strike a balance on the importance of that.
There are many opportunities generated from the activity of the industry. They can be characterized as the jobs created; the opportunities for local business; spending on R&D, training and infrastructure; and the benefits from the royalties and tax structures out of the payments to the jurisdictions.
In the notes we provided, we listed the specifics of those benefits, which are significant to the jurisdictions of Newfoundland and Nova Scotia. There is no activity in the offshore in the North, so only potential benefits could be talked about with respect to the North.
The oil and gas industry can make significant contributions, including to the federal northern strategy, by providing skills, training and jobs and contributing to the local communities, thereby contributing to the goal of Canadian sovereignty in the North.
All the benefits I talked about relate to the benefits associated with our sector, but there are spinoff benefits to other sectors as a result of the deployment of technology, training and infrastructure. Other sectors enjoy a secondary benefit of our activity.
All that activity operates against a global backdrop. The International Energy Agency, IEA, projects that energy demand will grow by 40 per cent over the next 20 years. We believe that means all forms of energy will be required to meet that increasing demand, and oil and gas will continue to be an important part. The IEA expects that 40 per cent of that growth will need to be met by oil and gas going forward as well, and certainly a significant portion of the base requirements for energy will continue to be met by it.
In terms of the offshore as an industry globally, about 38 per cent of the world's global crude production comes from the offshore now. In Canada, it is about 10 per cent. For natural gas, about 2.5 per cent of Canada's gas comes from the offshore.
The message from the IEA is that all forms of energy will be needed. All forms of energy pose their own environmental and safety risks. The challenge for us all — government, policy-makers, regulators and the industry — is to find a way to strike the right balance among the three Es that we spoke about earlier, and find a way to take reasonable measures to mitigate risks such that incidents are unlikely to occur, and then be prepared to respond to them if one should occur.
You have heard in great detail from the regulators over the past days and weeks of your review. I cannot give you the details that they can, but we do think there is a robust regulatory system in place today that provides for multiple layers of oversight ranging from technical analysis to environmental systems management and the activities of contingency planning, all of which must be addressed in any application that goes forward.
As you have heard many times before, that means that we need to manage this in a two-pronged fashion — planning to prevent and planning to respond in the event that an unlikely event occurs.
It is also important to understand that these events are not the only triggers for regulatory reviews; they proceed on a periodic basis for specific reasons. The regime in Canada is not static; it has improved over time and reviews do occur periodically, depending on what public policy changes occur and what technological advances are made.
I want to emphasize that, in recent years, one of the more significant moves in the regulatory regime around the world for our industry was the move from the prescriptive model to the goal-oriented model, and Canada has been moving in that direction as well, and we certainly support that premise. It translates into looking at the spectrum of prescriptive on one end and goal oriented on the other and picking where, as a regulator, you think you need to be, depending on what you are trying to regulate.
You heard from the previous testimony that the real value of the goal-oriented model is that it allows the regulator and requires the industry to turn their minds to the uniqueness of the specific activity which they are about to operate or regulate. It avoids the premise of the check-box mentality. It is easy to check a box; it is much harder to say, "I must accomplish this outcome and this is how I will do it." The regulator is there to ensure that the proposal meets the expectations of that.
That essentially means the regulator is ultimately accountable for ensuring that the goals are met, and they will exercise that accountability through the oversight provided in the activity approval process. I would also argue that they are there throughout the operation, monitoring it, auditing and following up to ensure that industry meets its commitments in that regard.
As I have said before, I think we have an effective system. We have a system that is moving, adapting and changing, and it is not enough to say that we can hang on that. We cannot be complacent. We need to always be considering new initiatives and new activities. Where we end up on that spectrum in the future will depend on the knowledge of the industry by the regulator, and the complexity and nature of the risk as we go forward.
I want to spend a bit of time talking about some of the things this or the House of Commons committee may have heard. I would first like to make the observation that there currently exists a separation of functions between the industry promotion and financial benefits roles of government, which are housed with the departments both federally and provincially, and the technical regulatory functions provided by the offshore boards. This situation avoids the potential conflict of interest that could exist and has been identified under the U.S. circumstances, and that means we are already one step ahead of what the U.S. is learning. We already have that separation of function to avoid the conflict of interest.
In other presentations before the House of Commons Standing Committee on Natural Resources, and I think in the media as well, there has been mention of the possibility of splitting the functions of the offshore petroleum boards in Atlantic Canada into two separate entities, one dealing with environment, health and safety, and one dealing with licensing and other board functions. While we understand that perspective, we would also like the committee to understand the value of the holistic approach to regulation.
