Vol. 149, No. 28 — July 11, 2015

Canada–Newfoundland and Labrador Offshore Petroleum Cost Recovery Regulations

Statutory authority

Canada–Newfoundland and Labrador Atlantic Accord Implementation Act

Sponsoring department

Department of Natural Resources

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issues

Cost recovery is a sound management practice that seeks to recover from industry the costs associated with the administration and enforcement of Canada’s regulatory regime in the offshore oil and gas sector and to minimize the burden on public taxpayers, particularly given that the roles and responsibilities of regulators continue to evolve with respect to safety and environmental protection.

Currently, cost recovery is implemented on a voluntary basis. The proposed regulations would introduce mandatory requirements for cost recovery in the Atlantic Accord offshore areas to increase the transparency, predictability, and enforceability of cost recovery for regulatory activities. Enhancing the predictability of cost recovery by prescribing requirements in regulations is expected to promote confidence and investment in Canada’s offshore oil and gas sector, and strengthen Canada’s already strong offshore oil and gas regulatory regime.

Background

In 2009 and 2010, two large-scale oil spills from offshore oil and gas operations occurred: the Montara wellhead platform blowout off the northwest coast of Australia, and the Macondo field Deepwater Horizon oil rig blowout in the Gulf of Mexico. These incidents highlighted the safety and environmental risks inherent in offshore oil and gas activity, and the corresponding need for strong and transparent legal frameworks and regulatory regimes with stringent planning, prevention, and preparedness requirements.

As a part of the response to these incidents, Part 1 of the Energy Safety and Security Act (the Act), which received royal assent on February 26, 2015, but which is not yet in force, amended the Canada–Newfoundland and Labrador Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (Accord Acts), the Canada Oil and Gas Operations Act (COGOA), and the Canada Petroleum Resources Act (CPRA) to strengthen the safety and environmental protection of Canada’s offshore oil and gas regime by modernizing the liability and compensation regimes and updating incident preparedness and response requirements. These amendments included the authority to create new regulations to allow regulators (see footnote 1) to recover from industry the costs associated with regulating offshore and northern onshore oil and gas activity. At this time, cost-recovery regulations are being proposed for the Atlantic Accord areas only; cost-recovery regulations for the offshore and onshore oil and gas activities regulated under the COGOA and the CPRA are expected to be developed in the future, and are subject to Governor in Council approval.

Current cost-recovery regime (Atlantic Accord areas)

At present, the two regulatory boards (the Canada-Newfoundland and Labrador Offshore Petroleum Board [CNLOPB] and the Canada-Nova Scotia Offshore Petroleum Board [CNSOPB]; collectively “the Offshore Boards”) do not have the authority to recover costs for their regulation of oil and gas activity in offshore areas where they retain regulating authority.

The Offshore Boards currently recover a significant proportion of their costs from industry, on a voluntary basis. In 1999, after the Accord Acts were established and offshore oil and gas activity began in the Accord areas, the federal and provincial governments established a voluntary cost-recovery agreement with industry, as represented by the Canadian Association of Petroleum Producers (CAPP). The CNLOPB currently recovers approximately 75% of its costs from industry and the CNSOPB recovers approximately 50% of its costs. The remaining 25% and 50%, respectively, are split between federal and provincial government funding. These levels were established in order to reflect the level of oil and gas activity at the time, and to support the development of Atlantic Canada’s emerging offshore oil and gas sector.

Objectives

The objective of the proposed regulations is to remodel the existing voluntary cost-recovery regime of the Atlantic Accord areas to recover up to 100% of the regulators’ costs. This would help to ensure that the costs recovered are more closely attributable to the services rendered, as opposed to a general proportion (e.g. 50% or 75%) of the regulators’ costs. Prescribing cost-recovery requirements in regulations, as opposed to relying on voluntary agreements, increases transparency and ensures these requirements are enforceable. This will ensure that most regulator costs are borne by industry and not by taxpayers, in keeping with other cost-recovery frameworks implemented by the Government of Canada.

Description

The proposed regulations would establish the new cost-recovery model, which will divide regulator costs into four categories.

Different cost-recovery methods will be used for each category of costs, depending on the type of licence, approval, or regulatory activity that is undertaken or provided by the regulator (i.e. one of the Offshore Boards). Having different cost-recovery methods provides flexibility for regulators and industry, to ensure that cost recovery is tailored to the nature of the activity, project, or service provided.

The four cost-recovery methods are

For any given project or activity, one cost-recovery method would be applied, and where applicable, direct billing can also occur (i.e. the Other Charges method and either the RAP method or the Formula Fees method can be applied simultaneously to the same project or activity, as long as the Other Charges collected for specific services are not already captured under the RAP charge or formula fees).

