Offshore drilling platforms are not visible on the horizon of the Gulf of St. Lawrence. However, much has been written on the Québec offshore oil and gas industry, and much is still expected. We will present a brief review of the sporadic offshore oil and gas exploration over the past decades, up to the recent accord between the Québec and federal governments on shared management of the hydrocarbon development in the Gulf of St. Lawrence, followed by an overview of Québec hydrocarbon legislation. This will provide an illustration of what can be expected in the coming years.
1. A Brief History of Oil and Gas Exploration in the Gulf and St. Lawrence Estuary
The first oil drilling to take place in Québec dates back to 1860 in Gaspésie, but real development started in the 1960s. This was made possible by the new technology of reflection seismology, which facilitated exploration. In 1963, Hydro-Québec received the mandate and licences to explore the Gulf and St. Lawrence Estuary. Further to this, the first drilling in the Gulf occurred in 1970 at Brion Island, north of the Magdalen Islands.
In 1969, SOQUIP (Société québécoise d'initiatives pétrolières), a provincially owned company, was created to evaluate Québec's hydrocarbon potential. The licences in the Gulf and St. Lawrence Estuary were then transferred to SOQUIP, but in 1997, after creation of the Oil and Gas division within Hydro-Québec, these licences were transferred to Hydro-Québec. The offshore exploration conducted by SOQUIP did not produce conclusive results. In fact, in its 1984 report, SOQUIP estimated that there was only a low hydrocarbon potential in Québec.
In 1995, the discovery of oil in Port-au-Port, on the west coast of Newfoundland, boosted oil exploration in the region. In 1996 and 1997, licences to explore 200,768 hectares in the Gulf of St. Lawrence were granted by the Québec Minister of Natural Resources and Wildlife. The company Corridor Resources, which acquired the licences to the Old Harry sector, later confirmed the region's potential. Despite Corridor Resources' request, the federal government did not recognize the validity of the licences granted by the Québec government within the Gulf of St. Lawrence.
(a) The Disputes over the Gulf of St. Lawrence
In 1964, the Maritimes and the provinces of Newfoundland and Labrador and Québec established their frontiers within the Gulf of St. Lawrence and agreed to have mutually exclusive rights to deliver licences to explore for hydrocarbons within their respective portions of the Gulf. However, the federal government never recognized this Joint Statement.
The St. Lawrence Estuary, along with the western part of the Gulf of St. Lawrence, is considered to be part of the Québec territory by the federal government, according to the Royal Proclamation of October 7, 1763. On the other hand, the federal government also considers the part of the Gulf of St. Lawrence that is east of the western tip of the Anticosti Island to be under its jurisdiction.
The Supreme Court indirectly confirmed the federal position on the matter. In 1967, in Re: Offshore Mineral Rights, the province of British Columbia argued that the territorial sea was part of its territory. The Court determined that the boundaries of British Columbia ended at the low-water mark, and therefore that the territorial sea and the continental shelf were under federal jurisdiction. Since British Columbia had never been an independent state, it never acquired rights offshore. The federal government owned the territorial sea and enjoyed exclusive rights over the continental shelf based on the public property power (section 91(1A) Constitution Act) or the residual power (section 91's openings words: "all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces").
An agreement with the federal government was then necessary in order for the provinces to exploit the hydrocarbons in the Gulf of St. Lawrence. Following the discovery of the Sable Island natural gas reserve (Venture) a first agreement between Nova Scotia and the federal government was entered into 1982. In 1985, after the discovery of the Hibernia oil reserve, the Atlantic agreement with Newfoundland was also signed.
In 2001, arbitration between Nova Scotia and Newfoundland established the frontier between the two provinces. The arbitration process was provided for in the agreements. The arbitrators underlined the non-binding nature of the 1964 Joint Statement. The 1964 Joint Statement was not considered a definitive agreement resolving their offshore boundary, particularly the boundary between Nova Scotia and Newfoundland.
