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White Curve February 20, 2009 - Volume 7, Number 3
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A LOW-ENERGY FEDERAL BUDGET
By: Craig Burley

The recent federal budget, aimed squarely at economic stimulus and tax reduction, failed to deliver some of the hoped-for items that had been proposed by the energy sector. There are, however, opportunities within the budget for many in the energy industry.

The corporate tax provisions of the Budget were extremely modest in their nature and scope. The income limit for the small business deduction will be raised from $400,000 to $500,000, capital cost allowance (CCA, i.e. depreciation) of manufacturing and processing equipment and computers will be accelerated, and tax credits for mineral exploration (unfortunately not extending to energy exploration) have been extended.

One specific tax policy item was directed towards the energy sector, although it will not be implemented immediately: the government announced a consultation process with the energy industry regarding accelerated CCA for carbon capture and storage (CCS) assets. Although there is no specific indication in the budget, this would likely become a part of, or replicate, the current regimes for Class 43.1 and 43.2 assets.

Likewise, there was very little direct support for the energy sector in the budget, unlike the extensive targeted support delivered to manufacturing, forestry and the auto industry. The exceptions were a one-time investment of $351 million for Atomic Energy of Canada Limited to develop a new line of CANDU reactors, and the new Clean Energy Fund which has been allocated $200 million per year over five years, with the majority apparently targeted at CCS projects. The Budget documents were not specific but set a target of $2.5 billion in CCS investments to be stimulated by the Clean Energy Fund.

The Clean Energy Fund is clearly aimed at the development of hoped-for technology, rather than the immediate impact of investment in current clean energy technology. Eighty-five percent of the Fund is to be used for the "development and demonstration of promising technologies" and the remainder for "research". This allocation should provide a boon for companies currently looking to develop and implement new ideas in the clean energy field, particularly in CCS.

Also announced was an additional $500 million per year over two years for the Green Infrastructure Fund (GIF) that partners with the provinces and municipalities to fund sustainable energy infrastructure. The announcement in the budget documents that modern energy transmission lines will be an item of emphasis for the GIF will be of particular interest to the electricity industry.

Finally, an item of interest to energy producers dependent on imported machinery and equipment is the permanent elimination of customs tariffs on 214 classes of specialized equipment, as of January 28, 2009. Energy producers are specifically targeted (among other industries) by the tariff eliminations.

One notable item that failed to find support was the ecoENERGY for Renewable Power Initiative (eRP) that had been originally announced in early 2007 and slated to run until March of 2011. However, the eRP had been so successful that all of the funds originally allocated have now been spent. There was hope within the alternative energy sector that further support would be forthcoming to spur more immediate investment in renewable power. It had been particularly hoped Canada would match the extensive commitment made by the U.S. federal government in late January to the corresponding U.S. program, increasing funding and extending it to 2012. It seems entirely plausible that this American commitment, in addition to the mixed signals it transmits, will shift some alternative energy investment to the U.S.

Craig Burley
(905) 540-7116
craig.burley@gowlings.com
Craig Burley

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DEEP CONCERNS ABOUT SHALLOW RIGHTS REVERSION
By: Paige Ainslie

What is SRR?

For over 25 years the deep rights under Alberta petroleum and natural gas leases (rights below the lowest producing formation) have been subject to reversion to the Crown even while the lease continues through production. Until now, shallow rights were immune from reversion, so that a lessee could hold all formations down to the base of the lowest producing formation.

As of January 1, 2009, the Alberta Government made all Crown leases subject to Shallow Rights Reversion (SSR). Pursuant to SRR, petroleum and natural gas rights above the top of the shallowest productive zone in a Crown lease will be severed from the lease when it expires and the leaseholder applies to have its mineral rights continued.

The objective of both SRR and Deep Rights Reversion (DRR) is to make available for resale those geological formations that are not being developed by current rights holders, thereby creating additional revenues for Government and stimulating exploration.

