Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 22 - Evidence - January 27, 2015
OTTAWA, Tuesday, January 27, 2015
The Standing Senate Committee on Energy, the Environment and Natural Resources, to which was referred Bill C- 22, An Act respecting Canada's offshore oil and gas operations, enacting the Nuclear Liability and Compensation Act, repealing the Nuclear Liability Act and making consequential amendments to other acts, met this day at 5:02 p.m. to give consideration to the bill.
Senator Richard Neufeld (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Richard Neufeld. I represent the province of British Columbia in the Senate, and I am chair of this committee.
I would like to welcome honourable senators, any members of the public with us in this room and viewers all across the country who are watching on television. As a reminder to those watching, these committee hearings are open to the public and also available via webcast on the sen.parl.gc.ca website. You may also find more information on the schedule of witnesses on the website, under "Senate Committees.''
I would now ask senators around the table to introduce themselves. I will begin by introducing the deputy chair to my right, Senator Paul Massicotte from Quebec.
Senator Seidman: Judith Seidman from Montreal, Quebec.
[Translation]
Senator Rivard: Senator Michel Rivard from the province of Quebec.
[English]
Senator Black: Doug Black from Alberta.
Senator Tkachuk: Senator Tkachuk, Saskatchewan.
Senator Mitchell: Grant Mitchell, Alberta.
[Translation]
Senator Ringuette: Pierrette Ringuette from New Brunswick.
[English]
Senator Ataullahjan: Salma Ataullahjan from Ontario.
The Chair: I would also like to introduce our staff: the clerk, Lynn Gordon, on my left, and our Library of Parliament analyst, Sam Banks, on my right.
Today we continue our hearings on Bill C-22, the proposed "Energy Safety and Security Act,'' which was read the first time in the Senate on November 18, 2014.
As you are likely aware, the bill was amended and a reprinted version, as passed by the House of Commons, was produced effective November 7, 2014. Honourable senators, your offices have received from the clerk this reprinted copy of the bill and the briefing binder supplied by Natural Resources Canada.
Today I am pleased to welcome, by video conference from Calgary, officials from the National Energy Board: Mr. Jim Fox, Vice President of Strategy and Analysis; and Jonathan Timlin, Director of Regulatory Approaches.
Gentlemen, I understand you have some opening remarks, after which we will go to questions from the senators. Welcome to the meeting tonight. The floor is yours.
Jim Fox, Vice President, Strategy and Analysis, National Energy Board of Canada: Good afternoon, honourable senators. It is a pleasure to be here today to talk to you about Bill C-22 and its implications for the National Energy Board.
Of the important changes proposed by Bill C-22, the NEB would be impacted by changes to the Canada Oil and Gas Operations Act, known to us as COGOA, and the Canada Petroleum Resources Act, which we call CPRA. Specifically, Bill C-22 proposes significant changes in the areas of financial liability and responsibility, public participation and transparency, enforcement, cost recovery and the use of spill-treating agents.
Working within the legislative mandate given to us by Parliament under COGOA and CPRA, the National Energy Board has successfully carried out our responsibilities in the North and the offshore for many years.
On April 1, 2014, the Government of the Northwest Territories became the responsible regulator for oil and gas activities in most of the onshore area in the Northwest Territories. The NEB continues to be the regulator for oil and gas exploration and development projects in offshore areas not covered by an accord, onshore in Nunavut and onshore in the Northwest Territories, in the Norman Wells Proven Area. The NEB will also continue to be the regulator onshore in the Inuvialuit Settlement Region, under territorial legislation that mirrors COGOA and CPRA, for a period of 20 years post-devolution.
As an organization dedicated to continual improvement, the NEB supports any measure to strengthen our legislation and expand our toolkit to protect people and the environment. Under COGOA, the board's responsibilities include safety of the public and workers, protection of the environment, conservation of oil and gas resources, efficient energy infrastructure and joint production arrangements.
The board's responsibilities under CPRA relate to technical evaluations of the extent of oil and gas resources in a given area. This act also lays out certain limitations to the board's ability to publicly disclose information provided to it in support of an application or for other purposes under CPRA and COGOA.
Our mandate does not include the rights issuance process, which is managed by Aboriginal Affairs and Northern Development Canada in the North. This means that the rights issuance process of Arctic offshore oil and gas exploration and development is clearly separated from safety, environmental, conservation and technical issues. This provides a strong separation between issuing oil and gas rights and issuing regulatory authorizations to undertake activities.
Safety and environmental protection are the NEB's top priorities. No work or activity proposed for the exploration or production of oil and gas under COGOA will occur unless the board is satisfied that a company's plans are safe for workers, the public and the environment. In the offshore oil and gas sector, Bill C-22 would raise the absolute liability for companies operating in the Arctic from its current level of $40 million to $1 billion. Liability in the case of fault or negligence would remain unlimited.
Although attention is often focused on the NEB's review of project applications, the fact is that we regulate the complete life cycle of projects. We keep a watchful eye as companies prepare and operate to be sure that they follow the rules. We do this through inspection, audit and, if necessary, enforcement of the requirements.
Related to enforcement, proposed legislative changes in Bill C-22 will provide the board with the authority to issue financial penalties to both companies and individuals, something that we can already do under the National Energy Board Act. The bill would also allow the Governor-in-Council to make regulations respecting the recovery of the board's costs from companies carrying out activities regulated under COGOA.