As the regulatory system in Atlantic Canada currently stands, safety and environmental issues are paramount values under the regulatory framework. They are embedded into all the regulatory expectations there. As an example, to ensure that safety remains a top priority, a position of chief safety officer was created that is autonomous and cannot be overridden by the boards there. They really are focused on safety.
Safety in the regulatory context includes protection of the workers as well as protection of the environment, but it is also embedded in the design of vessels, installations and equipment associated with the offshore. We think that separating the board's responsibility would be counterproductive to ensuring the holistic oversight of the industry and could potentially lead to inconsistent or conflicting direction. In our view, safety and operations are two sides of the same coin in that equipment and operating practices are integral to safety.
Mr. Chair, this is an area coming up where I think I will find some time to save. You have heard much from the companies you mentioned around their views on how they approach risk management, safety, prevention and spill response. I will not go into the details of that specifically. I will touch on a couple of things.
The premise of risk management — we need to ensure we understand what that means and how that gets operated. From an industry perspective, obviously, we will approach our activities with the goal to complete the activity without an incident or injury, and risk is assessed, mitigating measures are applied to achieve a risk level as low as reasonably practicable without eliminating the possibility of conducting the activity.
Once a company goes through that exercise, it may choose to continue on with an application or choose to say this no longer meets the hurdle rate of an operation it wants to pursue. Assuming it goes forward, it then enters into the approval process with the appropriate regulator and proposes its risk management strategies as part of its application. I believe what you heard from the previous testimony was, as that application comes in, the regulator determines the suitability of what a company may have proposed and may choose to accept it, may choose to ask for changes, or may choose to reject it outright.
Moving along, around the spill response, one of the areas that came up in the last discussion was the premise of who is in charge and I wanted to talk about that a little more. Under spill response, notwithstanding the equipment we have to have in place, we also have to have a system of command. The typical name for that is the incident command system, which actually has its roots in the military world. That is intended to integrate the company's roles and the regulatory agency's roles to provide and define the leadership responsibilities and execution throughout the duration of an incident.
Yes, I believe the company certainly is the first responder. They are on site and they will enact their incident command system and their plans, including in that engaging all the agencies or other entities that are supposed to be part of the operation of that plan.
To wrap up, the industry has been operating in Canada's offshore since the late 1960s. During that time, hundreds of wells have been drilled with very few incidents. Technology and research are always advancing. Industry, along with governments, is investing in that area, not only in prevention but in spill response. Both government and industry will draw from this research to identify any gaps to inform suitable prevention and response strategies.
I believe we do have a modern regulatory regime in Canada that allows us to incorporate these new technologies and research into operations. I believe the premise of the goal-oriented regulatory environment furthers that capability and becomes more important in that regard.
As I have said before, it does not mean we should be complacent. Events in the Gulf of Mexico are certainly a significant and painful reminder that we must always be vigilant and examine the risks we are taking and what can be done to mitigate them.
This risk management is a fundamental premise of public policy, evident everywhere from rail and air travel, to road systems, to health-care strategies. It is not unique to oil and gas and I do not believe there is a good understanding of how risk management is operated within the regulatory world.
That helps us return to the committee's notion and ours of the three Es: Energy security, environment and the economy. We understand that finding the right balance and the risks we accept to advance the three Es is difficult, but it becomes an important governance process to determine whether a project would proceed.
As industry, we begin by asking ourselves whether we can do this safely and we design our operations with our own checks and balances so that the risks are mitigated as far as practicable. Ultimately, however, as I have said before, the determination of whether the residual risk is acceptable is a matter for public policy and it must be government and the regulator who make the determination in the public interest.
We must all work together to ensure the regulatory system is designed to mitigate and manage risk in a way deemed to be sufficiently protective and recoverable such that Canada can continue to benefit from the developments of the offshore resources.
The Chair: Thank you, Mr. Pryce. You placed a lot of emphasis this evening on what you referred to as the "goal-oriented approach" to regulation, to the concepts of balanced principles in risk management, and how this would apply to your industry.
I think that was code for, be careful of the risks or dangers of over-regulation; be careful that one size does not fit all and, therefore, you have to adapt a set of rules to the particular situation. We have seen an analogy in the financial system.
The banking system in the United States has long been regulated by the rules-based approach, whereas here in Canada and in the U.K. we have adopted the principles-based where judgment is exercised, and it is not a hard and fast rule.