Regulatory Activity Plan method

The Regulatory Activity Plan (RAP) method will be used to recover regulator costs associated with larger, more complex projects, such as drilling, development, production, and abandonment activities, as well as multi-year or complex seismic surveying programs. As these types of projects are considered complex and can vary significantly in terms of the degree of resources required by the regulator, the level of costs to be recovered is determined on a project-specific basis.

The RAP charge (the amount owed by the applicant or operator) is a calculation of the total costs based on the estimated time required by the regulator for each project, over the course of one fiscal year. The proposed regulations require that a RAP be prepared and that the total costs for the regulator to implement the RAP be calculated.

The RAP model is designed to be performance-based and to ensure that regulators use a consistent approach to recover costs in the two Accord areas. This ensures that the total costs borne by the regulator with respect to a given project are recovered and that these costs are based on a regulatory plan established each year.

This approach also provides flexibility to the regulators by ensuring that the total costs of undertaking the activities set out in the RAP are calculated in a way that reflects their respective methods and accounting procedures used to determine the various subsets of costs (e.g. the amount of time spent for any given activity and the associated indirect costs, such as legal services, human resources, operations and maintenance).

For a new project (also known as a “work” or an “activity” under the Accord Acts) captured by the RAP model, the regulator will, upon receipt of a project description or letter of intent from an applicant, prepare a RAP, estimating the charge related to that project for that year.

The RAP will also identify the total estimated number of units of time (days or hours) of direct regulatory activities required for a project. “Direct regulatory activities” include assessing applications, issuing licences, granting approvals and authorizations, verifying and enforcing compliance, and providing information, products and services that are required for the regulator to fulfill its regulatory responsibilities. The RAP will then be shared with the applicant, and the amount owing will be billed on a quarterly basis.

For existing projects already under a RAP, the regulator will prepare a RAP each new fiscal year following the approval of its budget. The federal and provincial budget approval process for the regulators will not change as a result of the proposed regulations.

If changes occur to a project under a RAP, the regulator may recalculate, at its discretion, the estimated charge for that project and adjust the amount to be invoiced accordingly. For example, if a proponent decided to increase the number of wells that would be drilled within the scope of an existing exploratory drilling project after the RAP for that project had been established, the regulator would need to increase the total oversight workload for that project. This ensures that regulators can adjust estimated charges following unexpected changes to proposed projects.

If, at the end of the fiscal year, the actual regulator costs associated with the project are different from the estimated costs invoiced, the regulator will adjust the charge and either issue a supplementary invoice or provide a credit to the operator on a subsequent invoice.

Formula Fees method

The Formula Fees method will be used to recover regulator costs for oversight of smaller oil and gas-related projects: geological, geophysical, and geotechnical activities, such as petrography, seismic surveys, or seafloor gravity surveys, respectively. Such costs will arise from the assessment of applications for project licences, verification of regulatory compliance by operators of existing projects, and any other foreseeable regulatory work that is necessary for these types of projects or activities.

The types of projects or activities for which a formula fee will be used are listed in the proposed regulations, along with the applicable formula for calculating the associated fee. For example, petrography work will be subject to the Formula Fees method calculated without variable units of time, while offshore seismic surveys and seafloor gravity surveys will be subject to the Formula Fees method calculated with variable units of time.

The formulas can include the following elements:

Base units of time (hours or days): This is an estimate of the time spent by the regulator on direct regulatory activities (as described above under the RAP method).

Variable units of time: This is an estimate of the amount of time of regulatory oversight attributed to particular characteristics of a project or activity that will add time for the regulator (in other words, to account for oversight activities that can require variable amounts of time). This time estimate is in addition to the base time and is to be calculated using the same unit of hours or days.

For example, for an average offshore seismic project (i.e. one that would not be complex enough to warrant the use of the RAP method) that will use one vessel, for which the base units of time are 30 days and the variable units of time are 10 days per vessel, the total amount of time spent by the regulator on direct regulatory activities for that project would be 40 days. If the project required two vessels, the base units of time would be 30 days and the variable units of time would be 20 days, for a total of 50 days of direct regulatory activities.

Effective rate: This is the rate (the dollar amount) to be charged for every hour or day of direct regulatory activities. It is derived from the total of the regulator’s costs for the year (for both “direct regulatory activities” and “indirect regulatory activities”), minus costs for regulatory activities to which cost recovery does not apply, divided by the units of time (in hours or days) spent on the direct regulatory activities. “Indirect regulatory activities” are those activities that support direct regulatory activities, for example activities related to training, administration, human resources, information technology, legal services, operations and maintenance.