While open and transparent processes are hallmarks of the NEB Act, COGOA and CPRA currently do not expressly provide for public hearings, participant funding or the release of certain information about projects without the applicant's permission. The proposed legislative change would provide for more public and transparent processes under COGOA.
Since the BP Macondo incident in 2010, public awareness and expectation around the regulatory oversight for energy projects has intensified. After this incident, the NEB initiated the review of offshore drilling in the Canadian Arctic, known to us as the Arctic Review. This was a comprehensive review of the safety and environmental requirements for offshore drilling in Canada's Arctic environment. The NEB recognizes the importance of hearing from people who are directly impacted by a proposed project or who have relevant information or expertise to offer. During the Arctic Review, the NEB heard that northerners are deeply connected to the land and the ocean. Northerners want to be involved in the review of projects that might have an impact on their way of life. Public participation is an important element of an open and balanced regulatory process. It strengthens the quality and credibility of the decisions.
There is no doubt that Canadians — all Canadians — are concerned about the safety and protection of the environment in any energy development. We will continue to adapt in order to fill our mandate to regulate in the Canadian public interest. The Canadian public expects us to hold companies we regulate accountable for the safe operation of their energy projects.
In closing, safety and environmental protection are the National Energy Board's top priorities. We welcome any measures to strengthen our legislation and expand our toolkit to protect Canadians and the environment.
We operate within the mandate set for us by Parliament, but at arm's length from the government. Our role is to implement, not to set, the policy choices affirmed by legislation. And we will be ready to implement any changes to our legislation passed into law.
We look forward to your questions. Thank you.
The Chair: Thank you very much. We'll begin with the deputy chair, Senator Massicotte, please.
Senator Massicotte: Thank you very much for being with us today.
[Translation]
Thank you for joining us this afternoon. It is very much appreciated.
[English]
To start with the macro issue, you talk about the NEB being responsible for the safety and the protection of the environment. That is your broad mandate, your responsibility and your important contribution to our society. However, I must note — and I'm sure you're aware of this — that in Quebec there is a lot of debate right now related to the pipeline and the reversal of one pipeline. The public, as well as some politicians, talks about this project review by NEB as if NEB does not exist or is not credible. They immediately associate you to a political objective and in my mind don't give you proper justice relative to your own technical ability and objectives.
How do you respond to that? You're doing a lot of work, and it's frustrating for me to see all the criticism you're getting as if your own review is not independent and credible.
Mr. Fox: That is a difficult question to respond to. It doesn't deal specifically with Bill C-22. I think the board looks at the way its processes are being viewed by the public, by stakeholders, by parties who talk to us and looks to try and change those processes so people can understand the processes we undertake.
As we speak today, our current chair, Peter Watson, is in Eastern Canada, in Nova Scotia I believe, talking to various groups about just that issue. My response to you, senator, would be that we look to evolve processes to meet the needs of Canadians to show them that indeed we are regulating in the Canadian public interest.
Senator Massicotte: Thank you.
Senator Mitchell: Thank you, gentlemen, for your presentation. Once again, you mentioned that safety is one of your responsibilities. Before the committee some time ago, the previous chair of the NEB mentioned that consideration was being given to the NEB, during their audit process of projects, of auditing safety culture, that it was actually apparent that it's now doable or getting close to being doable, that the technology and the possibility exists to actually audit safety culture. Could you give us an update on where you are on that?
Mr. Fox: The board is working on its own and with a group of regulators within North America to come up with specific elements so that it would go into a company and be able to audit. Auditing something as conceptual as safety culture requires us to develop indicators or things that we can look at in a company that would indicate whether a company has a positive safety culture if more work was provided.
Together with other regulators, including our two offshore petroleum boards — the Canada-Nova Scotia Offshore Petroleum Board and the Canada-Newfoundland and Labrador Offshore Petroleum Board — the U.S. pipeline regulator, which is the Pipeline and Hazardous Material Safety Administration, and the U.S. offshore regulator, which is the Bureau of Safety and Environmental Enforcement, we're working to try and come up with elements that we commonly agree would allow us to ask questions about a company's safety culture and come out with a viable demonstration. We're not there yet, but we are fairly close.
Senator Mitchell: Thank you.
In your opening comments you mentioned that this bill, once it becomes an act, will open up the transparency and openness of the processes that are hallmarks of the NEB Act but that aren't currently a part of COGOA and CPRA. Could you give us an example of some information that we would receive as a result of this act that we're not receiving now?
Mr. Fox: Currently, if a company were to apply to us for an authorization to drill a well in the Arctic offshore, the application that the company provides, the technical details of what they intend to do, their plans for safety and environmental protection, are covered by the clause under CPRA that does not allow us to give those out without the company's approval. If this bill were to pass, those would become public materials.
Senator Mitchell: Speaking of offshore drilling in the Arctic, where is the technology of spills reaction and response now given the potential problems of an under ice blowout or spill?
Mr. Fox: The way I would address that is our goal at the board would be, first, to prevent any incident from ever happening, and that would be done through a rigorous assessment of the company's proposal and rigorous oversight of the company's activities.
My understanding of the technology is that a blowout under ice would not be a desirable thing. It makes it very difficult to treat and very difficult to respond to, so what we would be expecting the company to do is not approach the situation where a blowout would occur.