In 1997, in order to reach its own agreement with the federal government, the Québec government amended its legislation. The Québec government owns the subsoil and therefore manages access to its resources. In Québec, access to the hydrocarbon resource is based on the free mining principle: everyone has access to the resource, the first applicant is granted the exploration rights, and in the case of a discovery, the applicant is guaranteed to obtain the resource production rights. The licence is delivered on a first-come, first-served basis. However, for the federal jurisdiction, the access to the resource is based on a call for bids system. Therefore, on December 2, 1997, the Minister of Natural Resources and Wildlife presented Bill 182, Act to amend the Mining Act and the Act respecting the lands in the public domain, where a call for tenders system was introduced in order to harmonize marine environment legislation with federal legislation.
In order to prevent interested companies from acquiring the entire marine territories before the coming into force of the new call for tenders system, a moratorium was introduced upon the introduction of the bill on December 2, 1997. The moratorium on the delivery of oil and gas exploration licences in marine environments is still maintained today.
(c) The Bureau d'audience publique sur l'environnement (BAPE)
In 2002, the Oil and Gas division of Hydro-Québec presented the Plan d'exploration pétrole et gaz naturel au Québec 2002-2010 (Oil and natural gas exploration plan for Québec 2002-2010). It stressed the necessity of gathering more data through geophysical surveying to assess the oil and gas potential of the St. Lawrence.
This need to gather additional data was based on the emergence of new evidence since SOQUIP's work in the 70s and 80s. More and more signs of gas and oil potential had arisen from exploration activities. Recent discoveries in the shale formation in the eastern United States intensified the exploration activities in the St. Lawrence Lowlands and the good news from Canada's East Coast (Sable Island, Hibernia, Terra Nova) fostered exploration of the Gulf and St. Lawrence Estuary. Moreover, the recent improvement of drilling technology enabled deeper exploration and extraction. However, knowledge of the rock formation in Québec was very limited and explains the poor results achieved at that point.
For the marine exploration, Hydro-Québec initially planned a $40 million geophysical surveying program that was supposed to run from the fall of 2002 until early 2006. This program aimed to identify geological structures and potential drill targets. Drilling was to begin in 2005, or as soon as major structures were located. Within the Gulf and St. Lawrence Estuary alone, Hydro-Québec planned to invest a total of $300 million between 2002 and 2010.
In a context of the moratorium being lifted, this information would have a good value for companies wishing to participate in a possible bid. Hydro-Québec primarily intended to play a catalytic role by using its investment to attract major oil companies, with important contributions.
After the Plan d'exploration pétrole et gaz naturel au Québec 2002-2010 was released to the public and Geophysical Service Incorporated received the mandate to proceed with the geophysical surveying, environmental groups, scientists, native communities, and members of the fisheries and tourism industry raised concerns about the impact of the seismic surveys and the production of hydrocarbons in the Gulf and St. Lawrence Estuary.
In December 2003, in response to these concerns, an expert committee was formed by the Minister of Natural Resources and the Minister of Environment in Québec. Its mandate, conducted between December 15, 2003 and February 15, 2004, was to review the issue of seismic surveys. In addition, the Minister of Environment announced a public hearing by the Bureau d'audiences publiques sur l'environnement (BAPE) (Public Hearings on the Environment Board). The expert committee's report was released in March 2004 and the BAPE report followed in August 2004.
The expert committee suggested two changes, which were elaborated in the BAPE report, to the legal framework pertaining to seismic surveys done within Québec's marine boundaries. The first change was the implementation of an environmental protocol to be followed during seismic surveying under the Regulation Respecting Petroleum, Natural Gas and Underground Reservoirs. This protocol was to be harmonized with the other regulations applicable in the Gulf of St. Lawrence. The second change was the subjugation of the seismic surveys to either an environmental authorization under section 22 of the Environmental Quality Act or to an environmental impact assessment and review procedure under section 31.1 of the same Act.
In general, the BAPE report underlined the poor level of knowledge and the high level of concern about the seismic surveys, and suggested a precautionary approach. The BAPE commission stressed the need for research on the Gulf and St. Lawrence Estuary in order to circumscribe protected areas (migration corridors, reproduction and feeding areas).
In February 2004, Geophysical Service Incorporated withdrew from its mandate and no geophysical surveys were completed in the Gulf and St. Lawrence Estuary.