“Heavy burden” coefficient: This is a multiplier that can be applied to formula fees in instances of non-compliance, negligence or lack of effort by an applicant or operator in responding to the regulator’s requirements during an application process or activities (this is not meant to be an enforcement tool; the objective is to recover costs imposed on the regulator that were unforeseen). This is a retroactive charge based on the extra amount of effort (measured in units of time) required by the regulator. The regulator would multiply the fee already charged to the proponent by a coefficient representing the additional number of units of time of regulatory oversight required as a result of the non-compliance, negligence or lack of effort. For example, if the regulatory oversight took double the amount of time normally required because of non-compliance, the coefficient would be 2, and the fee would be doubled.

At minimum, the formula will include the base units of time and the effective rate: [X hours or days of work (base units of time)] multiplied by [Y cost per hour or day of work (effective rate)] = Basic formula fee.

The calculation of variable units of time is applicable only to the list of activities prescribed in the proposed Regulations, and the heavy burden coefficient variable is applied at the discretion of the regulator.

Following their budget processes, each of the Offshore Boards will publish (online) the estimated values for each of the elements in the formulae (except for the heavy burden coefficient, which is not predictable) and the resulting activity fees for each project or activity listed in the regulations.

Payment of formula fees

Fees are to be paid by an applicant at the same time as the application is submitted to the regulators for review.

Other charges (direct billing of 100% of certain costs)

The regulator may require that companies reimburse 100% of the regulator’s costs for certain activities undertaken or services provided that are not captured under the RAP or Formula Fees methods. These costs will be directly billed to the relevant person or company and pertain to all activities related to the following:

Such fees will be billed as costs are incurred.

Geodata centre set fees

These fees represent the costs incurred by the Offshore Boards when providing access to physical geoscience data (e.g. core samples). The fees will be determined and published by the Offshore Boards. The fees will cover costs associated with the time required by the regulator to prepare samples for viewing, or to complete other related requests. Such fees will be billed immediately to persons requesting access to data. The fees do not capture access to digital geoscience data, which will remain available at no additional cost.

Requests for access to physical samples for academic purposes or by government employees are exempt from these fees.

Remittance of funds

The funds that are cost-recovered by the Offshore Boards are remitted to the federal and provincial governments on a quarterly basis, subject to operational requirements.

“One-for-One” Rule

The “One-for-One” Rule does not apply to the proposed regulations, as there is no change in administrative costs for business.

Small business lens

The small business lens does not apply to the proposed regulations, as they do not impact small businesses.

Consultation

A Steering Committee and a Technical Working Group were convened by the Department of Natural Resources (NRCan) in January 2014, with membership from the Department of Indian Affairs and Northern Development (DIAND), the two provincial governments, and the three regulatory boards. The Steering Committee, which provides direction and oversight to the Technical Working Group and approves the work drafted by the Technical Working Group, met three times in 2014 (every four months), and has met every month so far in 2015. The Technical Working Group meets as needed: multiple times between each of the Steering Committee meetings in 2014, and at least once between each of the Steering Committee meetings in 2015.

This committee and this group have collaboratively informed the development of the proposed Cost Recovery Regulations.

Further consultations are planned with industry stakeholders and Aboriginal groups on the proposed Cost Recovery Regulations in April and May of 2015.

Rationale

The proposed regulations are required to formalize and re-structure the existing voluntary cost-recovery regime for offshore oil and gas activities, which brings added transparency, predictability and enforceability to the regime.

Cost recovery ensures there is a shared responsibility in the management of the offshore oil and gas sector, in that those who derive the greatest benefit from the activities — the operators — will pay a fair share of the costs associated with the regulatory activities.

The costs recovered from industry by the regulators will constitute direct savings for the Government of Canada and the provincial governments of Nova Scotia and Newfoundland and Labrador of an estimated total of $29.4 million over 10 years. The proposed regulations will enable regulators to recover up to 100% of their costs. This will result in estimated incremental cost savings for the federal and provincial governments of up to 25% of the CNLOPB’s costs, and up to 50% of the CNSOPB’s costs.

Given that the incremental costs to industry also constitute direct savings for the federal and provincial governments, the proposed regulations are considered cost-neutral.

Cost recovery is part of the overall costs associated with doing business in the oil and gas sector around the world; companies involved in Canada’s offshore sector are aware and generally accepting of this aspect of their sector, as demonstrated by the voluntary cost-recovery arrangements currently in place in the Atlantic Accord areas.

