Pipeline Financial Requirements Regulations: SOR/2018-142

Canada Gazette, Part II, Volume 152, Number 14

Registration

June 25, 2018

NATIONAL ENERGY BOARD ACT

P.C. 2018-874 June 22, 2018

Her Excellency the Governor General in Council, on the recommendation of the Minister of Natural Resources, pursuant to subsections 48.12(6) footnote a, 48.13(7) footnote aand 48.14(3) footnote a of the National Energy Board Act footnote b, makes the annexed Pipeline Financial Requirements Regulations.

Pipeline Financial Requirements Regulations

Interpretation

Definitions

1 The following definitions apply in these Regulations.

Act means the National Energy Board Act. (Loi)

authorized, in respect of a pipeline, describes a pipeline whose construction and operation have been authorized under Part III of the Act, but not

Limits of Liability

Limits for classes of company

2 (1) The following amounts are prescribed for the purposes of paragraph 48.12(5)(b) of the Act:

Calculation of risk value

(2) For the purposes of paragraphs (1)(c) to (f), the risk value is calculated by multiplying the square of the pipeline’s maximum outside diameter, measured in millimetres, by the maximum operating pressure, measured in megapascals, and, if the company operates two or more pipelines, the risk value is that of the pipeline with the highest risk value.

Multiple commodities

(3) If a company operates an authorized pipeline that transports two or more commodities, and the limits of liability in respect of those commodities are not the same, the limit of liability applicable to the company is determined in accordance with paragraph 48.12(5)(a) of the Act and subsection (1) as if the company were transporting only the commodity that results in the highest limit of liability.

Multiple varieties — same commodity

(4) If a company operates an authorized pipeline that transports two or more varieties of the same commodity, the limit of liability applicable to the company is determined in accordance with paragraph 48.12(5)(a) of the Act and subsection (1) as if the company were transporting only the variety that results in the highest limit of liability.

Multiple unconnected pipelines — different commodities

(5) If a company operates two or more authorized pipelines that are unconnected and transport different commodities, the limit of liability applicable to the company is determined in accordance with paragraph 48.12(5)(a) of the Act and subsections (1) to (4) as if the company were operating only the pipeline that results in the highest limit of liability.

Financial Resources

Financial resources

3 For the purposes of subsection 48.13(2) of the Act, the Board must choose from among the following types of financial resources:

Readily accessible financial resources — 5%

4 (1) A company that operates one or more authorized pipelines referred to in paragraphs 2(1)(a) to (d) must maintain at least 5% of the amount of financial resources referred to in subsection 48.13(1) of the Act in types that are readily accessible.

Readily accessible financial resources — 2.5%

(2) A company that operates one or more authorized pipelines referred to in paragraphs 2(1)(e) to (i) must maintain at least 2.5% of the amount of financial resources referred to in subsection 48.13(1) of the Act in types that are readily accessible.

Financial resources

(3) If the Board specifies the types of financial resources that must be readily accessible to a company, it must choose from among the following types:

Pooled Funds

Requirements of pooled fund

5 (1) For the purposes of subsection 48.14(1) of the Act,

Administrator of the pooled fund

(2) The administrator of a pooled fund must

Coming into Force

10th day after publication

6 (1) The following provisions come into force on the 10th day after the day on which these Regulations are published in the Canada Gazette, Part II:

First anniversary after publication

(2) The following provisions come into force on the first anniversary of the day on which these Regulations are published in the Canada Gazette, Part II:

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The safety and security of Canada’s energy sector is crucial to the health of Canadians, the environment and the national economy. While Canada’s energy safety record is impressive, the safety and security of energy sectors are complex and continually evolving, requiring continuous vigilance and ongoing improvement.

Public confidence in the safety and security of oil and gas sectors has been questioned in recent years due in part to incidents that have resulted in human, environmental and/or economic impacts. The Government of Canada examined the context and has enhanced the federal energy safety and security of the federal regime. This has included stronger legal frameworks and other measures, not only for pipelines, but also for the offshore, nuclear, marine and rail sectors. Changes have focused on the pillars of prevention, preparedness and response, liability and compensation.