I want to make sure that the analogy is that one, because we have recently had a terrible crisis in the financial services sector and they are paying a huge price in the States where they had the rules-based, whereas in the other jurisdictions it has been mitigated.
I think you are emphasizing that and I think also some of your members have suggested that there is a point where it is simply not economic to get into this offshore, notwithstanding the great rewards at the end of the day. It is simply that you can make it too tough to be worthwhile.
If I understood you well, then I will have no questions and I will go immediately to Senator Banks.
Senator Banks: To be really picky, Mr. Pryce, you said a parliamentary committee; this is a parliamentary committee.
The Chair: He meant the other place.
Mr. Pryce: Thank you for that correction.
Senator Banks: I do not mean to correct you, I am sorry; I am just touchy about that because newspapers have announced that Parliament has risen for the summer. Well, it has not, actually.
You said the regulator is ultimately accountable. I do not think you meant that in the sense that I understand it. Would you just make sure that I understand it correctly?
Mr. Pryce: I meant the regulator is ultimately accountable to judge whether we have the right plan. You have had much conversation in the past discussion that the company is ultimately accountable for its actions, and you probably heard that from the industry in previous testimony that they agree and they accept that. I believe you heard from Mr. Caron that they probably do not have any choice in that matter anyway.
Senator Banks: Right, to a limit of their capacity to meet the obligation.
Mr. Pryce: Yes.
Senator Banks: I am a little confused because we heard two things that are either slightly different, or I heard them slightly differently, about the obligation that is imposed under the terms of a lease for offshore drilling on the company that holds the lease.
We heard on the one hand that somebody thought that meant they had to drill by a certain period of time, by a certain date, I guess, and we heard otherwise that no, that meant they have to spend a certain amount of money by a certain date. Which of those do you understand to be the situation?
Mr. Pryce: My, what I would characterize as my limited, understanding is I believe they propose in their bid what they will undertake to do, and in many cases they will spend a certain amount of money within a certain time frame. I think also there is an expectation in the duration of the lease that at some point in time they will undertake to drill a well.
I am giving you my best understanding. It is not an absolute fact.
Senator Banks: Okay. I am wondering what would happen if they were obliged to and they did not.
Mr. Pryce: That reinforces your suggestion about INAC perhaps coming in to explain that as well.
If they did not fulfill their commitments, I think the expectation is they would lose the monies they had deposited in that and will have lost the lease at the same time.
Senator Banks: We have heard from everyone that there is no drilling going on currently in the Arctic or in the Beaufort to be specific. Are any of your members actively pursuing, because other countries are, the possibility of recovering gas from hydrates?
Mr. Pryce: Not to my knowledge. I do not believe they are. It is very far down that triangle of the difficult components of the hydrocarbon chain to access. It is far more economic to go after the conventional oil and gas, and we are moving into the unconventional world.
It is a relevant question because, as we look to maintain the level of production and meet the energy demand, we are looking at offshore as another future supply of those hydrocarbons, but the hydrates are much further down that area of interest. They are a different technology. They are more expensive to access.
Senator Banks: If the price is high enough, we will go there, or the supply gets low enough.
Mr. Pryce: Either the price is high enough or that basin becomes more competitive than another basin in the world for something else.
Senator Banks: If you had to describe CAPP's reaction to that horrible event that has given rise to our questions, I suggested the other day — and I do not know whether you would agree — when it comes down to the question of who is ultimately responsible in terms of their capacity to pay, a member's capacity to pay if something happened, that if you go to talk to the people on the beach in Florida or South Carolina they do not care who is responsible. It does not make any difference because the damage is done, and it almost does not make any difference who is responsible. For example, if an event happened with one of your members and the costs of it, mitigation and correction and doing all the things that need to be done, exceeded that company's ability to pay, it does not make any difference any more who or what is responsible because the country has to clean it up. It would become a national responsibility in the end, would it not?
Mr. Pryce: When you look at the nature of the companies that are pursuing these offshore resources, they are huge companies with huge capital behind them. The company involved, BP, right now has made commitments to honour that expectation. In my opinion, the challenge we all see is sort of the posturing to get ready for how you pass down some accountability through some legal determination. From what I have read in the papers, BP is saying they are accountable, but BP also will want to look at who else among its partners or some of the service companies might have some determined accountability, and so that complicates the whole discussion, unfortunately.
At the end of the day, we hear from the regulator ultimate accountability to the industry, and what you are hearing from the company as it tries to respond to that incident is, "We understand that; we have that obligation."
