In the early hours of Saturday December 10, 2016 a bleary-eyed Quebec National Assembly voted 62 to 38 to adopt Bill 106, An Act to implement the 2030 Energy Policy and to amend various legislative provisions.¹ Pierre Arcand, Quebec’s Minister of Natural Resources and Wildlife, had introduced the bill on June 7, 2016 and Government wanted it adopted before the year’s end.

Energy policy has been a subject of much debate in Quebec for the better part of a decade and after numerous policy papers, expert panels, public consultations and other tergiversations, Government wanted to remove a potential irritant from the political scene.  The next Quebec provincial election is scheduled for October 2018 and Premier Couillard’s Liberals want the last two years of their current mandate to have a happier tone than the first three, when the focus was the cleanup of Quebec’s public finances replete with painful service and budget cuts. With Quebec having largely righted its financial affairs – at the time of writing unemployment is at a 34-year low and tax revenues have materially increased — it was time to clear the tables.

The legislative process has been arduous.  Bill 106 is an unusual statute. It is akin to an omnibus bill. It deals with four energy-related but nonetheless discrete subjects. The first three are relatively uncontroversial and supported by a wide-ranging consensus.  The same cannot be said of the fourth chapter.

The first three chapters of Bill 106 pertain to (i) the adoption of An Act respecting Transition Énergétique Québec, a new state-owned entity created to assist transition from fossil fuels to renewable energy, (ii) amendments to An Act respecting the Régie de l’énergie² designed to ensure market access for renewable gas (e.g., biomethane) and increased gas pipeline capacity in Quebec, and (iii) amendments to the Hydro- Quebec Act³, the province’s vertically integrated electricity provider and one of the world’s major hydroelectricity producers. The amendment to the Hydro-Quebec Act allows Hydro-Quebec to become another source of financing for electric public transportation systems such as the $5 billion Réseau électrique métropolitain light rail system proposed by CDPQ Infra, a subsidiary of the Caisse de dépôt et de placement du Quebec.  This is the “Green” part of Bill 106 and is meant to anchor the renewable energy credentials of Government.

The fourth chapter deals with the adoption of the Petroleum Resources Act (the “PRA”). The opposition parties, some municipalities, most environmental groups, many First Nations and other members of civil society wanted Bill 106 split into two with the PRA removed to allow for a more focused examination, debate, amendment or, as some groups advocate, defeat of the PRA. There is a vocal minority that does not want Quebec to allow any exploration and production of hydrocarbons on its territory.  In their view, Quebec, at a time of plentiful oil and gas, need not start an industry that even the Premier of Quebec, when piqued by the press, blurted would not be representative of the economic future of Quebec.

Purpose of Petroleum Resources Act

The purpose of the PRA is set out at section 1: the Act regulates oil and gas exploration and production whilst ensuring (i) the security of individuals and property, (ii) the protection of the environment and (iii) optimal production.  Section 1 laconically adds that all of the above must be accomplished in conformity with the Government’s greenhouse gas reduction commitments. It is not clear what impact subservience to greenhouse gas reductions will have in concrete terms but it is certain that Government wants to take a holistic view of oil and gas exploration and production as well as leave a door open quickly to reshape policies to the political needs of the day.

Main Features of the Petroleum Resources Act

The PRA does the following:

1. It lays downs the framework for a comprehensive oil and gas regulatory regime,
2. It enables the authorities closely to monitor all phases of an exploration and production project,
3. It effectively requires projects to be socially acceptable,
4. It provides for a strict liability regime,
5. It favors participation by well-funded and technically advanced entities,
6. It is agnostic as to technology and geography, and
7. It depoliticizes many project regulatory decisions whilst allowing Government opportunity to respond to the political climate of the day by tweaking licensing and approval conditions and in, rare cases, suspending licenses or approvals until resolution of court challenges.

Comprehensive Regime. When announcing the adoption of Bill 106 a proud Premier Couillard stated that the PRA lays down the framework for one of the world’s most comprehensive and stringent oil and gas regulatory regimes. The Act has 269 sections and borrows from best practices adopted in other Quebec statutes, most noticeably the Environment Quality Act⁴ and the Mining Act⁵.

Despite being fulsome the Act does not at this time provide a complete picture. Nearly 50 sections of the PRA expressly provide for supplementary regulations.  Many of these regulations concern matters critical to an investment decision, including:

1. the auction rules governing exploration licenses (section 15)
2. the oil and gas royalty rates and calculation methodology (section 59),
3. the annual license fees (sections 17, 60 and 63),
4. the information and documents required to apply for licenses and authorizations,
5. the form and amount of the site closure and remediation guarantees (section 95), and
6. the upward limit of a license holder’s strict liability (section 119).