In an effort to support the strengthening of Canada’s pipeline safety regime, regulations are needed to support the establishment of the “no-fault” absolute liability regime for companies operating federally regulated pipelines.

Background

The Minister of Natural Resources is responsible for setting the policy framework for the oversight of federally regulated pipelines (i.e. those that cross provincial, territorial, or international boundaries). The National Energy Board (NEB), which reports to Parliament through the Minister of Natural Resources, is the independent federal agency that regulates cross-border pipelines. The role of the NEB is to ensure that pipeline companies meet strict requirements to keep Canadians and the environment safe.

The Pipeline Safety Act (the “Act”), which came into force on June 19, 2016, further enhances Canada’s strong pipeline safety system based on prevention, preparedness and response, liability and compensation. The Act reinforces the “polluter pays” principle and confirms that federally regulated pipeline operators continue to have unlimited liability for an unintended or uncontrolled release from a pipeline when they are at fault or negligent. The Act also introduces a “no-fault” liability regime for companies operating federally regulated pipelines to ensure a prompt response in advance of the determination of fault and to ensure that Canadians are protected from costs and damages following an unintended or uncontrolled release from a pipeline. The Act establishes an absolute liability of $1 billion for companies operating major oil pipelines (i.e. those transporting 250 000 or more barrels per day) and provides that classes and limits for other pipelines will be set out in regulations.

The Act requires that a pipeline operator maintain financial resources to match the limit of absolute liability. It authorizes the NEB to order a company or class of companies to maintain the financial resource requirements (including a portion to be readily accessible) in specific types of financial instruments. The Act also authorizes the NEB to request information (i.e. specific proof) from companies regarding their financial capacity.

The Act also provides that regulations may be developed related to pipeline abandonment, damage prevention around pipelines, and cost recovery from industry, in the event that the NEB needs to take over incident response in exceptional circumstances.

Objectives

The objectives of the Pipeline Financial Requirements Regulations (the “Regulations”) are to

Description

Absolute liability classes and limits

The Pipeline Safety Act establishes an absolute liability limit of $1 billion for companies authorized to construct or operate one or more pipelines that individually or in the aggregate have the capacity to transport at least 250 000 barrels of oil per day. These Regulations establish classes, absolute liability limits and financial resource requirements for other pipeline operators. The classes have been divided into three commodity groupings: oil, gas, and other commodities. For clarity and consistency, “oil” and “gas” have the same definitions as under section 2 of the National Energy Board Act (NEB Act). Other commodities are defined as those commodities transported by federally regulated pipelines that do not fall within the NEB Act section 2 definitions of “oil” or “gas,” for example pulp, slurry, salt water, and carbon dioxide.

Only authorized in-service pipelines will be considered in the determination of a company’s absolute liability class, with the following being excluded:

Companies operating federally regulated pipelines are divided into absolute liability classes, with the absolute liability limit as follows:

Absolute Liability Class

Details

Absolute Liability
Limit

Oil class 1

Companies that are authorized to operate one or more pipelines transporting at least 250 000 barrels of oil per day (bpd).

(Established in the Pipeline Safety Act)

$1 billion

Oil class 2

Companies that are authorized to operate one or more pipelines transporting at least 50 000 bpd but fewer than 250 000 bpd of oil.

$300 million

Oil class 3

Companies that are authorized to operate one or more oil pipelines transporting at least 1 bpd but fewer than 50 000 bpd of oil.

$200 million

Gas class 1note*

Companies that are authorized to operate one or more pipelines that have a risk value of at least 1 000 000.

$200 million

Gas class 2note*

Companies that are authorized to operate one or more pipelines that have a risk value of at least 100 000 but less than 1 000 000.

$50 million

Gas class 3note*

Companies that are authorized to operate one or more pipelines that have a risk value of at least 15 000 but less than 100 000.