The Chair: I wonder if I could take that a step further. I appreciate that initially no one wants a blowout. I feel the same. No one around this table would want a blowout to happen, but I want to drill a little bit deeper. What happens? What do you do? What are the rules? What regulations do you have in place if in fact there is a blowout under ice? How do you deal with it? Maybe you could give me a little further explanation.
Mr. Fox: The current situation is that if a company desires the authorization to drill in the Arctic offshore, they must do so not through the ice, unless it's a land-fast ice situation, but do it in the ice-free season. So we would not look for a blowout under ice.
If they go in at this current time, there's a requirement for them to demonstrate the ability to drill a same-season relief well. That would mean another rig would have to be able to come within the ice-free season and drill a relief well to stop the unconstrained flow of oil through the well in the same drilling season.
That's the ultimate backstop. We would hope never ever to get there, but ultimately drilling a relief well, which is ultimately what stopped the Macondo well, is required. The capacity to drill a relief well is required.
The Chair: What is the ice-free season and when would you stop a rig from drilling? If you're getting close to when the ice is going to be there, all that must be taken into consideration. So approximately when can they start drilling and when must they stop if they're not finished the well?
Mr. Fox: Those are technical details, senator, that I unfortunately don't have. Generally the ice-free season in the Canadian Beaufort is between July and October. It's approximately three months long. In seeing a proposal, the board would want to evaluate that the company stops short of the time when the ice covers the water in such a way as to prevent them from moving their equipment. They would have to move their equipment off the well before the ice came in, so they have to stop drilling sometime before that.
The Chair: Would that require them to have a rig on standby?
Mr. Fox: It would depend, senator, on the conditions and what else was going on. Often, if you have two wells being drilled in the vicinity of each other, they would provide each other with same-season relief well backup. That's a mechanism used in certain other jurisdictions. In Norway, I know, and in the U.S. offshore, they look to other rigs drilling nearby. So if there was another rig drilling nearby, it's possible that that could be used as a same-season relief well capacity.
The Chair: That would make sense.
What if no other rig was close by? They're not just sitting around most of the time, and it's probably a long way away. There are no offshore rigs all the way down the West Coast, including the U.S., so it would probably have to come out of the Gulf of Mexico. Give me some sense of when —
Mr. Fox: I think the best sense I can give you is that this would be a question of what the company offers the board to demonstrate its ability to drill the same-season relief well, and it would be up to the boards to judge whether or not it was adequate. The Canadian Beaufort, where drilling is currently contemplated in the next half decade or so, is a very long way from anywhere else; and not having a rig close by, it would seem that that would not constitute same-season capacity.
The Chair: Thank you for that. I guess I was remiss. In Alaska there would probably be some rigs closer by than the Gulf of Mexico. Sorry about that.
Senator Black: Gentlemen, thank you very much for being here. I want to echo the comments of my colleague Senator Massicotte. Thank you for the tremendous work that the National Energy Board does. Maybe, like senators, you are rarely thanked for what you do, and we all know you do very good work. So thank you very much for that.
I have a couple of technical questions. I would understand if it's not in your wheelhouse to answer, so don't feel any pressure at all, but I want to understand some technical aspects of Bill C-22 a little better.
Are you able to define what the offshore is? Now, I know that sounds like a foolish question, but is it literally as you step into the water? Is it the 12-mile limit? Is it the 200-mile limit? What is this legislation intended to get at?
Mr. Fox: Senator, thank you for that question. I appreciate the work that you do too.
My understanding is that the offshore is defined in other federal legislation, and it is that part of the ocean that extends beyond a provincial boundary.
Senator Black: That's helpful.
Now, where did the number $1 billion come from? Is that adequate? What is your view of that?
Mr. Fox: I'll say at a high level that our role is to implement the choices that Parliament chooses to put into legislation. My understanding — because we didn't actually write this bill — is that Natural Resources Canada visited numerous other regimes and talked to them about their liability provisions. They looked at recent incidents, such as the Macondo incident — and there was another one offshore Australia that offshore regulators talk a lot about, called Montara — and what is the possible damage that could happen and what would be deemed adequate protection.
Senator Black: I could explore that with Natural Resources. I understand that.
It's so long since I was at law school. You're going to have to help me with this. I don't recall anymore exactly what we mean by "absolute liability.'' Can you help me with that?
Mr. Fox: I will defer to my colleague, Mr. Timlin, for that one.
Jonathan Timlin, Director, Regulatory Approaches, National Energy Board of Canada: Thank you very much, senator and Mr. Fox.
Absolute liability is the limit of liability that the operator is responsible for without proof of fault or negligence. As Mr. Fox indicated in his opening statement, if there is fault or negligence, the sky is the limit as to what the operator can be liable for.
Senator Black: So if there's an accident off the coast of British Columbia, and it's a relatively — there's no "minor accident,'' but the spill is contained, and the damages are half a billion dollars, you're saying that these provisions would provide that the monies would need to be paid without the judgment of a court?
Mr. Timlin: Yes. Maybe if I could take a step back, senator, and say that at the outset the NEB expects the companies will do everything they need to do to stop the flow of an incident, to contain it, to clean it up, and of course to compensate those who are affected by it. The absolute liability, as I mentioned, is the limit of liability that an operator would have on any absence of proof of fault or negligence. If, in fact, fault or negligence is proven, the liability would certainly exceed that amount.