(d) Energy Strategy Plan 2006-2015
Following a consultation process that had started in November 2004, in 2006 the Québec Minister of Natural Resources and Wildlife presented its Energy Strategy Plan for the next ten years. Among all of the potential hydrocarbon sources in Québec, the hydrocarbon potential of the Gulf and St. Lawrence Estuary was still considered by the government to be the most promising in Québec in 2006.
The Energy Strategy pinpointed three problems that had to be resolved in order to move forward with development of this potential: i) the need to secure significant investment for the prospection of offshore fields, mainly due to the high cost of offshore drilling; ii) the environmental concerns on the possible impacts of seismic surveys; and iii) the unsettled territorial disagreement between Québec and the federal governments concerning exploration and drilling in the Gulf of St. Lawrence. The two last points must be resolved in order to attract major investors.
Regarding the environment, the Energy Strategy Plan presented three government initiatives, further to the recommendations of the BAPE report. The first was the development of a guide of good practice for offshore seismic surveys in collaboration with British Columbia, Nova Scotia, Newfoundland and Labrador and the federal government. This will set standards for safety perimeters between seismic survey boats and marine mammal populations, as well as govern the period of the year during which surveys are permitted. Its provisions will be incorporated into the Regulation Respecting Petroleum, Natural Gas and Underground Reservoirs. The second was the harmonisation of seismic survey work and commercial fishing and observation tourism activities. All seismic surveys will have to include a scientific component allowing the acquisition of new data on the features of the marine environment. The third was the harmonization of the legal framework for environmental assessments with federal and other provincial provisions. Initially, the Energy Strategy Plan requested that Québec carry out a strategic environmental assessment of the Gulf and St. Lawrence Estuary. Then, all seismic surveys would be subject to a certificate of authorization under section 22 of the Environment Quality Act, which would incorporate the restrictions and concerns identified by the strategic assessment. Finally, the Environment Quality Act would also be amended to bring the environmental assessment procedure in line with the procedures in force in Newfoundland and Nova Scotia's offshore petroleum boards.
As for an agreement with the federal government for resource ownership in the Gulf of St. Lawrence, the Québec government was hoping to reach its conclusion in 2006.
Hydro-Québec has been asked to evaluate the oil and gas potential of the Gulf and St. Lawrence Estuary, this time in partnership with the private sector. The Government estimated that the partnership approach will send a clear and positive signal to the industry concerning the Government's promotion of the eventual oil and gas production within its territory. It will allow the continuation of the work that has already begun in Gaspésie, Anticosti Island and the Old Harry prospect in the Gulf of St. Lawrence, as well as the development of the geoscientific data held by Hydro-Québec.
However, as stated in its Strategic Plan 2006-2010, Hydro-Québec shifted its focus on renewable energy. The Oil and Gas division of Hydro-Québec was finally eliminated in 2007, and licences were transferred to the private sector.
(e) Strategic Environmental Assessment – Part I
In June 2009, the first of two strategic environment assessments (SEA) planned by the Energy Strategy Plan 2006-2015 commenced. The SAE covers the north-western part of the Gulf of St. Lawrence and the Estuary, from the Saguenay-St. Lawrence Marine Park through the western tip of Anticosti Island, covering the section of the Gulf of St. Lawrence and Estuary within the Québec boundaries.
The objective of the SEA is "to advance our understanding of the biophysical, social, and economic components that characterize this basin with a view to drafting recommendations concerning the conditions for oil and gas exploration and development." The Native communities living within the studied territory have to be specifically consulted, aside from other local and regional consultations.
In July 2010, a preliminary report was released for consultation purposes. The issues raised by the report can be divided in to two groups: the biologically and human sensitive areas, and the socio-economic uses of the territory (commercial fisheries, tourism, marine transport, ancestral rights and claims and Native uses of the territory). The report analyzed the environmental and socio-economic impacts of the exploration (geophysical surveys and exploratory drillings) and the production of the hydrocarbons (installation of production units, production itself and restoration of the premises to their former state). Also, in addition to emphasising the fact that the ecological knowledge for some species was insufficient, the report presented preliminary observations of the constraints on exploration for and production of hydrocarbons in the north-western Gulf and St. Lawrence Estuary. These preliminary observations were drawn from the issues raised above, and from the environmental and socio-economic impacts. Finally, the report set forth a list of global mitigation measures.