$50 million

Gas class 4note*

Companies that are authorized to operate one or more pipelines that have a risk value of at least 1 but less than 15 000.

$10 million

Other commodities (i.e. other than oil, gas, carbon dioxide, water class 1

Companies that are authorized to operate one or more pipelines carrying other commodities — other than oil, gas, carbon dioxide or water — in a liquid state by land or in a liquid or semi-solid state across a watercourse.

$10 million

Other commodities (i.e. other than oil,gas, carbon dioxide, water) class 2

Companies that are authorized to operate one or more pipelines carrying other commodities — other than oil, gas, carbon dioxide or water — in a gaseous or semi-solid state by land and or in a gaseous state across a watercourse.

$5 million

Carbon dioxide and water

Companies that are authorized to operate one or more pipelines carrying carbon dioxide or water.

$5 million

The operations of federally regulated pipeline companies can be complex and vary greatly. To address this complexity, the Regulations provide the following additional clarifications related to determining a company’s absolute liability:

Acceptable financial instruments

The Pipeline Safety Act authorizes the NEB, if it chooses to do so, to order a pipeline company to maintain the required financial resources in one or more specific types of financial instruments, to be set out in regulations. These Regulations prescribe the following list of acceptable financial instruments:

Readily accessible portion

The Pipeline Safety Act provides authority to make regulations governing the amount of financial resources a pipeline operator must hold in a readily accessible form so that the company can respond quickly to an incident, as well as the specific types of financial instruments an operator could be ordered by the NEB to use.

These Regulations establish that all federally regulated oil and class 1 and class 2 gas pipeline operators must maintain at least 5% of the applicable financial resource requirement in readily accessible form. Federally regulated class 3 and class 4 gas pipeline operators, as well as pipeline operators that transport other commodities (i.e. other than oil or gas) must maintain at least 2.5% of the applicable financial resource requirement in readily accessible form. The acceptable financial instruments the NEB could order a company to use would be one or more of the following for the purposes of the readily accessible portion:

Pooled fund

The Pipeline Safety Act provides that industry can elect to create and participate in a pooled fund to allow each participant to demonstrate it meets its financial resource requirements.

The establishment of, and participation in, an industry-led pooled fund is voluntary — a fund or funds would only be created and maintained if there is interest on the part of pipeline operators.

The Act provides that regulations are to set out the parameters of a pooled fund. These Regulations establish parameters for a pooled fund as follows:

A fund administrator must

If desired, industry may decide to operate more than one pooled fund, as long as each fund meets the requirements established in the Act and the Regulations.

“One-for-One” Rule

The “One-for-One” Rule does not apply, as these Regulations do not result in new administrative costs for business. Industry stakeholders were consulted on the regulatory proposals, including potential costs. Companies already voluntarily maintain financial resources in a variety of forms, some of which have carrying costs (e.g. insurance). Unless and until the NEB chooses to order a company to use specific financial instruments, companies have flexibility to use the financial instrument(s) of their choice provided the NEB is satisfied with the choice of instrument. Consequently, there are no incremental, administrative costs in the absence of a NEB order.

Small business lens

The small business lens does not apply, as nationwide cost impacts are less than $1 million annually. However, a number of pipeline companies do constitute small businesses and will be required to implement these Regulations. Feedback from preliminary consultations led by Natural Resources Canada suggested that compliance costs associated with the readily accessible portion of the financial resource requirement could be potentially burdensome for some small businesses (approximately eight small businesses have been identified). As noted above, compliance costs would not be generated unless and until the NEB were to issue an order directing a company to use a specific financial instrument(s). Otherwise, how a company chooses to meet its financial resource requirements under the Act and these Regulations will be a business decision. For example, a company could plan to meet its financial requirements by using a combination of cash on hand and an existing insurance policy.

In the absence of a NEB order to use specific financial instruments, there are no incremental administrative requirements associated with these Regulations, including for small businesses.