Senator Black: That's very helpful. Thank you both very much.
Senator Seidman: In your presentation, you referred to three entities, shall we say. You referred to the Government of the Northwest Territories, which has a new mandate as of April 1, 2014; you referred to, of course, yourselves, the National Energy Board; and you also referred to Aboriginal Affairs and Northern Development Canada. You talked about the jurisdictional issues and the mandates of these entities, including your own. My interest is in whether this bill changes the mandates of these three entities in any way. Are the jurisdictional issues complex? Are there issues that would need dealing with in a different way?
Mr. Fox: Thank you for that question, senator.
I can say that this bill would change the National Energy Board's mandate and jurisdiction slightly. Under the areas of financial liability and responsibility, we would have new responsibilities under that subject. Public participation and transparency would change. That would be offering information to the public that currently can't be offered now. In terms of enforcement, we would receive new powers to administrate monetary penalties — which are fines, essentially — to people and companies. We would have the ability, under regulations, to recover general operating costs. This also sets out a regime for the effective use of spill-treating agents. Under those five areas, the National Energy Board's responsibilities would change.
Senator Seidman: Are there any conflicts or complex jurisdictional issues that we ought to know about with regard to these new obligations or responsibilities on your part?
Mr. Fox: Not that we foresee at the moment. The division between the Government of the Northwest Territories and the National Energy Board is fairly clear. We have a very good relationship, where we talk about any issues that could potentially come up, but our regulatory responsibilities are set out in a defined area of the Northwest Territories and in the offshore area, where it's well understood. My understanding is that there are no jurisdictional concerns with respect to Aboriginal Affairs and Northern Development Canada.
Mr. Timlin: The one thing I would add is that the NEB works hard with its partners to establish agreements, to lay out roles and responsibilities, and to work together on incidents. For example, we participate with partners in the North on exercises to ensure spill preparedness. There are a lot of measures that we work on with government departments and agencies in other jurisdictions to ensure that we're prepared and ready when needed.
Senator Seidman: It's helpful that you brought up spill preparedness, because my question to you was going to be: If there is a crisis, an emergency or a spill, who is in charge? Let's say it's offshore. Maybe that makes it easy for you to answer; I'm not sure.
Mr. Fox: It does. In the offshore, if there is a spill from the rig while it's operating as a rig, the lead federal agency is the National Energy Board. That's very clear. As Mr. Timlin said, we work with other agencies of the federal government, as well as territorial governments, municipal governments if there are any, and even U.S. government agencies, who would think about an offshore spill in Canadian waters potentially flowing into U.S. waters. We work with them to understand how the spill would play out.
The expectation is that the company, when it gets an authorization, is required to prepare for such a spill and respond to the spill immediately to stop the flow of oil, to make sure that people and the environment are safe, and to clean up. Those are expectations of the company.
I hope that answers your question.
Senator Seidman: Sort of.
What does it really mean to say you're in charge? One of the things that we heard repeatedly about the blowout in the Gulf was that it wasn't clear who was in charge and, as a result, it took a very long time for people to have a chain of command and to carry out directions. What does it mean when you say you're in charge? Do you have the power to issue orders and give the company directives? What does it really mean?
Mr. Fox: To clarify, the issues around Macondo and how the response to Macondo was managed are something that regulators and various people studied and tried to learn from. One of the ways that we've learned from those is to make it very clear and to run exercises about what would happen if there were such a spill.
Being in charge, being the lead federal agency, the NEB has the ability to direct the company and to make orders that have the force of law on the company. They can do various things. The NEB has the ability to oversee the company's response and adjust it in various ways. It has the ability to liaise with other federal agencies that have similar responsibilities or aligned responsibilities, such as Fisheries and Oceans, Transport Canada and the Canadian Coast Guard. Various parties have some responsibility if there's an emergency of this nature.
The board as lead agency can actually take over the response to an incident and take over the direction of the response to an incident if it doesn't believe the company is doing a good job, so we have powers right up to that level.
Senator Seidman: Thank you very much.
Senator Ringuette: In your presentation, you say that in the offshore oil and gas sector, Bill C-22, will raise the absolute liability for companies operating in the Arctic from $40 million to a $1 billion liability, and in the case of fault it would remain unlimited. Why are you only indicating the Arctic region?
Mr. Fox: I think I'll defer to my colleague, Mr. Timlin, on this question.
Mr. Timlin: As Mr. Fox mentioned, we talked specifically about the Arctic offshore in his opening statement. However, there are other limits of absolute liability that exist under the act in different locations. For example, onshore, where COGOA applies, where the proximity to water is more than 200 metres, the absolute liability is $10 million. Onshore, where the proximity to water is less than 200 metres, the absolute liability would be $25 million. Those limits did not change or would not change as a result of this bill.
In addition, as I'm sure the senator is aware, COGOA is mirrored in accord acts with Nova Scotia and Newfoundland. A different liability limit exists in those areas, which is $30 million. There are a number of different areas of liability.
Senator Ringuette: And that is solely based on the closeness of water?
Mr. Timlin: Yes. As Mr. Fox mentioned in his opening statement, we're not the ones who set the absolute liability limit, but one can imagine that it would be less expensive to clean up and respond to a spill on land than it would be somewhere in the Arctic, as an example.