In the words of Alberta's Energy Minister Mel Knight when announcing the Crown's intention to include SRR in the New Royalty Regime: "No one knows how much gas has been stranded uphole by inactivity but the figure is very substantial".1

In Alberta's mature oil and gas industry, availability of land is an important concern for many smaller producers.2 In many cases, access to shallow formations was tied up for decades by companies which were developing deeper formations. For many existing leaseholders (particularly the larger producers), the modest drilling targets offered by the shallower formations did not provide sufficient incentive to drill. With SRR, Alberta Energy hopes to implement a 'use it or lose it' policy, freeing up shallower zones for production.

Coalbed Methane (CBM) exploration is a notable aspect of the opportunity arising from SRR. CBM formations are often relatively shallow but effective development requires access to vast contiguous tracts of land. Freeing up the rights to the shallower zones will make it easier for producers to acquire rights to entire fields without having to negotiate for unitization or pooling with the deep rights owners.

How Will It Be Implemented?

The same continuation rules apply for DDR as SRR. The Department of Energy requires the lessee to demonstrate the "productive capability" of a zone, which can be proven with any of the sub-sections of section 15 of the PNG Tenure Regulation, including:

  • Good gas test;
  • Physical production (re-entering an existing wellbore or drilling a new well);
  • Mapping;
  • Unitized rights; and
  • Payment of offset compensation.

Agreements purchased after January 1, 2009 will be subject to SRR at continuation. Beginning in 2011, all agreements continued before January 1, 2009 will be served an SRR notice, with the oldest agreements being served first. The leaseholder will have three years from the date of service to prove up its rights before SRR is applied.

All agreements purchased prior to, but not continued by, January 1, 2009, will be subject to SRR after they have been continued once, subject to DRR only. Once that has occurred, an SRR notice must be served on the leaseholder. The Department of Energy expects to start with 1,000 notices and eventually increase to 5,000 notices per year.

Impact on Industry

As with all aspects of the Royalty Regime, there are winners and there are losers when it comes to SRR.

The Small Explorers and Producers Association of Canada (SEPAC) is in favour of SRR, but is concerned that large portions of currently untapped reserves will remain stranded if producers take the tack of simply completing the shallowest possible zone, thereby boxing out the majority of the leased formations. SEPAC suggests that, for significant rights reversion to occur, Alberta should follow British Columbia's lead and implement zone-specific retention.

SEPAC has also expressed concern about the timeframe for implementation. Since most Crown leases are for a five-year primary term, under the current plan a leaseholder who purchases a new Crown lease after January 1, 2009 will be subject to SRR long before most current leaseholders, who may have been holding undeveloped shallow rights for many years. SEPAC sees this as an unacceptable delay in working towards the objective of increased exploration of shallow zones.

On the other side of the debate, conventional oil producers and companies that operate deep gas wells have the most to lose from SRR. Representatives of these parties have protested that the application of SRR to existing leases constitutes a fundamental change to the terms of the initial lease and is equivalent to expropriation by the Crown.

The same concerns were raised by producers when DRR was implemented. This objection was ignored then and, unless the Government reverses the policy it has announced with SRR, rights owners will again be forced to either prove up their rights or lose them.

Surface Footprint Issues

The Canadian Association of Petroleum Landmen (CAPL) has written the premier of Alberta to voice the concern that SRR is working at cross-purposes with policy and regulatory initiatives aimed at minimizing the surface footprint and impact of oil and gas field activities on surface landowners and stakeholders.3 With the potential for multiple parties requiring access to the same parcel of surface land, negotiations with landowners, and the related number of disputes, are bound to increase.

Environmentalists share CAPL's concern over the increased infrastructure and surface disturbance that may result from SRR, including the impacts of a potential increase in CBM exploration.