Consultation

Overview of preconsultation

Between December 2015 and April 2016, Natural Resources Canada conducted preliminary engagement activities with a variety of key stakeholders including industry, Government, non-governmental organizations and Indigenous groups to inform the draft Regulations. Stakeholders were engaged through a variety of mechanisms including in-person meetings, teleconferences, and email communications. A discussion paper outlining the basis of preliminary regulatory proposals was used as the foundation for engagement activities and stakeholders were asked to provide feedback on the preliminary proposals including benefits, potential impacts and potential barriers to implementation.

The main themes from feedback on the preliminary regulatory proposals included the following:

The following key changes were made to the regulatory proposals following preliminary engagement:

Natural Resources Canada also received feedback regarding implementation of elements of the Pipeline Safety Act itself. Feedback on the Act was noted and shared with the NEB as the regulator responsible for implementing the Act and associated financial regulations.

Prepublication in the Canada Gazette, Part I

Written comments on the proposed Regulations were accepted during a 30-day period from October 8, 2016, through November 7, 2016. During this time, Natural Resources Canada received 14 written submissions from interested parties, representing industry and non-government. There was also ongoing dialogue between interested parties and Natural Resources Canada to provide further information and to clarify elements of the Regulations. All comments were considered in finalizing these Regulations and they are summarized below.

Absolute liability

A number of stakeholders commented on the absolute liability limits proposed in the Regulations. Industry stakeholders commented that the classes (the basis of the absolute liability limits) may be too broad, should be refined and should take other variables into consideration in the assessment of risk. These variables included the different characteristics of pipeline systems (i.e. gathering lines versus major transmission lines, actual volumes of product transported and location of pipelines [urban versus remote]). Industry highlighted the relatively lower risk associated with gas and other commodity (non-energy) pipelines and also suggested that actual, as opposed to maximum, pressure was a better indicator of risk and should be taken into account when calculating absolute liability.

Industry suggested that, where possible, the NEB be given flexibility and discretion to determine absolute liability based on the risk profile of individual pipelines. Industry also highlighted requirements under other federal regimes (relating to financial resources and responsibility) and requested that these requirements be taken into consideration by the NEB in its assessment of proof of financial resources.

Non-industry stakeholders recommended the absolute liability limits in the proposed Regulations be increased to reflect the risk and potential environmental damage of an incident. These stakeholders also requested that demonstration of proof of financial capacity be easily verified and frequent.

In its assessment of the various stakeholder comments concerning absolute liability, Natural Resources Canada considers that the absolute liability amounts in these Regulations best reflect the risks, based on consideration of the type and amount of commodity that can be transported, and size of operations. The originally proposed absolute liability limits specific to oil and gas pipeline operations were maintained to ensure these operators are financially positioned to cover any potential costs associated with an incident on their line. Given the inherently lower risk associated with pipeline companies operating, exclusively, pipelines carrying water or carbon dioxide (in gas or liquid form), the absolute liability amount now matches that of other commodity, lower risk pipeline operations (i.e. $5 million). The NEB, which is responsible for regulating federally regulated pipelines, is responsible to ensure that all companies demonstrate proof of their financial requirements.

For gas pipelines, maximum pressure is deemed a good indicator to determine the overall risk profile. Risk value for natural gas pipelines is calculated using the maximum outside pipeline diameter in mm2 × maximum operating pressure in megapascals.

Readily accessible financial requirements

Pipeline companies are required to hold a minimum level of readily accessible financial resources as part of their overall financial resource requirement. Some stakeholders noted the importance of accounting for risk of pipeline incidents, type of commodity, and size of operator (from the perspective of small businesses) in the calculation of the readily accessible financial requirement. There was also a suggestion that this requirement be established as a fixed amount, as opposed to as a percentage.

The purpose of this requirement for readily accessible resources is to ensure that companies can respond quickly in the event of an incident. Natural Resources Canada recognizes that the short-term costs stemming from a potential incident on a smaller gas pipeline or “other commodity” pipeline would likely be smaller relative to an incident on a pipeline carrying high volumes of carbon-based product. Consequently, the readily accessible requirement for pipelines carrying other commodities (i.e. other than oil and gas) and gas (classes 3 and 4 only, representing gas pipelines with a risk value below $100,000) are set at 2.5% of the overall financial resource requirements of the operator.

