Overview

A number of recent Letter Decisions[1] of the National Energy Board (Board) note the need for the Canadian natural gas industry to access overseas markets due to an increase in the North American gas resource base. It is necessary that the legislation and regulations governing the export of natural gas reflect the realities of selling liquefied natural gas (LNG) to overseas markets.  While some amendments to the statutory framework have been made, important changes are necessary in order to create a commercially sensible regulatory regime.

Background and Regulatory Context

As a result of the July 2012 amendments to the National Energy Board Act (NEB Act), the Board has now proposed changes to the regulations that govern the licencing of the export of LNG: the National Energy Board Part VI (Oil and Gas) Regulations (Part VI Regulations) and the National Energy Board Export and Import Reporting Regulations (Reporting Regulations).  While the proposed changes to the regulations represent a move toward increased efficiency, the current regulations and Board interpretation have the potential to create problems for the commercial reality of LNG exportation. 

Whether Canada knows it or not, players from around the world are watching these sorts of issues with great interest; it is potential regulatory gaps like this that could influence whether investments in Canada’s nascent LNG industry are made or not.

Regulatory Problem

The Reporting Regulations require that the licence holder report commercially sensitive export information including price, location and quantity on a monthly basis. However, in a Letter Decision by the Board on February 20, 2014 granting Jordan Cove LNG L.P. a licence to export LNG, the Board noted that in its view section 116 of the NEB Act “does not require the holder of the licence to also be the owner of the gas proposed for export”.[2] On one hand this interpretation implicitly allows natural gas export licence holders to act as agents for owners of the gas; and on the other hand, the Board requires that the licence holder be the only party to fulfill the reporting requirements to the Board.

In recent Letter Decisions,[3] the Board has refused to grant reporting exemptions; meaning that the reporting requirement of section 4 of the Reporting Regulations must be fulfilled by the licence holder, and only the licence holder. The Board made clear in the Oregon Letter Decision that, “in any instance where [Oregon] is acting as an agent, that it is responsible as the licence holder, for reporting the information prescribed by the Reporting Regulations”.[4] Where the licence holder is acting as an agent for a number of parties who own gas it is likely that this method of reporting will lead to the agent having access to commercially sensitive information, such as the price and quantity of gas exported.  Triton LNG LP raised concerns related to these reporting requirements in their licence application. It was noted by the Board in the Triton Letter Decision that Triton had sought relief from the reporting requirements of section 4 of the Reporting Regulations due to concerns that a “competitive disadvantage” could arise as a result of requiring the applicant to “file detailed information, including the names of export customers and the price of the LNG on a monthly basis”.[5]

The good news that remains in all of this is that despite the recent refusals to grant reporting exemptions, the Board has not yet finalized proposed changes to the applicable regulations. Although the Board denied Triton’s request to limit reporting to quarterly as opposed to monthly reporting, it did note in the Triton Letter Decision, that it “is currently in the process of reviewing and updating the Reporting Regulations”.[6]  Hopefully the Board will choose to implement a commercially reasonable update to these regulations.

Recommendations for Regulatory Change

The Board’s refusal to allow third parties to report directly and in respect of a specific licence appears to be mired in administration ease rather than understanding the real and substantive concern industry has posed of having potentially confidential LNG export information passed off and reported through that third party’s agent. The inability of third parties reporting to the Board under a specified export licence could very well mean that parties who otherwise would have not needed their own separate licence will now have to apply and become a licence holder themselves.

A commercially minded approach to resolving the issues created by the current reporting requirements could involve the Board amending the regulations and allowing for the assignment of export rights under a licence.  The Board should consider imposing terms on the LNG export licence that would allow the licence holder to assign rights to export and require that any such assignments be brought to the attention of the Board.  Any assignments under the licence would also be subject to any applicable laws, in particular the reporting requirements of section 4 of the Reporting Regulations.  Alternatively, the Board could change its policy such that it is first informed of which parties will be exporting under an issued licence and allowing those parties the opportunity to report directly to the Board.  Under either proposed model of export rights assignment or informing the Board as to which parties will be exporting under a licence, parties seeking to export could have commercial assurance that they are not passing information to third parties that may be competitors.

Although these solutions may not be optimal from an administrative perspective, they do address the more substantive and underlying issue of ensuring market sensitive and competitive information is not disclosed inadvertently or at all.  Whether Canada knows it or not, players from around the world are watching these sorts of issues with great interest; it is potential regulatory gaps like this that could influence whether investments in Canada’s nascent LNG industry are made or not.