Senator Ringuette: Research indicates that that's the case. Cleanup, whatever the amount of spill, would be easier done inland than offshore.
I should reframe my question. Do you have research that indicates that the cost of whatever kind of spill is more expensive offshore than inland? Do you have scientific research that will bring you to that conclusion?
Mr. Timlin: We don't have research to that effect, but I will say that the absolute liability limits are set out in the legislation. With that, the board will always want to ensure that the company has the ability, as I've said, to clean up the mess, to remediate and to compensate those who are affected. On a case-by-case basis, the board would look at the situation, look at the application that has been submitted and determine if in fact the company should have what's referred to as "financial resources.'' It's a component of the bill, which is the ability of the company to pay should there be an incident. If the board feels that that amount should exceed the absolute liability limit, then that is acceptable under the legislation.
Senator Ringuette: What are the current insurance requirements in regard to offshore drilling in Nova Scotia and Newfoundland? Since it's a condition that you currently impose to provide for an operating certificate, you should be able to tell us what the current situation is in those two areas.
Mr. Timlin: Mr. Chairman, I am your hands. As the committee is aware, we're not the regulators for the offshore accord areas in Newfoundland and Nova Scotia.
Senator Ringuette: No. I understand what you're saying, but we have a responsibility to look at the national perspective in regard to this issue, just like the National Energy Board has that responsibility. How does this $1 billion requirement for the Arctic area compare with the requirement for the offshore drilling in Nova Scotia and Newfoundland?
Mr. Timlin: I'm sorry, senator; now I understand.
Bill C-22 also makes changes to the accord acts. Our focus, of course, has been on COGOA, but as I understand it, the $1 billion absolute liability limit would also apply to the offshore in Nova Scotia and Newfoundland.
Senator Ringuette: Of course you saw the previous meetings where I raised the issue in regard to the cost to the atomic energy sector of providing such guarantees. What is your analysis of the additional costs for these additional insurance policies?
Mr. Timlin: As mentioned, this is a new absolute liability limit. With that, if you were undertaking drilling or development work, you would be required to have financial resources, which is the ability to pay commensurate, at a minimum, to the amount of absolute liability. The board can require, on a case-by-case basis, that that exceeds the absolute liability limit.
The Governor-in-Council will make regulations that will determine what the board can accept in terms of instruments to demonstrate that the company is in fact meeting those requirements. In the absence of the regulations having been made, I can't speak at this point as to what different tools and instruments would be available to companies and the various costs of those instruments.
Senator Ringuette: You have knowledge of the current operation certificate that you issue and the amount these operating companies can supply. If we go from $40 million, which is quite an amount of money, to a billion dollars, there has to be research done. Nothing happens in a vacuum.
As you indicated earlier, Mr. Timlin, you deliver a certificate with the backing of some asset in case of an incident. I cannot believe that there has been no study in regard to the additional cost of going from insurance of $40 million, whether in assets or the purchase of insurance company liability, to a billion dollars. I would like to know how this billion dollars in cost differs in regard to the cost being incurred by drilling off the coast of Nova Scotia and Newfoundland.
I want to make sure that the Arctic region is not removed from economic growth, a competitive issue in regard to offshore drilling. Cost is a major factor in all of these. So I believe that if there has not been a study, gentlemen, I think you should hurry to do so. As a member of this committee looking at this legislation, I want to make sure that there is fairness in the system with regard to this issue.
Mr. Fox: If I may, senator, the National Energy Board's mandate with respect to offshore Arctic oil and gas exploration is set out within the Canada Oil and Gas Operations Act. It sets a number of factors that we focus ourselves on: safety, environmental protection, conservation of resources, efficient energy infrastructure and joint production arrangements. Those are the five things that we can focus on.
The board stands ready to implement, if Parliament chooses to change the legislation. But making sure that this is the right balance for Canada or for the Arctic or for any given region is more a concern of Natural Resources Canada, which does make policy that underlies this bill. It's not something that the National Energy Board would look at because the act does not permit us to say, well, economic development would dictate one thing and safety would dictate another. We look at the responsibilities we have under the Canada Oil and Gas Operations Act and execute on those.
Senator Ringuette: Mr. Fox, are you saying to us that the National Energy Board was not consulted by Natural Resources Canada before this bill was produced?
Mr. Fox: No, senator, I'm not. I'm saying that the National Energy Board was consulted on whether or not the regime set out in this bill would be operational.
Senator Sibbeston: Gentlemen, you indicated that the National Energy Board has initiated and completed a study of offshore drilling in the Canadian Arctic, known as the Arctic Review. In your study, did you determine how much it would cost to clean up a moderate spill and repair the damage it caused? Is the billion dollars that's spoken of sufficient to cover any accident in the Arctic?
Mr. Fox: The Arctic Review did not look at a study of what would be sufficient or what wouldn't be sufficient. It looked at the factors that a company would have to show to the board and talk to the board about if they were to want an authorization to drill in the Arctic offshore. So, no, we did not do a study.
Senator Sibbeston: I'm aware that one of the requirements that the study provided was a requirement for companies, in the case of a blowout similar to the one in the Gulf of Mexico, is to be able to drill a relief well in the same season. Given the difficulties of operating in the Arctic and the Beaufort Sea, where any drilling is most likely to occur in the next few years, is this something that oil companies would be able to do? Have you determined that technically if there's a blowout in the Arctic that they are able to provide a relief well in the same season of the occurrence?
