On October 19th the centre left Liberal Party, led by Justin Trudeau, was elected to govern Canada winning 184 of the 338 seats in the House of Commons. The Liberals defeated the Conservative Party that has governed for the past ten years.
This is the second political change to occur in the last five months that directly impacts Canada’s oil and gas industry. In May Alberta’s left leaning New Democratic Party was elected ending 44 years of Progressive Conservative government in that province.
The election of the Liberals comes at a time when Canada’s oil and gas industry is struggling with drastically reduced revenues following the collapse of oil and natural gas prices over the past year and from the negative effects of the measures that the NDP has passed since being elected (increased income taxes and charges for greenhouse gas emissions) and may implement following the royalty and climate change reviews currently underway.
The oil and gas industry is generally apprehensive about Liberal governments. Memories in the patch linger of the highly unpopular National Energy Program that the Liberals under Justin Trudeau’s father, Pierre Trudeau, enacted 35 years ago. The NEP imposed higher taxes and other restrictions on producers and led to years of federal-provincial hostilities and Western alienation.
While the energy policies of Justin Trudeau’s Liberals do not resemble those of his father there are concerns over what this change of government could mean for the industry.
The Liberals’ campaigned on a slogan of bringing “Real Change” to the way that Canada is governed. Some of those changes that could affect the oil and gas industry include the following:
Support for Pipeline Projects
The Conservatives supported all the oil export pipeline projects that were proposed while they were in power. While Mr. Trudeau has said that he understands the importance of the oil and gas industry gaining access to tidewaters, he appears inclined to pick winners and losers. He has openly supported Keystone XL, but opposed Northern Gateway saying that pipeline would not be built if he became Prime Minister. How Mr. Trudeau could overturn the certificate that has already been issued for Northern Gateway may however raise significant legal issues. An end-run by imposing a moratorium on crude oil tanker traffic on British Columbian’s North Coast, including inlets to Northern Gateway’s terminal in Kitimat, which Mr. Trudeau has promised is unlikely to go unchallenged.
As for Kinder Morgan’s proposed TransMountain Expansion and TransCanada’s proposed Energy East project, Mr. Trudeau has not offered unconditional support for those projects. The Liberals may intend to let the regulatory processes for those projects unfold as both are currently before the National Energy Board. But Mr. Trudeau has been openly critical of the environmental assessment processes that have been used in those regulatory reviews after the Conservatives streamlined those processes in an effort to expedite approvals being granted. The Liberals may accordingly seek to delay final consideration of the TransMountain Expansion and Energy East until they have completed their review and reform of the environmental assessment process for these kinds of projects.
Support for LNG Projects
Unlike the various proposed oil export pipeline projects, all of which cross provincial or national boundaries, the various BC LNG projects that have been proposed are all built entirely within one province. Even the largest and most integrated projects involve export terminals built on the BC coast; gas supplied from fields in north-east BC and shipped over pipelines constructed wholly inside the province.
While this has tended to make the province of BC the principal regulator and most important decision-maker on those LNG export projects, the federal government plays a key role in approving any gas exports and in assessing any environmental consequences that touch federal jurisdiction.
Several of the largest proposed BC LNG facilities are, essentially, unaffected by the federal election. Each of the Shell-led LNG Canada and Chevron-led Kitimat LNG projects already hold all the material regulatory approvals they need to make their final investment decisions. Project economics and global LNG market trends, rather than regulatory approvals, will now dictate the timing of the investment decisions for these projects.
The position of Petronas-led Pacific Northwest LNG is more complex and potentially more controversial. The Pacific Northwest project is nearing the end of its federal environmental assessment. There appears to be one remaining, but bitterly contested, issue - the design, construction and operation of the LNG berth and off-loading facilities adjacent to the Lelu Island liquefaction plant. Months of negotiation, the offer of a billion dollar compensation package, and an effort at mediation do not appear to have brought Pacific North-West LNG and the principally affected First Nation any closer to resolution, at least not yet. Given the significance that the Liberal platform attached to the protection of Indigenous peoples as part of the environmental assessment process, it may be that the pressure to re-design some of the more controversial elements of the proposed off-loading facilities or to otherwise reach an acceptable accommodation with the affected First Nation has increased, materially, as a result of the federal election.
The Conservatives repealed the Canadian Environmental Assessment Act and replaced it with the CEAA, 2012 in order to streamline the regulatory process and expedite approvals of major energy development projects, including federally-regulated pipeline projects. This streamlining has been met with growing public distrust in the credibility of the federal environmental assessment process and of the effectiveness of the National Energy Board in those processes. Rather than expediting approvals the streamlining has done little to provide project proponents with increased regulatory certainty and even worse has contributed to increased resistance to major energy projects.
