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Regulations for oil field development and operations in Canada
Canada can be described as the 5th largest producer of energy in the world, and it produces about 6% of all the global energy suppliers. It is important to understand that in Canada, there is the existence of Canada’s federal system of government. Canada can be described as a federation of around ten provinces and three territories.
However, this is in exception to Quebec, which is a common law jurisdiction. The Constitution of Canada divides the legislative authority of the federal Parliament and the provincial legislatures. This paper looks at Regulations for oil field development and operations in Canada.
Key words: Federal Crown, Provincial Crown, Concession-based, Direct-based
The Federal Parliament has powers over matters of interprovincial, international scope and national. The provincial legislatures often have a jurisdiction over matters that are of a local nature. It is critical to note that participants in the oil and industry fields have to be subjected to both federal as well as the provincial regulators because these different levels of government overlap each others in authority when it comes to natural resource development. Canada is blessed with oil and natural gas and in fact currently it has the world’s third largest proven reserves of crude oil.
The ownership of oil and gas in Canada is split between the Federal Crown and the provincial crown. It is important to understand that different interest groups are often administered by the federal crown. In most cases, for example, in the Case of Alberta, which is the largest producing area in Canada, the provincial Crown is the owner of around 81% of the mineral rights. However, it is important to understand that different interest groups in Canada often have varying claims as well as interests when it comes to land and natural resources. In fact, these interests are constitutionally and statutorily protected.
There are several acts in Canada that are in respect to oil and Gas regulations. Firstly, there is the drilling and production regulation which is an amalgamation as well the complete modernization of the Drilling, as well as Production and Conservation Regulations. These acts are administered by three main regulators. They include the National Energy Board, the Canada-Nova Scotia Offshore Petroleum Board and the Canada-Newfoundland and Labrador Offshore Petroleum Board. The regulations are often kept in place in order to ensure that the activities that are related to the drilling and production of oil and gas are being carried out in a safe manner that protects the environment and ensures that the different resources are not wasted in any way.
There are several federal statutes and regulations that often govern oil and gas exploration. The first is the National Energy Board Act. It is this act that establishes the National Energy Board that is supposed to deal with energy-related issues under the authority of the Crown (Federal). This includes the administration of oil and gas
These interests include conservation, production, construction, the operation of pipelines, tariffs on the pipelines and the inter-provincial trade of oil and gas. Further, it is also the National Energy Board that is responsible for the exportation and the importation of oil and gas into Canada. Another Key statute used in the regulation of oil and gas in Canada is the Canadian Environmental Assessment Act.
This Act sets out rules which are intended to ensure that indeed projects are substantially reviewed in order to avoid detrimental environmental effects as well as encourage sustainable growth and development. The third important Federal statute is the Canadian Environmental Protection Act. It is this act that can be said to be the main instrument for the provision of protection of the Canadian environment, as well as human health. It is of the essence to comprehend that this includes the prevention as well as the complete management of risks which are posed by hazardous substances.
The oil and gas regime that exists in Canada can be described as concession based as compared to direct participation. This, therefore, means that the crown does not directly participate in oil and gas projects. In most cases, the owner of the mineral rights, which can be the Crown or at times the owners of freehold estates, often grant a company a lease which gives them the right to explore and drill minerals for a certain term in exchange for a certain amount of rental fees, consideration and royalty interests in the different recovered minerals.
When it comes to permitting rights, there are the freehold leases and the provincial crown leases and licenses. The freehold leases are often set for a certain term, and it often grants the lessee, the right to explore and drill mineral substances. This is often done by the lessee in exchange for rental fees, royalty interests in the minerals that are recovered and a certain amount of consideration. It is important to note that the lease is often automatically extended in an indefinite manner if there is continuous production that comes from the lands; however, if there is no production at all, the lease often expires at the end of the initial primary term.
The provincial Crown leases and licenses share the same concept, however, it is important to note that under the provincial Crown leases and licenses, there is a specific area that is targeted for exploration and there are two types of extensions. There is the indefinite extension of the lease that often comes because of continued production from the fields, and then there is the definite extension where a period is given to the lessee.
In most provinces, it is often five years. It is important to understand that the current regime that exists in Canada can be described as being generic because the same royalty rates and rules apply equally to all the oil sands projects. This, therefore, means that the different projects are often assessed according to their net revenue principle, and this means that a lower royalty will automatically apply to gross revenues, and a high rate obviously applies to net revenue.
This move is done in a bid to encourage both innovation and development and ensure that indeed the Crown does not impose substantial taxes on any operator until the project becomes profitable. There are often two main considerations that are used in order to determine whether a project is taxed at a higher or lower royalty rate. The first is whether the project is profitable and the second is the current price of oil. In many provinces, before a project can be said to be profitable or has reached its payout, a royalty of 1% to 9% is often paid to the gross revenue.
However, after a project has become profitable, a net revenue is often taxed at a net royalty rate of around 25% to around 40%
There is also the existence of income taxes. The first income tax is the corporate income tax rates. The Federal and Provincial crowns impose tax on the taxable income of the corporations. The federal corporate tax rate is around 15%; the provincial corporate tax, on the other hand, can vary between 5 to around 16%. This is entirely dependent on the area where the oil field is located.
The Canada’s competition act contains civil and criminal provisions that are aimed at the prohibition of a variety of anti-competitive conduct.
The Canada’s competition act establishes a pre-transaction notification and transaction review regime. This act is important as it gives broad powers to the Commissioner of Competition to investigate fully whether a certain transaction is likely to prevent or even lessen competition substantially. If a transaction is known to raise these concerns, then the Commissioner may apply to the Competition Tribunal in order to get a remedial order. This competition act is important as it ensures that indeed there is fair competition and that companies do not try and create monopolies with the main aim of manipulating the market.
In regards to foreign ownership limits, the Canadian government encourages foreign investments that contribute to employment opportunities, as well as economic growth in Canada. However, it is critical to note that foreign investments that are known to exceed certain monetary thresholds (the current is C$330 million) must be reviewed under the federal Investment Canada Act. The foreign investments that are reviewed are often approved if they are seen to meet a ‘net benefit to Canada’ test.
In conclusion, the regulations for oil field development and operations in Canada are controlled by both the Federal Crown and the Provincial Crown. Each of the Crown’s have an interest in oil and gas and consequently they come with their rules and regulations. The regulations range from taxation, ownership, development, foreign investment, and control of competition. These regulations ensure that the resources are not wasted and that the benefit from the natural resources trickles down to the people.
Canada. (2008). Government of Canada modernizes Indian Oil and Gas Act. Ottawa, Ont.: Indian and Northern Affairs Canada.
Canada. (1963). Office consolidation of the Canada oil and gas land regulations and oil and gas land orders. Ottawa: Queen's Printer.
Canada Oil and Gas Lands Administration. (1984). Drilling for oil and gas on Canada lands: Guidelines and procedures. Vanier, Qué.: Canada Oil and Gas Lands Administration.
Ron Deyholos, D. C. (2013). Canada. European Lawyers reference series , 1-16.