Mr. Fox: The National Energy Board's current requirement is that a company demonstrates the capability to drill a same-season relief well, so technically it's something that can be done. It may be very difficult economically.
Senator Sibbeston: With respect to the liability of a company, can you give us examples of situations where they would not be liable? If you can imagine a company operating in the Arctic and a spill or blowout occurs, what situation would make it so they were not fully responsible for what had occurred?
Mr. Fox: The only circumstances where we can technically see that they would not somehow be liable would be some sort of act of nature — a freak storm that could not have been expected or something like that — but even then we would expect the company to manage the weather conditions and the sea conditions that it expected to see. So it would have to be something wildly outside of our expectation and understanding of what would happen to a drilling situation in the Arctic for them not to be liable.
[Translation]
Senator Rivard: Before I ask my question about Bill C-22, could you remind us what happened with BP in the southern hemisphere a few years ago?
At the end of the day, what was the decision? Was it an accident, was it a case of fault or negligence?
[English]
Mr. Fox: I'm sorry, senator, are you speaking about the Montara incident?
Senator Rivard: Yes. Was it an accident?
Mr. Fox: My understanding of the outcome of the Montara incident is that it was determined that the company should have suspended the well in a manner more consistent with permanent capping than what they did, which was to leave the well in a condition that would allow it to leak, which it did.
[Translation]
Senator Rivard: If memory serves, BP had to pay over $4 billion to repair the damage done to the environment. Is that correct?
[English]
Mr. Fox: I'm sorry; I can't confirm that number.
[Translation]
Senator Rivard: Let's go back to Bill C-22. Under Bill C-22, some insurers will certainly offer the coverage that companies need for exploration projects in the North, with liability of up to $1 billion. Am I to understand that those insurers will cover accidents? The request is that accident insurance be up to $1 billion, and that the amount be unlimited in the event of negligence or fault.
In your view, are there any insurers in the world that will want to provide unlimited coverage in the event of fault or negligence?
[English]
Mr. Fox: The scheme that's put forth under Bill C-22 does not necessarily require an insurer to take that risk. It's possible that a large company could put up resources of its own to respond to an incident. BP did not have an insurer for the Macondo incident and has spent something in the order of $40 billion responding to and cleaning up after that incident.
The scheme that is being proposed under Bill C-22 is not particularly different from the scheme in the United States or other Arctic nations like Norway, Greenland or Iceland. There's no need to demonstrate fault or negligence in Norway. The regime requires an unlimited liability no matter what happens. The way that that's mitigated in Norway is that Statoil, the state oil company in Norway, is involved in every single offshore drilling program in some way, so the unlimited liability is essentially backstopped by the Norwegian Crown. Our regime is not fundamentally different from the other regimes in Arctic offshore nations.
Senator Tkachuk: I have a couple of questions on liability. I think you said that in the event of a crisis, a spill or something like that offshore, the National Energy Board would be in charge in the cleanup operation. Am I correct in this assumption?
Mr. Fox: The National Energy Board would be the lead federal agency. We expect the company to undertake all of the activities to stop the spill or stop whatever incident is going on, to protect the people and to clean up. We expect the company to oversee that, and then we oversee the company. To the extent that the company isn't reacting in a way that the National Energy Board thinks is appropriate, the board can order the company to do various things or, at the extreme, take over the management of the spill, directing the company's resources toward that spill response.
Senator Tkachuk: I understand the $1 billion that the company would be responsible for in terms of the cleanup operation. But what if there is disagreement between you and the company as to what the action should be and your actions cost a hundred million more than their actions would have cost? Do they have liability against the Government of Canada? Against you?
Mr. Fox: Thanks for that question, senator. I actually don't know the answer to that. That's kind of a legal question that we have not explored yet.
Senator Tkachuk: I want to get back to that because you said that if there are civil suits, there could be liability well over a billion dollars. When there's a big spill, there are all kinds of hands in the water, so to speak. There will be you in there. There will be the companies in there. There may be provincial agencies in there. But, at the end of it, people will begin legal action. How much of that $1.5 billion, let's say, that they sue for is your responsibility since you were in charge of the cleanup? Obviously, if they have a lawsuit, it's because certain people or agencies or whatever thought that they hadn't been satisfied with the results of that and hadn't been satisfied with the compensation; therefore, they are going to continue to a larger amount. If you're the overseer, the Government of Canada has a bigger pocketbook than most of the companies. Who do people go after? Would they go after us? Would they go after you? You're us, right, so who would they go after? I know who I'd go after.
Mr. Fox: My understanding, senator, is that they don't have the ability to go after us. The board is a quasi-judicial regulatory tribunal; we make decisions. We can be challenged in court on our decisions on issues of fact or issues of law. If we have followed the law and if we had made reasonable judgments, by and large our decisions are upheld.
From a civil standpoint, I'm far out of my league there, and I would have to decline. I just don't have an answer for you; I'm sorry.
Mr. Timlin: I'm looking through the bill to find the exact section because it has been a while since I read that particular component, but I believe that there is a provision that excludes the board or anyone it directs from being liable for taking over management of a spill in the event that there is one.