Mr. Trudeau has pledged to restore credibility to environmental assessments. The Liberals have indicated that they will immediately launch a public review of Canada’s environmental assessment process. An overhaul of the CEAA, 2012 is likely imminent following that review including increasing the involvement of First Nations, Inuit and Metis Peoples in these processes. Mr. Trudeau will also conduct a wholesale review of the elimination of the Navigable Waters Protection Act (replaced by a much weaker Navigation Protection Act) and of the substantial narrowing of the scope of Fisheries Act. It is equally clear that Mr. Trudeau is a proponent of the concept of “social licence”.
The Liberal platform states that Mr. Trudeau’s government “will explore, consult, and work collaboratively to move towards a system where federal environmental assessments of projects include an analysis of upstream impacts and the greenhouse gas emission resulting from the projects being assessed.” It is not entirely clear what this means, but it appears that at a minimum, the Liberals will engage in a dialogue about the inclusion of upstream emissions in the assessment of the impacts of proposed projects. This has been a key issue for environmental groups and other stakeholders (including President Obama in his review of Keystone XL) who oppose proposed oil pipelines as a means of preventing the continued development of Alberta’s oil sands. Last year the Federal Court of Appeal confirmed that, under its current mandate, the NEB does not regulate upstream and downstream facilities and activities and is not required to consider their impacts in these approval processes.
Action on Climate Change
The Liberals did not outline a specific emissions reduction target or set out details of their pledge to put a price on carbon in their election platform. The Liberal platform said a new target would not be set until there is a federal-provincial plan. The emissions reduction target that the Liberals eventually adopt is however unlikely to be less than the Conservatives’ target of 30% below 2005 levels by 2030.
The lack of a specific target meshes well with the Liberals’ pledge to end the cycle of arbitrary targets. Mr. Trudeau indicated that he intends to take a more flexible approach to climate change, working with provinces to establish a pan-Canadian framework for combatting climate change. That framework will include establishing national emissions reduction targets. Meetings with the provinces in this regard will take place within 90 days of the upcoming Paris climate conference, which Mr. Trudeau will attend with the Premiers of the provinces. While national emissions reduction targets will be set, Trudeau has committed to leaving the provinces with the flexibility to design their own policies, including carbon pricing policies in addressing climate change in each of their own jurisdictions. That approach will allow provinces that have already instituted, or are in process of instituting, carbon policies (like AB, ON, BC and Quebec) to keep those policies in place.
The Liberals’ pledge to meaningfully address climate change combined with the flexible approach allowing for provinces to design their own policies having regard to the particular challenges faced in differing regions with vastly different emissions profiles could bode well for the oil and gas industry. That approach could allow Alberta to have lower emissions reduction targets than say Ontario or Quebec. It appeared during the campaign that Alberta Premier Notley, who is currently reviewing that province’s climate change policy, was more aligned with Mr. Trudeau’s position on climate change than the federal NDP’s position. While there will certainly be increased costs to oil and gas producers in complying with new emissions policies, these actions in respect of climate change may facilitate the industry’s access to markets as the Conservative’s failure to meaningfully address carbon emissions hindered the marketability of oil sands to the US and other jurisdictions that viewed Canada as laggard in this area.
The Liberals pledged to develop a nation-to-nation relationship in “full partnership” with Canada’s Indigenous peoples and that the government will meet its consultation, accommodation, and consent obligations, in accordance with Canada’s constitutional and international human rights obligations, including Aboriginal and treaty rights and the United Nations Declaration on the Rights of Indigenous Peoples (the UN Declaration). The UN Declaration explicitly incorporates the concept of Free, Prior and Informed Consent (FPIC). The impact of increased participation in approval processes is discussed above. For more see http://www.canadianenergylaw.com/2015/10/articles/regulatory/one-size-does-not-fit-all-changing-approaches-towards-aboriginal-engagement/.
What changes will occur as the Liberals implement their election platform and how those changes will affect Canada’s oil and gas industry remain to be seen.
While the oil and gas industry may have preferred conservative governments federally and in Alberta, the combination of these new Liberal and NDP majorities may bring a different, less confrontational approach to the issues affecting Canada’s oil and gas industry that may be more effective in progressing export projects. Notwithstanding the Conservatives’ support for these projects none of them were completed while the Conservatives were in power and opposition to them has grown.
Both the NDP and the Liberals have acknowledged the importance of the oil and gas industry to the economies of Alberta and Canada. And both have indicated support for many of the export projects that have been proposed.
They also have similar views on what environmental reforms are required and a shared awareness that efforts to expand export opportunities have to be combined with substantive efforts to combat climate change and to address the impacts of those projects on Indigenous peoples.
The challenge for the Liberals will be to implement the energy related parts of their platform in a timely, coordinated manner with Alberta, BC and the other provinces that effectively addresses the environmental agenda and the other issues that they are concerned with, but at the same time does not increase uncertainty or unreasonably delay the approval process for major energy projects, and does not subject the industry to excessive additional costs.
Any of those negative results could deter investment and erode values in the industry, weaken the economy and revive Western alienation.