(f) An Act to Limit Oil and Gas Activities
On September 27, 2010, the Minister of Natural Resources and Wildlife announced that, further to the results of the SEA preliminary report, the Québec government would prohibit any hydrocarbon exploration and production in the St. Lawrence River upstream of the western tip of Anticosti Island. The Minister stressed the complexity and fragility of the river's ecosystem and did not wish to develop the hydrocarbon sector at the expense of other commercial sectors.
The Act to Limit Oil and Gas Activities was enacted on June 10, 2011 and came into force on June 13, 2011. Therefore, for the part of the St. Lawrence River west of the western tip of Anticosti Island (west of longitude 64°31'27"), and for the islands situated in that part of the river, no mining right provided under the Mining Act may be delivered and all mining rights already issued are now revoked. No compensation is offered by the government.
(g) Strategic Environmental Assessment – Part II
The second SEA started in March 2010 and covered three basins: the Baie des Chaleurs basin, the Anticosti basin, and the Magdalen basin – i.e. the remaining part of the Gulf of St. Lawrence within the Québec boundaries of the 1964 Joint Statement. The preliminary report for consultation purposes should come out during the summer of 2011; the consultation will be held during the fall of 2011, and the final report will be released in the fall of 2012.
2. Accord between the Government of Canada and the Government of Québec for the Shared Management of Petroleum Resources in the Gulf of St. Lawrence
A motion was passed by the Québec National Assembly on March 18, 2010, asking the federal government to conclude an agreement with the Québec government regarding oil and gas exploration and production in the Québec portion of the Gulf of St. Lawrence as soon as possible. The federal and Québec governments finally reached an agreement on March 24, 2011. The Accord between the Government of Canada and the Government of Québec for the shared management of petroleum resources in the Gulf of St. Lawrence was signed by both Ministers of Natural Resources.
(a) Content of the Accord
The Accord, without prejudice to the constitutional status of the Gulf of St. Lawrence or the division of legislative powers by the Constitution, imposed shared management of the hydrocarbon resources through mirror legislation by the federal and Québec governments and through an independent joint Board. Among the objectives, the Accord aims "to promote within this shared management regime, as much as possible, an approach which is consistent with petroleum management regimes outside the Accord area."
The limits of the Gulf of St. Lawrence subject to the Accord as defined in Annex 1, confirms the Québec boundaries of the 1964 Joint Statement. The Accord provides for an arbitration process in the case of an unresolved dispute with another province over the limits of the Accord area.
The Accord recognizes Québec as the main beneficiary of the hydrocarbon development. Québec will receive all the revenue from royalties, licence fees and other revenue from natural gas and oil development. Therefore, Québec has exclusive power to establish a royalty regime. However, the revenue from income and sales taxes are excluded from the Accord and should therefore benefit both governments depending on a future agreement to be concluded. The Accord confirms the validity of the licences that have been delivered by the Québec government, such as the licences to the Old Harry sector still held by Corridor Resources.
The Accord provides that before delivery of an exploration licence, an SEA will have to be jointly completed. Furthermore, all exploration and production projects will have to follow the obligations of both the Canadian Environmental Assessments Act and Québec's Environment Quality Act.
(b) Implementation of the Accord
Both governments will have to submit mirror legislation for adoption no later than two years after the declaration of a commercial discovery. These laws will cover the exploration for and production of natural gas and oil activities and establishment of the independent joint Board to manage this process.
Meanwhile, a transitional management structure will be put in place by transitional mirror legislation, incorporating by reference or otherwise the relevant provisions of the federal and Québec laws. The Accord will be deemed concluded when the transitional mirror legislation is adopted and enters into force. A Canada-Québec Joint Secretariat will make recommendations for the mirror legislation during the transitional phase. During the transitional phase, the National Energy Board and the Régie de l'énergie will jointly administer the regulatory functions through a Canada-Québec Joint Regulatory Office.
