Canada: Alberta Energy Regulator Denies Transfer Of EPEA Approvals: Commercial Realities Do Not Translate

On May 13, 2020, the Alberta Energy Regulator (AER) issued a decision denying the joint application of Shell Canada Limited (Shell) and Pieridae Alberta Production Limited. (Pieridae) (the Applicants) to amend and transfer certain environmental and facility approvals, including those issued under the Environmental Protection and Enhancement Act (EPEA) and the Oil and Gas Conservation Act (OGCA), relating to Shell's Jumping Pound and Waterton sour gas processing plants and facilities (Sour Gas Plants).¹ In June 2019, Shell agreed to sell the Sour Gas Plants and associated facilities to Pieridae and the AER's denial of the application effectively blocks the sale from being completed for the time being.

AER Applications

The Applicants submitted applications under the EPEA, as well as related applications under the OGCA and other Alberta legislation, seeking: an amendment to existing EPEA approvals for the Sour Gas Plants; a transfer of the amended approvals from Shell to Pieridae; and the issuance of a new EPEA approval to Shell for an existing containment and monitoring system (CMS) operating at the Sour Gas Plants (CMS EPEA Approval) (collectively Proposed EPEA Approvals). The purpose of the applications and the CMS EPEA Approval was to allow Shell to retain liability and responsibility for certain operational and remedial aspects at the Sour Gas Plants relating to a historical contamination, including that arising from a specific contaminate used in sour gas processing, while allowing Pieridae to retain operational rights as well as regulatory responsibility and liability for all other contamination and closure, remediation and reclamation activities.

AER Decision

In denying the applications, the AER identified that the scope of contamination on the two sites is not well understood, noting that there are significant gaps in the information about the contamination and associated liabilities. The AER found that this lack of information makes identifying and distinguishing between historical and existing contamination, for which Shell would be responsible, with other contamination arising from ongoing operations, for which Pieridae would be responsible, unclear. In the AER's view, the Applicants were requesting the AER move away from the regulatory certainty afforded through the operational and closure obligations arising under the existing EPEA approvals for the Sour Gas Plants, to a “far less certain situation, where the parties will have separate and partial regulatory obligations regarding different aspects of operations, remediation, monitoring and reclamation of the sites.”

The AER found the Proposed EPEA Approvals, which attempted to give effect to the business arrangement between Shell and Pieridae, were contrary to the fundamental principles and provisions in the EPEA since, if granted, those approvals could override, or at least significantly dilute, Shell's obligations under the EPEA. Shell's liability for remediation and reclamation for historical contamination relating to a specific contaminate and Pieridae's liability and responsibility for decommissioning, remediation and reclamation of the Sour Gas Plants, both arising under the Proposed EPEA Approvals, would physically overlap for the entirety of both sites. In the AER's view, this apparent split in liability and remediation and reclamation obligations is incompatible with the EPEA, which does not discriminate or allocate reclamation duties by substance or contaminate. The AER also found that the proposed split in liability is contrary to the concept of joint and several liability that underlies the enforcement of obligations amongst operators and persons responsible under different provisions of the EPEA and that this could lead to competing EPEA instruments (approvals and enforcement orders). The AER highlighted that issuing an EPEA approval with only obligations (i.e. remediation and reclamation) with no corresponding benefits (i.e. gas processing) – like the CMS EPEA Approval - would disincentivize compliance with approval terms and existing duties as the number of meaningful enforcement tools available to the AER would be reduced.

The AER concluded that it cannot, by way of an EPEA approval, “carve up and re-distribute fundamental regulatory obligations in a manner that is contrary to or inconsistent with EPEA.” Further the AER found that the Proposed EPEA Approvals would be contrary to the AER's mandate under the Responsible Energy Development Act, for the efficient, safe, orderly and environmentally responsible development of energy resources. Specifically, in the AER's view: it is not efficient nor orderly for the AER to split EPEA rights and obligations amongst operators or to administer two approvals setting out separate partial regulatory obligations when one single approval already exists and covers all operational and reclamation aspects for a site; and the subdivision between two operators of an aspect of an approved EPEA activity – in this instance, reclamation – for the same site may impact the AER's ability to provide for environmentally responsible development.

In denying the applications, the AER was express that its decision was without prejudice to the Applicants submitting new applications relating to the sale of the Sour Gas Plants.

Comments

In its decision, the AER noted that the Proposed EPEA Approvals appeared to mirror or give effect to a business arrangement between the parties.

There is nothing new about the dichotomy between business or commercial arrangements for the construction, operation and/or sale of energy infrastructure and facilities and the regulatory regime regulating their construction and operation. Often the commercial realities do not necessarily align with legislative or regulatory frameworks – this is such a case. In conducting the sale of the Sour Gas Plants, Shell and Pieridae sought to package up the historical regulatory liability associated with a specific contaminate at the Sour Gas Plants with certain portions of the regulated operations at the plants (i.e. the containment and monitoring system) and separate them from the remaining regulatory liabilities and regulated operations. As the AER concluded, the result would have been physically overlapping remediation and reclamation obligations under EPEA that, in the AER's view, created regulatory uncertainty and was inconsistent with the legislative and regulatory frameworks.

Separating liabilities in commercial arrangements for energy infrastructure and facilities is ordinary course. The nuance in this case is that disentangling regulatory liability from the requisite regulatory approvals is not so ordinary. Regulators, like the AER, must work within the mandate prescribed by their enabling legislation and within the rigid bounds of the applicable regulatory framework. To ensure successful outcomes, counterparties need to remain flexible in their commercial arrangements to account and adapt for this rigidity.

Footnote

1. Alberta Energy Regulator, Letter Decision May 13, 2020: Shell Canada Limited Transfer of Ownership Including the Waterton Sour Gas Plant EPEA Application No. 021-258 and Jumping Pound Sour Gas Plant EPEA Application No. 015-11587.

Originally published 15 May, 2020

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