Senator Massicotte: I have a couple of technical questions. As you noted earlier, the bill now proposes penalties, and as the responsible authority for offshore, you'd probably be the decision makers on what penalties to apply and why. What's the intent there, and why do you think it's going to make a difference? Even supposing you recommended such, what's the objective and the purpose here?
Mr. Fox: To clarify, senator, are you asking about the objective and the purpose of the monetary penalties?
Senator Massicotte: It doesn't currently exist. It's a new authority. Obviously something was wrong with the old way. Why is this new way better and how will it be applied?
Mr. Fox: I can talk about the administrative monetary penalties as a new tool. It's a tool that we don't current have under the Canada Oil and Gas Operations Act, but it's one we do have under the National Energy Board Act. It's another tool that we can use to move companies back toward compliance if they're not in compliance and to recognize that them being out of compliance is not something that we want them to do. It's one in a suite of tools that we have to move us forward.
As for the limits on the amounts, they are consistent with the amounts that we have under the National Energy Board Act. Beyond that, I'm not sure I have a further answer for you.
Senator Massicotte: But why were they introduced? Is there a case or scenario in your own experience, your own history, that brought this up? What went wrong for you to recommend this new authority, this new tool?
Mr. Fox: I don't believe anything specific went wrong. We have had situations of persistent non-compliance under the National Energy Board Act where we have used administrative monetary penalties, and they've proven to be a useful tool.
Senator Massicotte: Let me jump to another subject. The bill also provides for greater use of spill treatment agents. We heard previous witnesses relative to this use, but a lot of people are also concerned that this new-found authority may not be used wisely. Why this new authority? Why is it being proposed, and how do you make sure that it's always the best option relative to the environment?
Mr. Fox: I'm going to allow Mr. Timlin to speak to this.
Mr. Timlin: Senator, the legislation includes a number of safeguards so that, as you say, these spill-treating agents are used wisely. Let me walk through a few of those.
First of all, the spill-treating agent itself, before it can be used, would need to be on a list established in regulation by the Minister of the Environment. Then, at the time of the application, when the proponent or the operator brings forward its application to the board, the spill-treating agent would need to be included in the contingency plan, and the various conditions around the use of that spill-treating agent would need to be analyzed in the context of our review, which includes the environmental assessment.
In the event of a spill, the conditions around the use of the spill-treating agent would be assessed in what we refer to as a net environmental benefit analysis, NEBA. That would need to be done to ascertain whether the weather, the proximity to the shore, currents in the water and what have you would lend themselves to the use of that spill-treating agent and whether that would lead to an outcome that is a net benefit for the environment. That NEBA would also include consideration of other potential mechanical, for example, means to deal with the spill, such as booming or skimming. Only after those steps would the board authorize the use of a spill-treating agent. Again, I would emphasize that it would only be after the board has taken the decision, in fact, the chief conservation officer of the board has taken the decision that this spill-treating agent would be of net environmental benefit.
Senator Massicotte: I have a last very technical question. The bill provides for recovery of the board's cost. What's the intent there? Are you trying to recover the marginal costs only? Are you going to try to make sure the NEB is not a cost to the government? What's the intent there and how significant are those sums going to be to those seeking permits and your approval?
Mr. Fox: The National Energy Board is currently funded through an allocation from Parliament but recovers between 90 per cent and 95 per cent of those costs through cost recovery to the pipeline industry now under the National Energy Board Act. This was simply an extension of that regime towards offshore oil and gas projects. It comes in alignment with a scheme that's been in place under the National Energy Board Act for over 20 years.
The intent would not be just to recover marginal costs; it would be to try and recover that remaining 5 per cent to 10 per cent of the National Energy Board's costs, the time that we spend on COGOA activities, from companies being regulated under COGOA.
Senator Massicotte: That 90 per cent, 95 per cent should go up to 100 per cent in a couple of years.
Mr. Fox: We hope so, yes.
Senator Mitchell: I'm interested in pursuing Senator Black's question with respect to liability and the question of how that infinite liability up to $1 billion — that is, you don't have to prove it — would be allocated in, for argument's sake, two different situations.
Let's say that in situation A it costs the company $500 million to stop the spill and clean it up, and in situation B it cost the company $1 billion to stop the spill and clean it up. So situation A is not at its maximum liability, for which it doesn't have to be proven, but in situation B it is at its maximum liability.
Let's assume that I'm an Aboriginal community with a fishery. In situation A, I wouldn't have to prove that you've done damage to my fishery because there's still $500 million that you're liable for without anyone having to prove it; but in situation B, it seems to me that I've got a $100 million damage to my fishery but now all of a sudden I have to prove that the company was negligent. Is that the case? Would exactly the same level of damage to exactly the same community's fishery require different legal application under those two circumstances?
Mr. Fox: I don't actually believe it would. The proof of fault or negligence would come out of an NEB investigation into the incident. It would not necessarily be something that a claimant against the company would have to demonstrate. The board would, and it does this already after every incident, look to see the causes and contributing factors. If the cause and contributing factors were in the control of the company, there would be your fault or negligence. Then the National Energy Board's own incident report would determine why the accident happened.
As I mentioned before, very few accidents that happen in offshore oil and gas are truly just accidents that the company could not control somehow.