3. Legal framework
The past events affect the legal framework of the hydrocarbon exploration and production. First, following the prohibition of any hydrocarbon exploration and production within Québec's official frontiers (upstream of the western part of the Gulf of St. Lawrence), there is no more exclusive provincial jurisdiction over hydrocarbons in marine environments. Second, for the part of the Gulf of St. Lawrence where exploration is not prohibited but which lies within the Québec boundaries of the 1964 Joint Statement, both Québec and federal jurisdictions apply. Third, as the Québec moratorium is still in force, no licence can be issued. Finally, the recent Canada-Québec Accord will affect the regime applicable to hydrocarbon exploration and production in the Gulf of St. Lawrence as soon as the transitional mirror legislation comes in to force, and even more so when the final mirror legislation comes into force, at which time a new licence regime will be put in place.
(a) Québec legislation
(i) Mining Act
In Québec, hydrocarbon exploration and production is covered under the Mining Act. In January 2010, the amendments made in 1998 to the Mining Act by the Act to amend the Mining Act and the Act respecting the lands in the public domain came in to force. The amendments dealt with the call for tenders system for marine environments, the power for the Minister of Natural Resources and Wildlife to delimit a zone in a marine environment where the oil and gas licence could be issued, and the power for the Minister to impose requirements or conditions in addition to, or that differ from those of the Mining Act and its regulations for oil and gas licences in a delimited zone in a marine environment. Despite the introduction of these amendments, the moratorium is still in place. These amendments allow for harmonization of the Québec legislation with federal marine environment legislation.
In order to proceed with geophysical surveys, a company will need to acquire a licence for geophysical surveying issued by the Minister of Natural Resources and Wildlife for a specific territory. The Directive on Québec Practice with respect to the Mitigation of Seismic Sound in the Marine Environment is still supposed to be issued by the government further to the SEA results as recommended by the BAPE report.
In order to conduct oil and natural gas exploration, a company will need a licence to explore for petroleum, natural gas and underground reservoirs delivered by the Minister of Natural Resources and Wildlife through a call for tenders. The licence is valid for five years, but can be renewed for one additional year up to five times. The Regulation respecting petroleum, natural gas and underground reservoirs determines the annual fees. Each licensee must, in addition to paying the annual fee, carry out exploration work (geological and geophysical or drilling) to maintain the licence in force. However, the costs of exploration work may be grouped under one licence if the company has several, or may be deferred to subsequent years if they exceed the minimum costs required. Various others licences will be required as exploration advances: a well-drilling licence, a well-completion licence and, if necessary, a well-conversion licence.
In order for the company to exploit the resources found, a lease to produce petroleum and natural gas will need to be signed with the Minister. The lease lasts twenty years, but can be renewed for a period of ten years up to three times. The Regulation respecting petroleum, natural gas and underground reservoirs sets the annual rent and the royalties.
(ii) Future Act on Hydrocarbons
Due to the development of the shale gas industry, the Québec Minister of Natural Resources and Wildlife has repeatedly announced the future creation of an act on hydrocarbons separate from the Mining Act. Since an SEA on the shale gas development was announced on March 8, 2011 by the Québec Minister of Sustainable Development, Environment and Parks, the act on hydrocarbons might be introduced only after the report is released.
(iii) Environment Quality Act
The Environment Quality Act, under the authority of the Minister of Sustainable Development, Environment and Parks, has two authorization mechanisms relevant to offshore oil development.
First, there is the certificate of authorization of section 22 of the Environment Quality Act. Before any drilling can be carried out in a marine environment, the company must obtain a certificate of authorization. After an examination of the project and its environmental mitigation measures, the Minister of Sustainable Development, Environment and Parks will either issue the certification with conditions with which to comply or refuse the project. However, even after the recommendation of the BAPE commission, geophysical surveys are not yet subject to a certificate of authorization.