To date, the Government of Alberta has provided little in the way of tangible solutions to these issues. The Department of Energy has stated that the increased surface footprint may be mitigated by innovative ways of utilizing existing surface disturbance and that specified protected areas may be off limits to SRR, but further details on these points have not been provided.4

Conclusion

Whether SRR is seen as a bane or a boon depends on whose shoes you are standing in, as most of its intended consequences have both significant benefits and drawbacks. Freeing up access to shallow formations will provide opportunities for smaller players to participate in the development of conventional resource pools, but existing leaseholders stand to lose a portion of their current interest, and face a potential increase in conflicts with surface rights holders. The increase in development and exploration which SRR promises to facilitate will swell provincial coffers, but will also increase industry's environmental footprint.

Staging the implementation over several years should provide an opportunity for government and stakeholder groups to collaborate in the development and implementation of policies and regulations which will effectively address the challenges presented by SRR.


1. Mike Byfield, "Mel Knight: Why Alberta Will Impose Shallow Rights Reversion" DOB Magazine (October 2007) online: <http://www.dobmagazine.nickles.com>.
2. Jaime Woods, "Oil and gas exploration set to expand when shallow rights revert to Crown" The Lawyers Weekly (18 April 2008) 11.
3. Letter from Canadian Association of Petroleum Landmen to the Honourable Ed Stelmach, Premier, (15 November 2007) www.landman.ca.
4. Department of Energy, "Shallow Rights Reversion" <http://www.energy.gov.ab.ca/Tenure/603.asp>.

Paige Ainslie
(403) 298-1976
paige.ainslie@gowlings.com
Paige Ainslie

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RESPONSIBLE ACTIONS - A PLAN FOR ALBERTA'S OIL SANDS
By: Arnie Olyan and Janelle Brown

On February 12, 2009, the Government of Alberta released its 20-year plan for the development of the oil sands, titled Responsible Actions - A Plan for Alberta's Oil Sands (the Strategic Plan).5 The intent of the Strategic Plan is to set a new direction for oil sands development that better addresses economic, environmental and social challenges, particularly within the Athabasca, Cold Lake, Peace River and Fort Saskatchewan regions.

Long-term Vision

The Government of Alberta's vision for the oil sands is for the resource to be developed responsibly, in a manner that sustains industrial and provincial growth over the long term, and simultaneously enhances the quality of life of Albertans. To achieve this vision, the Government notes that the right balance must be struck between development on the one hand, and environmental protection, social responsibility and economic success on the other.

In pursuing the long-term vision, the Government has established four guiding principles:

  1. Healthy environment and communities, promoting responsible stewardship, managing social impacts and improving quality of life.
  2. Balanced growth, maximizing the long-term value and benefits of the oil sands and increasing competitiveness, while also taking into account other non-monetary factors in oil sands development.
  3. Collaboration, encouraging cooperation and participation among all levels of government and key stakeholders and, in particular, Aboriginal communities.
  4. Public interest and accountability, fostering input and communication with all interested persons, and supporting the market with sound government policy and regulatory structures.

Strategies and Objectives

The Government has also developed six strategies to achieve the Strategic Plan's long-term vision, and has enumerated a variety of objectives to support each strategy.

1. Environmentally Responsible Development

To do this, the cumulative effects of oil sands development should be effectively managed to protect air, land, water, biodiversity and human health. In particular, regional thresholds should be developed to protect human health and the ecosystem, and industry will be required to use the best available technology that is economically achievable, which has not consistently been a requirement. Reclamation efforts will be enhanced and enforcement increased in order to protect the environment and minimize Crown liability. Specifically, tailings will be required to be reclaimed regionally at the same rate as or faster than the production of new tailings, and meeting land reclamation requirements may become a pre-condition to further development. In addition, biodiversity within the oil sands region should be maintained by increasing conservation and providing for additional protected areas within the oil sands regions. It is also noted that Alberta's greenhouse gas reduction objectives should be met or exceeded, which will necessitate the use of cutting-edge technologies. Finally, the Strategic Plan gives more "credit" to organizations involved in managing and monitoring environmental performance, stating that these organizations should be strengthened and included collaboratively in discussing development initiatives.