Financial instruments

Some industry stakeholders considered that the acceptable financial instruments list was prescriptive and limiting, and requested the need for flexibility in how they demonstrate proof of meeting financial resource requirements. This included possible use of parent or affiliate guarantees to meet their obligations for readily acceptable financial resources. The addition of “surety bonds” to the list of readily accessible financial instruments was also proposed.

Natural Resources Canada notes that the Act and the associated Regulations do provide flexibility for pipeline operators — they allow pipeline operators to manage their financial resource requirements as they see fit unless the NEB chooses to order a company otherwise. In this case, the NEB could order a company to hold its resources using certain financial instruments and/or in prescribed amounts. The NEB has responsibility for assessing and confirming that a company demonstrates proof of meeting its financial resource requirements, including the readily accessible portion. A pipeline operator may elect to use a surety bond, provided the terms and conditions are acceptable to the NEB. Additional guidance is planned to be developed by the NEB to assist companies.

Pooled funds

During the Canada Gazette comment period, Natural Resources Canada received no specific comments on the Regulations as they pertain to the establishment and use of a pooled fund; however, there was interest in further information on how the pooled fund would be operationalized.

Industry can voluntarily create and participate in a pooled fund to help meet financial resource requirements. The establishment of, and participation in, an industry-led pooled fund is voluntary. Guidance will provide additional information on the parameters of a pooled fund and how it can be used.

Other comments

Industry stakeholders requested clarification about whether absolute liability is required for abandoned pipelines, and the types of insurance instruments that can be used to demonstrate financial resources.

These Regulations exclude pipelines under construction and pipelines removed from service pursuant to a leave granted by the NEB. This would include pipelines deactivated for at least 12 months, or decommissioned or abandoned. The Regulations clarify that the use of insurance, if imposed by the Board, would be acceptable only if evidenced by a policy.

Rationale

Absolute liability classes and limits

Analysis of historical pipeline releases and pipeline characteristics and operations suggests that there are very different risk factors associated with oil, gas and other commodities. For oil, the key risk factor was determined to be throughput capacity, i.e. how much of the product may be transported through the pipeline. For gas, the key risk factors were determined to be the diameter of the pipe and the operating pressure. Finally, for other commodities, the key risk factors were determined to be the physical state of the commodity (liquid, semi-solid, gaseous) and the terrain through which the pipeline passes. Thus, it was determined that absolute liability classes would be divided into oil, gas and other commodities.

The classes of operators (basis of absolute liability limits) were based on historical analysis, statistical analysis and cluster analysis of pipeline incidents (in Canada, the United States and internationally) and their estimated or actual cleanup costs. The key policy objectives for establishing specific limits and associated financial requirements were to

These objectives are underpinned by the principle that the operators’ liability should be commensurate with the level of risk associated with their respective operations.

The determination of a company’s absolute liability class is based on NEB authorized activity to ensure that financial requirements are commensurate with risk. However, the following activities are excluded:

There may be situations where an operator’s pipelines are not fully utilized. This may be due to changes in supply or market conditions in either an origin or a destination of a pipeline, changes to the service of a pipeline because of economic, environmental protection or safety conditions, or competition from other methods of energy supply or transportation, e.g. switching to or from natural gas for electricity generation. The NEB’s determination of a company’s absolute liability class will depend on the facts of each case.

Under the authorities included in the National Energy Board Act, the NEB wrote to request baseline capacity information from all federally regulated pipeline operators. The information from operators serves as the basis for the NEB to determine the absolute liability class for each operator. For major oil pipeline operators (those subject to $1B absolute liability), this was completed in advance of the coming-into-force date of the Pipeline Safety Act.