Senator Banks: However, it is a different order of magnitude. The first no contest, no question $40 million, but last week, BP committed $20 billion, and that might be the first cut and there might be another one like that. If you take $40 billion away from somebody, that ain't hay. I do not care how big they are.
Mr. Pryce: Absolutely not.
Senator Massicotte: Thank you, Mr. Pryce, for being with us. Could you describe in simple terms what the liability of the oil and gas companies is on a spill?
Mr. Pryce: I am not an expert on that so I will not be able, notwithstanding what the chair suggested, to give you an answer there.
Senator Massicotte: The chair read your comments maybe slightly differently than I did. I enjoyed the perspective of your comments which I read. What I read says, ladies and gentlemen, do not forget the three Es, and the way I read that comment, which I appreciated, is it says let us be realistic about this thing. There is a risk of environmental damages because you cannot have perfection and get it down to zero. It may be 0.001 but there is a risk of significant damages. Mr. Canada, I appreciate that fact, but do not forget the other aspect, all the economic benefits you get; and do not forget, Mr. Canada, you are consuming a lot of this stuff. Unless you want to stop heating your home, please consider all three. You are trying to force everyone, including ourselves, to have a balanced view.
On that perspective, could you summarize for me — and I know you did by province in your report — the big picture, what the economic value of your industry is to Canada, employment, economic value and the same thing on the other Es?
Mr. Pryce: The industry itself is about a $110-billion industry in Canada. It is a national industry and operates in every jurisdiction or has interests in every jurisdiction.
Senator Massicotte: Is the $110 billion the assets or spending per annum?
Mr. Pryce: That is the spending per annum.
It is probably about 25 per cent of the TSX value right now, and that obviously fluctuates with share prices as commodity prices go, but it is in that range.
There are about 500,000 people in the industry across Canada directly and indirectly employed, and again, in most jurisdictions, there is some representation there. There are broad, indirect benefits of employment in that regard.
With respect to the offshore, I talked about the North. There is very little value going into the North right now in terms of industry spending. There are some seismic programs probably and perhaps some onshore wells drilled in the last year or so which, drawing from memory, was probably about $1.5 billion in spending in the North. It is probably about $2 billion to $3 billion spent in Atlantic Canada, and again, I am drawing from memory in that regard.
In my notes, it talks about some of the value that the industry generates to the respective jurisdictions of Newfoundland and Labrador and to Nova Scotia. I think it was about $2.2 billion last year to Newfoundland and Labrador. It is a smaller industry in Nova Scotia, but it was about $1.5 billion over the past decade or so. These are royalty payments to those jurisdictions. It is a fairly significant part of the revenue stream for the province itself.
I think we spent about $16 billion in Newfoundland and Labrador over the past decade in the activity that has occurred in the past.
Senator Massicotte: The employment is 500,000 people? What would happen if people said no more offshore drilling or people decided not to do it because of risk?
Mr. Pryce: In the Atlantic Canada region, in Newfoundland and Labrador it is about 3,000 direct jobs, and in Nova Scotia it is about 3,000 direct jobs. I do not have an indirect number for those areas but assume you shut down the entire industry.
Senator Lang: Take a multiplier of three.
Mr. Pryce: Yes.
Senator Massicotte: How about the supply side? We are getting 10 per cent of our crude from offshore. The price would go up, I presume, worldwide?
Mr. Pryce: I do not think the 10 per cent in Canada will drive the price up because it is globally set. If the offshore industry is significantly restricted globally, 38 per cent of the world's oil is coming from the offshore, and I was trying to help people understand that message. As governments contemplate what to do with this significant serious event, one of the implications is, if you take 38 per cent of the oil out of the marketplace, you will undoubtedly drive the commodity price up. You will also invite oil from other jurisdictions to start to flow where they have turned the taps back somewhat.
Senator Massicotte: In summary, you have half a million employed. You have basically a significant influence of finances because you have 38 per cent, and you are saying oil and gas will contribute as much as 40 per cent of the projected energy demand growth. The economy will be seriously affected, a lot of employment. There could be serious problems of supply.
How about on the environmental side? What is the lesson we should learn from it? Should we accept that the Louisiana stuff has to happen very occasionally? What is the balance there?
Mr. Pryce: You are seeing the worst-case scenario has happened.
Senator Banks: Worst case known so far.
Mr. Pryce: We are reassessing collectively, governments and industry and the environmental community and the public. That is a big dollar amount. That is more than environment. It is environment and social a bit, to your point. It is not just the implications for the coastline or the wildlife but to the fishery industry and that sort of thing. It is indeed a big number.