Second, there is the environmental impact assessment and review procedure of section 31.1 of division IV.1 of the Environment Quality Act. The project promoter must produce an environmental impact assessment according to the criteria set forth in a governmental directive. The Minister of Sustainable Development, Environment and Parks issues this directive after receiving the promoter's project description notice. After receiving the environmental impact assessment, the Minister of Sustainable Development, Environment and Parks will make it available for public consultation. Any person, group or municipality may ask the Minister to hold a public hearing on the proposed project. The Minister will then request that the BAPE hold a public hearing and report back to him or her. However, once again, the hydrocarbon exploration and production activities are not subject to the environmental impact assessment and review procedure even after the recommendation of the BAPE commission.
Various other Québec laws may come into play when it comes to the hydrocarbon development in the Gulf of St. Lawrence.
(b) Federal legislation
(i) Canada Petroleum Resources Act
For the part of the Gulf of St. Lawrence under federal jurisdiction, the Canada Petroleum Resources Act governs the issuance of rights for oil and gas development. Such issuance is done through a public call for bids. The exploration licensee has the exclusive right to explore, through drilling tests and other means, for hydrocarbons. Once a "significant discovery" is made, the exploration licensee has the exclusive right to eventually obtain a production licence. Through its regulation, the Canada Petroleum Resources Act fixes the royalty regime.
(ii) Canada Oil and Gas Operations Act
On the other hand, the Canada Oil and Gas Operations Act covers the exploration, production, processing, and transportation of oil and gas in marine environments. The purpose of the Act is to promote safety, environmental protection, the conservation of oil and gas resources, economically efficient infrastructures, and joint production agreements.
(iii) Canadian Environmental Assessment Act
The Canadian Environmental Assessment Act, through its environmental assessment process, provides four different environmental evaluations: screening, comprehensive study (for which the Comprehensive Study List Regulations lists the types of projects submitted to this evaluation), mediation, used when the different parties are willing to resolve the disputes, and finally, the review panel. Both the mediation and review panel must be referred by the Minister of Environment.
(iv) Statement of Canadian Practice with respect to the Mitigation of Seismic Sound in the Marine Environment
Québec has participated in the elaboration of the Statement of Canadian Practice with respect to the Mitigation of Seismic Sound in the Marine Environment, which sets forth mitigation measures for seismic surveys. As mentioned above, Québec has not yet incorporated the measures into its legislation. For the federal jurisdiction, a promoter applying for authorization to conduct seismic surveys should identify the Statement measures that would apply or provide an explanation for any modifications or variations to these measures.
Various other federal laws may come into play when it comes to the hydrocarbon development in the Gulf of St. Lawrence.
4. Recent Developments in the Old Harry Sector
In 2008, Corridor Resources acquired the exploration licence for the Old Harry sector within the Newfoundland and Labrador part of the Gulf of St. Lawrence from the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB). A number of geophysical surveys were conducted in October 2010 and based on the good results, a Project Description was filed with the C-NLOPB for the drilling of an exploration well. However, even though the C-NLOPB did not find evidence of potential environmental damage, the Board decided to recommend a mediation or review panel provided by the Canadian Environmental Assessment Act to the Federal Minister of Environment. This decision was based on the unusual amount of public comments received.
In 2003, Hydro-Québec secured an option to earn from 18.75 per cent to 40 per cent working interest in the Old Harry and Cape Ray prospects for $500,000. To exercise its option, Hydro-Québec will have to invest 25 per cent to 50 per cent of the drilling expenses. As of July 2011, the Québec Liberal government still plans to use this option, rather than sell it to the private sector.
5. Next Steps for Offshore Oil and Gas Development
The offshore oil and gas development in Québec is waiting on at least three conditions. The first is the report of Part II of the Strategic Environmental Assessment, expected in 2012. This will conclude the Strategic Environmental Assessment phase and will provide the basis for the elaboration of legislation more connected to the reality of offshore oil and gas production. The second is, following the release of the report and the consequential responses and adjustments, the possible lifting of the moratorium. According to the Québec Liberal Government, the moratorium is expected to be lifted in 2012. Third, licences would once more be issued, conditional on the development of at least the transitional mirror legislation for the implementation of the Canada-Québec Accord.