Contact

Daniel Morin
Policy Advisor
Offshore Petroleum Management Division
Natural Resources Canada
580 Booth Street
Ottawa, Ontario
K1A 0E4
Telephone: 613-992-4217
Email: Daniel.Morin@NRCan-RNCan.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to section 29.1 (see footnote a) of the Canada–Newfoundland and Labrador Atlantic Accord Implementation Act (see footnote b), proposes to make the annexed Canada–Newfoundland and Labrador Offshore Petroleum Cost Recovery Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Daniel Morin, Policy Analyst, Offshore Petroleum Management Division, Natural Resources Canada, 580 Booth St., Ottawa, Ontario K1A 0E4 (tel.: 613-992-4217; fax: 613-943-2274; email: daniel.morin@nrcan-rncan.gc.ca).

Ottawa, June 18, 2015

JURICA ČAPKUN
Assistant Clerk of the Privy Council

CANADA–NEWFOUNDLAND AND LABRADOR OFFSHORE PETROLEUM COST RECOVERY REGULATIONS

INTERPRETATION

Definitions

1. The following definitions apply in these Regulations.

“Act”
« Loi »

“Act” means the Canada–Newfoundland and Labrador Atlantic Accord Implementation Act.

“actual full cost”
« coût entier réel »

“actual full cost” means the full cost confirmed by the Board’s audited financial statements.

“direct regulatory activities”
« activités de réglementation directes »

“direct regulatory activities” means the activities, such as assessing applications, issuing licences, granting approvals and authorizations, verifying and enforcing compliance with the Act and providing information, products and services, that are required for the Board to fulfil its regulatory responsibilities.

“indirect regulatory costs”
« coûts de réglementation indirects »

“indirect regulatory costs” means the costs of activities that support direct regulatory activities of the Board such as office accommodation, supplies and equipment, professional services, communications, travel, management, training, administration, human resources services, finance, information technology services,hardware and software, the preparation of documents (including policies, standards, guidelines, procedures and notices) and the provision of technical expertise (including the updating of regulations) to the Federal Minister or the Provincial Minister at that Minister’s request.

“project”
« projet »

“project” means the work or the activity referred to in paragraph 138(1)(b) of the Act.

PART 1

REGULATORY ACTIVITY PLAN CHARGES

ESTIMATED ANNUAL CHARGE

Regulatory activity plan

2. For each new project relating to development, production, abandonment, exploratory drilling or multi-year or complex seismic programs in respect of petroleum operations, on receipt of a project description or letter of intent, the Board must

Existing project

3. For each existing project that was previously under a regulatory activity plan, after confirmation of the Board’s budget in any given fiscal year, the Board must

Recalculation

4. If an applicant or operator proposes changes to its project that are not reflected in the regulatory activity plan, the Board may recalculate the estimated annual charge for that project and adjust the payable amount accordingly.

QUARTERLY INVOICING

Invoice

5. (1) The Board must, on a quarterly basis, prepare and send an invoice for an amount equal to 25% of the estimated annual charge payable to each applicant or operator who has been notified under paragraph 2(c) or 3(c).

Payment within 30 days

(2) Within 30 days after the date of the invoice, the applicant or the operator must pay the amount invoiced.

ANNUAL CHARGE ADJUSTMENT

Annual adjustment

6. (1) Each year, following the end of the fiscal year, the Board must, for each project under a regulatory activity plan,

Effect of adjustment

(2) If the actual full cost calculated under paragraph (1)(a) is

PART 2

FORMULA FEES

INTERPRETATION

Interpretation

7. In this Part,

FORMULAS

Basic formula

8. (1) The fees for the activities set out in the table to this subsection are determined by the formula

A × D

where

A is the base units of time; and

D is the effective rate.

TABLE

Item Activity
1. Application for a declaration of significant discovery
2. Application for a declaration of commercial discovery
3. Application for a significant discovery licence
4. Application for a licence for subsurface storage
5. Application for a production licence
6. Application for an amendment to a licence or a consolidation of licences
7. Registration of a transfer
8. Registration of a security notice
9. Registration of an interest
10. Recording of a notice
11. Registration of an instrument other than a transfer or security notice
12. Application for an extension, by order, of the term of a production licence
13. Application for allowable expenditures

Formula without variable units of time

(2) The fees for the activities set out in column 2 of the table to this subsection are determined by the formula

A × C × D

where

A is the base units of time;

C is the heavy burden coefficient; and

D is the effective rate.