The challenge for all of us is how do you balance those off? How do you understand whether you have done your best to reduce the risk to the minimal, and have some confidence that the regulator has the appropriate tools and the appropriate oversight? Industry is doing its part to minimize that risk.
Senator Massicotte: That is the difficult part. You have economic reasons, the personal side, the environmental side and the supply side, which the Conservatives do not want to go dark. At the same time, I presume the oil and gas companies will say, "If there is unlimited liability, as seems to be in the BP case, then the risks may be so immense that I will not drill unless I can diminish that risk." Are we having that talk among your producers?
Mr. Pryce: I do not think that talk is happening at the moment. As companies look at what their prospects are and what they might want to pursue, they will want to understand the policy implications of that. They will measure that against their confidence around what they think they can do to mitigate that. One company already drilling on the East Coast has said that they have a degree of confidence that what they will be doing will work and work effectively.
Senator Lang: I am looking for ideas on how we can better regulate in conjunction with the companies in question. I do not think there is any misunderstanding here that we need the energy. By all reports, it sounds like what we are doing is better than what they have done down in the Gulf of Mexico, but that does not necessarily mean that it is where we are, or where we should be.
We have all centred our attention on the companies that are doing work, but we have to understand that we have a responsibility here. It is the same for the NEB, the National Energy Board of Canada. As the regulators or the offshore regulators for Newfoundland and Nova Scotia, they have a responsibility. If they do not exercise their responsibility, it puts the public at risk from the point of view of not doing the job that they said they would do on behalf of the public in enforcing those regulations. There is a combination of responsibilities; it is not just one sided.
Looking at what has happened in the Gulf of Mexico, on a number of occasions — and, it might be on a multitude of occasions — the regulators did not do what they were supposed to do to ensure that certain things were done. In this offshore business, especially in deepwater drilling, regulators obviously have key responsibilities. If a third party was hired, or if a government official is signing off on certain things that have been done and meet the criteria, there could be another step in the process. With Internet the way it is, it could be easy to do. It would be in the public domain that they have signed off on these certain functions and that anyone can review what has happened. The person signing off would have to accept the responsibility that they are getting paid for. Right now, however, a person can sign off, but they may have not done what they said they were supposed to do and they bear no responsibility.
This would, perhaps, make them more accountable. I want to put that to you from the point of view of working with the regulator overseeing the day-to-day operation and their responsibilities.
Mr. Pryce: I cannot comment on what has been going on in the United States in terms of who has done what right or wrong. My personal view is that we are spending a lot of time and money investing in our regulators. We want them to be good at what they do, accountable for what they do, and transparent in what they do.
If we pursue that as the path — and, maybe I have my former regulatory hat on now — I would hope that they would enjoy the confidence of government and the public that they know what they are doing. With transparency, people can see that they have done the right thing.
You probably have something that is worth looking at. How does the regulator demonstrate that to you? I think that during the NEB review they will have the systems in place. They have their own checks and balances to ensure that industry is doing what it says it will do and to ensure that they will meet their expectations.
A third party approach is one way to do it. I would rather ensure that our regulators have the resources and competency to do that job so that we can empower and entrust them to do it.
Senator Lang: We cannot comment on the Gulf of Mexico, but we are seeing it every day and getting reports from there every day. There must be a thread of truth coming through from the information that we are being provided.
Going back to my concern, there is accountability from all sides in this. We must remember that this happened in 1979. This is not new with the BOPs and the problems that they had in the Gulf of Mexico further down. The only difference was that CNN news was not there.
With the way technology is moving, it is important to eliminate that degree of human error. Can we think of other ways to do it without adding another layer of bureaucracy but, perhaps, by putting checks and balances in the system? That is my point.
Mr. Pryce: I do not think people would argue with the principle of transparency and the principle of ensuring the checks and balances are there. It is how you resource that.
Senator Neufeld: A number of my questions have been asked but I want to continue from what Senator Massicotte asked, when you talked about GDP, gross domestic product, and the amount of jobs and so on. Can you tell me, and put on the record for us here, how much in royalties and lease fees Newfoundland and Labrador would have received last fiscal year? What portion of their total budget would that amount to?
Mr. Pryce: Last fiscal year, Newfoundland and Labrador received about $2.2 billion in royalties, which was about 25 per cent or 28 per cent of their revenue stream.