2. Quality of Life and Community Promotion

Creation of a quality of life and promotion of communities that will attract and retain people, families and businesses is the second strategy. Success in this strategy requires supporting ongoing development in communities in the oil sands regions, with social and infrastructure needs identified and various financial models considered to address these needs. Public safety and security requires improvement, including in the areas of law enforcement, traffic safety, health prevention and treatment initiatives and workplace safety (particularly with respect to foreign labour). Investment in physical infrastructure in the oil sands regions, including working with industry to consider industry's contribution to such infrastructure, and using alternative financing approaches will also be required.

3. Maximizing Value

The use of economic growth, stability and resource optimization to maximize value for all Albertans will be essential. Albertans must receive appropriate economic returns from oil sands extraction, which can be achieved by ensuring an adequate royalty structure that is responsive to changing conditions, and potentially through the establishment of a transparent bitumen market. Value can be maximized by encouraging upgrading and value-added petro-chemical development within Alberta with fiscal and regulatory approaches. Additional markets for the products and services derived from Alberta's oil sands can also be sought, which may be facilitated by the development of pipelines to new markets. Industrial infrastructure should also be maximized by addressing workforce needs, including increasing participation of Aboriginal communities and establishing partnerships between industry and all levels of government.

4. Aboriginal Consultation

Communication with and between the Federal Government and Aboriginals should be strengthened and should be characterized by clarity and consistency. In particular, the input of First Nations groups should be sought to better understand potential cumulative environmental impacts on these communities. Cooperation with Métis groups should also occur where Métis lands could be affected.

5. Innovation

The maximization of research and innovation will be necessary to minimize environmental impacts, improve access to oil sand deposits and reduce costs. Alberta should be further developed as a centre of clean-energy research, which may involve funding certain types of research and creating networks to promote innovation at the grassroots level. Policy and regulatory structures should encourage or require the investment in sustainable development technologies by industry, including by way of government-industry partnerships, incentives and the sharing of government-funded research findings. A research and innovation portfolio that is long-term, balanced and responsive should be facilitated.

6. Transparency

The Alberta Government has also emphasized a need to increase access to information, develop measurement systems and enhance accountability with respect to oil sands management. Transparent and effective measurement systems should be created to monitor social, economic and environmental performance. Effective data-management systems should also be created to assist in planning in the oil sands regions, and a policy with respect to data sharing should also be created.

Intended Outcomes, Success Factors and Priority Actions

The Government of Alberta intends that the outcome of the Strategic Plan will be optimized economic growth, a reduced environmental footprint, and improved quality of life for current and future Albertans.

For the Strategic Plan to be successful, it is necessary for government to ensure that regulatory structures are well-defined and stable, that industry and government make long-term commitments to the development of the oil sands, that collaboration and communication among stakeholders and levels of government is clear, inclusive and effective, and that technological innovation is properly supported.

The Government has also highlighted four priority actions in the Strategic Plan, being environmental stewardship, strengthening communities, economic prosperity and building relations. The Strategic Plan does not currently explain how these priority actions fit within the Strategic Plan.

Conclusions

While the Strategic Plan contains few specifics, it does suggest a greater emphasis on balancing various priorities, with a focus on the environmental, social and economic consequences of oil sands development. A move away from an ad hoc approach to a more directed approach is also apparent from the Strategic Plan. How dramatically government policy will be altered as a result of the Strategic Plan remains to be seen.


5. Available at http://www.treasuryboard.alberta.ca/ResponsibleActions.cfm.

Arnie OlyanArnie Olyan
(403) 298-1850

arnie.olyan
@gowlings.com
Janelle BrownJanelle Brown
(403) 298-1823

janelle.brown
@gowlings.com

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