Senator Mitchell: That notwithstanding, worse yet, let's say the company wasn't actually negligent. So in the $500 million case, the Aboriginal community wouldn't have to prove it. There wasn't negligence in any event, but they would still be eligible to get their $100 million fixed. But in situation B, now the company has exhausted its billion dollars of unlimited liability and they're not negligent. The same Aboriginal community, with the same $100 million damage to their fishery, wouldn't get paid in situation B because there was no negligence, but they would get paid in situation A, even though there was no negligence. Is that right?
Mr. Fox: Actually, I'm not sure that that is exactly how it would play out in actuality. If the company was indeed not at fault or negligent in some way, the billion dollars would be divided up amongst claimants in some fashion. I presume there was a possibility that not everyone would get paid every claim they made, but they might all be paid some. It's not currently part of the legislation.
Senator Mitchell: So when we talk liability, are we talking the expense of cleanup and stopping, or is that before we even start talking about the billion dollars?
Mr. Fox: My understanding is that the billion dollars is public liability. In that billion dollars, we wouldn't count the company's expense of stopping. We would expect the company to pay everything to stop and clean up.
Senator Mitchell: And then have a billion dollars to give to people who had damages.
Mr. Fox: Yes.
Senator Mitchell: So the insurance regime that they get is for that billion; it's not necessarily to cover or to ensure that they have enough money to stop this thing. They could run out of money before they stop it.
Mr. Fox: Yes, under this legislation, senator, we assess the cash the company needs to have on hand to deal with any situation that may arise, and that is at least the amount of the billion dollars. It could be more depending on the circumstances. We expect the company to demonstrate that the company itself can afford the consequences of such a situation. We then expect them to put some portion of that into a liquid form that the board would have access to should the board need to take over some part of the incident or pay out claims the company seemed reluctant to pay out.
The billion dollars of absolute liability is there. There's also a financial responsibility portion where the company is expected to demonstrate to the board that it can pay up to that amount.
Senator Mitchell: I'm still not quite convinced. Let's say it costs $5 billion to stop it and clean up. What you're saying to me is yes, and they still have $1 billion of unfettered liability, so that the Aboriginal group would get part of that and somebody else would get part of that and somebody else. But they're not insuring the $5 billion to clean it up. They're only insuring the $1 billion of liability beyond the cleanup costs and the stopping costs; is that right?
Mr. Fox: For the $1 billion, the term you're using is "insuring,'' but we would look at things beyond insurance. What they have to demonstrate to the board is that they have the financial resources to respond to an incident. At the assessment phase, the board asks what we think a worst case scenario looks like and says the company needs to have financial resources to respond to that circumstance.
If an incident were to happen, we would expect the company to stop the flow of oil, keep people safe, capture as much oil as possible, clean up whatever needed to be cleaned up, and then the issue about liability to people who suffered a loss comes out. That is where the fault or negligence comes or, if not, the billion dollars that the company has to pay out without that demonstration of fault or negligence.
Senator Mitchell: Thanks.
The Chair: I have a couple of questions and then I believe we're done. No one else has indicated that they want to ask questions.
In the case of a spill, you are responsible for anything offshore. How is the Coast Guard involved with you? We were told in another study we did that at one point the Coast Guard has the official say, and now it's the NEB under this act. Maybe you could help me there.
Mr. Fox: As Mr. Timlin noted, we have a good working relationship with all the other agencies that would interact in such a situation, and we work with the Coast Guard to come to an understanding. The Coast Guard's mandate — and I hope they'll excuse me for speaking for them — is health and safety at sea. To the extent that there is a ship involved or people at sea, workers on a rig or others who are in danger, the Coast Guard is the lead agency in that situation. Where there's a spill or debris or an offshore oil and gas incident while the rig is actually drilling and being a drilling rig rather than a ship moving around, the National Energy Board would be the lead agency.
The Chair: That's clear for me.
Further to Senator Massicotte's question, we released a report in August of 2013 on the safe movement of hydrocarbons by rail, pipeline and tankers. For those of us around the table who were on the committee at that time, we should remember that we recommended that dispersants be used if there is a net environmental benefit. I want to just reinforce that the government does read some of our reports and actually reacts to some of them, because we see some of that happening now.
One other question: Are there offshore wells now that you're responsible for? I am aware that there are some man- made or artificial islands. Are you responsible for those or just totally offshore?
Mr. Fox: There are a number of artificial islands with producing oil wells on them in the Mackenzie River in the Norman Wells Proven Area, and we are responsible for those. The National Energy Board has had a couple of offshore exploratory wells drilled and then capped in the time it has been responsible for the Canada Oil and Gas Operations Act, and that has been since about 1990.
There are currently no wells being drilled and no active wells in the offshore area, which is the area outside a province or territory, offshore in the salt water, if you wish.
The Chair: There are no artificial islands in the salt water in the Beaufort? Is that what you're telling me? There are not?
Mr. Fox: There are not.
The Chair: Have you ever had a spill, then, that you've had to respond to?
Mr. Fox: There have been a number of incidents under COGOA in a variety of places that we have responded to. As you may know, we are responsible for spills from interprovincial and international pipelines, but from an oil well, no.
The Chair: Okay.
Senator Massicotte: You're hitting a thousand.
The Chair: Thank you very much for your time. We appreciate it. There have been some good answers and some good questions.
(The committee adjourned.)