Senator Neufeld: That is significant. If you were to shut down the offshore oil and gas industry in Newfoundland and Labrador — heaven forbid — they would lose 28 per cent of their total government revenue. Actually, Newfoundland has not been one of the provinces for a while now that has been a receiver of equalization for those reasons.
My time goes back with Mr. Pryce quite a number of years in my past life as Minister of Energy and Mines in British Columbia. Mr. Pryce and I know one another well because we worked a lot together.
Can you give a percentage of Nova Scotia's budget and what kind of revenues they receive?
Mr. Pryce: Their revenues, as I said earlier, are considerably smaller. It was about $1.5 billion in royalties, but over the previous 10 years. It is a significantly smaller amount. I think the previous year it was about one-third, given that the marketplace for natural gas had dropped. My notes read a third. I was corrected on my flight here that perhaps it is down because of the market price for natural gas, but it is not insignificant.
Senator Neufeld: It is significant in both those provinces and obviously significant in Newfoundland and Labrador, similar to Alberta and British Columbia. When you look at the revenues generated by the oil and gas industry, they are absolutely massive.
My other question about rules and regulations and those other things have basically been asked. Thank you, Mr. Pryce.
Senator Dickson: My question will be short. Some companies also have policies under the rubric of community support. What significant activities have CAPP and/or its members undertaken or plan to undertake in the North pre-bid application to educate and engage residents in the North on the risks and benefits of deepwater drilling and production? How will you sell it, in other words?
Mr. Pryce: That is a great question. I have a staff member up in Inuvik today sitting on a panel talking about onshore and offshore opportunities in the North, and I expect there will be many questions about that. As the National Energy Board conducts its review, in all likelihood, we and our members will be contributing to that, and that information will find its way into this open and transparent kind of process.
Members do meet with the various boards up there. I would imagine they will be talking about any specific plans they have. As Mr. Caron noted, right now, for the offshore, there is no well contemplated into the early future. It is at least four years out before a company may even choose to put an application in. I would expect that that company is watching very carefully to understand what the policy signals will be and the regulatory environment and, quite honestly, what the fiscal implications will be ultimately in that regard.
Senator Dickson: What feedback are you getting from the person you have in the North now vis-à-vis their positiveness before the spill in the Gulf and now with the spill in the Gulf? Has it turned around significantly?
Mr. Pryce: Actually, I have not spoken with him today, but I have heard messages out of the North. When I was at the — I have to make sure I get this phrase right — the other parliamentary committee — the Inuvialuit Game Council and a similar entity from Nunavut did testify there. I interpreted their words as, "Make sure you do not screw up, but there is a future for the industry if you do this right," not wanting to lose the opportunity for the industry to contribute to the well-being of the North. There is a legitimate tension in that regard on the part of the communities and the regulators.
Senator Banks: I want to pile on the point made by Senator Massicotte and Senator Neufeld. The province that Senator Brown and I live in, Alberta, was a recipient of the equivalent of equalization payments until 1963, so we are very conscious of the value to our economy of fossil fuels. I will also jump on Senator Lang's point. I bet Mr. Pryce will know this because he has meetings from time to time with counterparts elsewhere. I bet you that, on April 19, if you had gone to the Louisiana counterparts of the NEB and whoever was here and looked at their written rules and regulations and what was supposed to be done, they probably looked pretty good. They are not entirely inexperienced with respect to offshore drilling there. There are thousands of wells down there. They have a history of doing this, so they are probably good at it. It is like the U.S.S.R. Constitution. It is not whether it was well written, but was it enforced, was it observed, and was someone paying attention. You are exactly right, senator.
Mr. Pryce: Just to cast back to what Mr. Caron said, and again I do not know the rules, but on the assumption that they may be relatively prescriptive in nature, it may point to some value of looking at a goal-oriented approach that puts more accountability on the companies to make them think what they should be doing, and actually it puts more accountability on the regulators who judge what comes in, in terms of the application format. That is based on an assumption that it is more prescriptive. I think there is an opportunity, and I would expect they will be looking at learnings globally of the premise of goal-oriented regulation.
The Chair: Thank you, Mr. Pryce. I want to thank colleagues as well. I can feel the commitment to this study, and it is great. It is a late night, and it has been a long several weeks. The chair appreciates the support and the attention. I know both witnesses find it a little bit different coming to this committee from some of the other ones referred to. Thank you for coming and for following our proceedings. It you have any input you want to make in the future in terms of things that we might be recommending or additional data that you think might help our deliberations, we would be very welcoming to that.
(The committee adjourned.)