TABLE

Item Column 1

Category of Activity
Column 2

Activity
1. Geological operations authorization (with field work) Geochemical study
2. Geophysical (without field work) Geophysical study
3. Geological (without field work) Purchase of geological studies
4. Geological (without field work) Isotope age dating
5. Geological (without field work) In-house geological studies
6. Geological (without field work) Petrography
7. Geological (without field work) Paleontological or palynological study
8. Geological (without field work) Other geophysical activity
9. Annual compliance fee All geophysical projects

Formula with variable units of time

(3) The fees for the activities set out in column 2 of the table to this subsection are determined by the formula

(A + B) × (C × D)

where

A is the base units of time;

B is the variable units of time per primary vessel or aircraft multiplied by the number of primary vessels or aircraft used in a project;

C is the heavy burden coefficient; and

D is the effective rate.

TABLE

Item Column 1

Category of Activity
Column 2

Activity
Column 3

Variable
1. Geophysical operations authorization (with field work) 2-D seismic reflection survey (primary activity) Primary vessel
2. Geophysical operations authorization (with field work) 3-D seismic reflection survey (primary activity) Primary vessel
3. Geophysical operations authorization (with field work) 4-D seismic reflection survey (primary activity) Primary vessel
4. Geophysical operations authorization (with field work) Seafloor gravity survey (primary activity) Primary vessel
5. Geophysical operations authorization (with field work) Seismic refraction survey (primary activity) Primary vessel
6. Geophysical operations authorization (with field work) Controlled source electromagnetic survey Primary vessel
7. Geophysical operations authorization (with field work) Other geophysical program Primary vessel
8. Geophysical operations authorization (with field work) Aeromagnetic survey (primary activity) Aircraft
9. Geotechnical authorization (seabed survey) Piston core Primary vessel
10. Geotechnical authorization (seabed survey) Shallow seismic, seabed survey Primary vessel
PUBLICATION

Publication by Board

9. Before the beginning of each fiscal year, the Board must publish, by electronic or other means that is likely to reach applicants and operators, the base units of time, the variable units of time and the effective rate for each activity set out in the tables to section 8.

PAYMENT OF FEES

Fees calculated under section 8

10. (1) On the submission of an application in respect of an activity set out in either table to section 8, the applicant must pay to the Board the fee determined in accordance with that section.

Heavy burden coefficient

(2) If the Board uses a heavy burden coefficient to calculate an additional charge in respect of an activity, the Board must invoice the applicant or the operator and the applicant or operator must pay that amount to the Board within 30 days after the date of the invoice.

PART 3

GEODATA CENTRE

Definition of “daily access rate”

11. In this Part, the daily access rate is the rate established and published by the Board by electronic or other means that is likely to reach applicants and operators.

Sample access fee

12. Any person, except a person requesting access for an academic purpose, the Federal Minister and the Provincial Minister, who accesses a physical sample at the geodata centre must pay the daily access rate for each day the sample is accessed.

PART 4

OTHER CHARGES

Reimbursement of Board costs

13. The Board may require reimbursement for 100% of its costs for activities that are not set out in Parts 1 to 3 and that are related to the following:

PART 5

GENERAL

INTEREST

Compound interest rate of 1.5%

14. Interest on an amount owing to the Board must be calculated and compounded monthly at the rate of 1.5% and is payable and accrues during the period beginning on the due date and ending on the day before the day on which the payment is received by the Board.

REMITTANCE OF FEES AND CHARGES

Remittance

15. For the purposes of section 29.3 of the Act, the fees and charges obtained in accordance with these Regulations must be remitted on a quarterly basis subject to the Board’s operational requirements.

PART 6

TRANSITIONAL, REPEAL AND COMING INTO FORCE

TRANSITIONAL PROVISION

Non-application of section 3

16. (1) Section 3 does not apply to a project that relates to development, production, abandonment, exploratory drilling or multi-year or complex seismic programs if the applicant or operator has paid 100% of the Board’s estimated costs for the project for the fiscal year in which these Regulations come into force.

Presumption

(2) All existing projects relating to development, production, abandonment, exploratory drilling or multiyear or complex seismic programs that are under the Board’s regulatory authority before these Regulations come into force and that do not have a regulatory activity plan are considered to have been previously under a regulatory activity plan for the purposes of section 3.

REPEAL

17. The Newfoundland Offshore Area Registration Regulations (see footnote 2) are repealed.

COMING INTO FORCE

S.C. 2015, c. 4

18. These Regulations come into force on the day on which section 39 of the Energy Safety and Security Act comes into force but if they are registered after that day, they come into force on the day on which they are registered.

[28-1-o]