Acceptable financial instruments

It should be emphasized that the purpose of the list of acceptable financial instruments in these Regulations is to provide the NEB with options for situations when it chooses to order a company to use specific financial instruments to maintain its financial resource requirements, e.g. in a scenario where the NEB may be concerned with the financial condition of the company. Unless and until such time as the NEB orders a company to maintain its financial resource requirement in one or more specific financial instruments, a pipeline operator can maintain its required financial resources as it sees fit (i.e. it is a business decision). For example, a company could choose to hold its financial resources in cash and an insurance policy.

Financial instruments were examined based on a number of factors: degree of liquidity, level of security, protection of funds from creditors, administrative complexity, and the cost of carrying to the company. The identified list provides an array of options from which the NEB could choose. The list of acceptable financial instruments provides options that balance the interests of the Government (e.g. cash and cash equivalents are highly liquid) and the interests of industry (e.g. parental guarantees and insurance have lower carrying costs for companies but are less liquid). The list of eligible financial instruments is, for the most part, consistent with similar regulations under the Canada Oil and Gas Operations Act, pursuant to the Energy Safety and Security Act.

Readily accessible portion

To determine the required level of readily available resources, historical pipeline incident data was examined to isolate the short-term costs related to incident response for various commodities. Based on analysis, the readily accessible requirement was set at 5% of the overall financial resource requirements, with the exception of lower risk gas pipelines (i.e. class 3 and class 4 gas pipelines) and for pipelines carrying other commodities (non- hydrocarbon). This percentage is considered sufficient to cover short-term incident response costs.

The readily accessible portion is calculated as a percentage of the financial resource requirement, as opposed to the absolute liability limit. This is to account for the fact that the legislation provides the NEB with the authority to increase a company’s financial resource requirement beyond the amount of absolute liability.

The financial instruments for the readily accessible portion have been chosen for their high degree of liquidity.

Pooled fund

Establishing the parameters for the use of a pooled fund as an alternative or complement to other financial instruments will provide added flexibility to federally regulated pipeline operators in that it will allow companies to benefit from leveraging the contributions of other operators. A pooled fund would meet the policy intent of the legislation by ensuring that funds are available to respond to a potential incident.

The creation of one or more pooled funds is at the discretion of industry. Due to the optional nature of the pooled fund, there are no administrative or other costs that result directly from these Regulations. Any administrative or other costs associated with the creation and maintenance of a pooled fund would be borne by industry participants.

A minimum fund balance of $250 million is based on an analysis of data from historical pipeline releases. The minimum balance of $250 million is considered a reasonable amount for speedy response, in the event of a release. This aligns with requirements contained in similar regulations under the Canada Oil and Gas Operations Act, pursuant to the Energy Safety and Security Act, which require a minimum amount of $250 million for a pooled fund to be used as proof of financial responsibility for the drilling for, or the development or production of, petroleum in offshore areas regulated by the NEB, the Canada–Newfoundland and Labrador Offshore Petroleum Board and the Canada-Nova Scotia Offshore Petroleum Board. There are no other known industry pooled funds.

Implementation, enforcement and service standards

Some provisions of these Regulations enter into force shortly following publication in the Canada Gazette, Part II (i.e. 10 days)

Twelve months is deemed to be a reasonable amount of time to allow other (non-major oil pipeline class) companies, in particular smaller companies, to demonstrate that they can meet their financial resource requirements [subsections 2(1) to (5) of these Regulations]. The 12-month period will help to ensure companies have adequate time to comply, including given market volatility in energy sectors that may limit the availability of financial instruments.

The NEB has an existing toolbox of mechanisms it can use to address non-compliance, for example the issuance of warnings, orders or fines. The NEB is currently examining its compliance tools to determine those that would be most appropriate to apply in the case of non-compliance with the regulations, including how enforcement actions should escalate in the case of continued or repeated non-compliance. Guidance is planned to assist companies to support the coming into force of these Regulations.

Contact

Christine Siminowski
Director
Energy Sector
Natural Resources Canada
Telephone: 343-292-6272
Email: Christine.Siminowski@canada.ca