The PRA comes into force on the date of coming into force of the first regulation that replaces the Regulation respecting petroleum, natural gas and underground reservoirs (chapter M-13.1), which regulation effectively serves as the cornerstone of the current oil and gas regulatory regime in Quebec.⁶

Close Monitoring. From start to finish the major stages of an oil and gas project will require licenses and authorizations as well as much reporting. The Quebec regime is diametrically opposed to a self-regulatory one and will require that the regulators devote adequate staffing and financial resources to avoid bottlenecks and ensure that science-based decisions are taken on a timely basis.  The PRA imposes few time constraints on the regulatory authorities and unless the forthcoming regulations provide otherwise there is a risk of authorities proceeding at a very deliberate pace.  

In connection with oil and gas the PRA provides for three types of licenses.  These licenses are supplemented by seven additional ministerial authorizations.  The licenses are as follows:

Exploration license (PRA, sections 14 to 37)

The Minister may grant exploration licenses.  Such grant is made pursuant to a call for tenders (section 14). When deciding which territories to put up for auction, the Minister will take into account exploration requests made by interested parties (section 16). This having been said there is no obligation for the Minister to auction exploration licenses. An exploration license gives the right to its holder to explore for hydrocarbons on the licensed territory (section 22). However, certain types of exploration activities will require, as we shall see later, additional ministerial authorizations (sections 69 to 91).  The license is valid for five years and may be renewed (section 24). An exploration license holder must create a monitoring committee so as to involve local communities and First Nations in the exploration project (section 25). A monitoring committee is composed of at least one member from the municipal sector, one from the economic sector, a member of the public and, if government has consulted a First Nation regarding the issuance of such license, a member of the First Nation so consulted (section 25). The licensee has the right to access the territory that is subject to its license (section 27).  This right is conditional in the case of private lands or public lands leased from the state upon the licensee securing from the landowner or lessee the right to enter such lands (section 27).  An exploration licensee does not have the right unilaterally to enter upon private lands or lands leased from the state nor does the licensee have any expropriation or other right to force a right of access on private lands or lands obtained from the state. In the case of municipal lands licensee needs only to provide not less than 30 days prior notice to the municipality (section 27). The licensee must perform a minimum amount of work (section 28), pay an annual fee (section 33) and file an annual report (section 34). The licensee must inform the Minister of any important hydrocarbon find (section 35) and must within four years seek a production license, failing which the Minister may terminate in whole or in part the licensee’s exploration license (section 36).

Production license (PRA, sections 38 to 61)

The holder of a hydrocarbon exploration license who wishes to obtain a production license must first submit its production project to the Régie de l’énergie (“Régie”), Quebec’s independent energy regulator (section 38) and apply for an environmental authorization pursuant to section 31.5 of the Environment Quality Act (Quebec).  Bill 106 subjects the following to a section 31.5 environmental authorization: (i) all work related to oil or gas production and storage to which the PRA applies, and (ii) any oil or gas drilling in marine areas (section 249). In other words, from an environmental standpoint the production and underground storage of oil and gas will now be treated like any other extractive activity. The Régie will deliver its decision to the Minister for further transmittal to Government and consideration in connection with the section 31.5 environmental authorization (section 42).

The Minister will issue a production license to an exploration licensee who has obtained (i) a favorable decision from the Régie in connection with its production project, and (ii) an authorization from Government pursuant to section 31.5 of the Environment Quality Act (Quebec) (section 45). Should a territory not be subject to an exploration or production license, the Minister may issue a production license by way of an auction (section 46).

A production license gives its holder the right to produce oil or gas (section 48).  A production license is valid for 20 years and may be renewed (section 51). The monitoring committee created pursuant to section 25 in connection with the exploration license continues its activities in order to allow local involvement with the production project (section 52). Government may, when granting or renewing a production license, require the maximization of economic benefits within Quebec (section 53).

As with exploration licenses the licensee has the right to access private lands and public lands leased from the state (section 55).  However the licensee may, through expropriation, access private lands or public lands leased from the state if the owner or lease is unable or unwilling to grant such access (section 55).  In the case of municipal lands the licensee need only provide 30 days prior notice to the municipality (section 55). The licensee also has the right to evict from public lands any person in possession of such lands illegally (section 57).

The licensee must provide monthly reports to the Minister as to the amount of oil or gas produced and pay the related royalties (section 59). The licensee must also pay an annual fee (section 60) and prepare an annual report (section 61).

Underground Storage license (PRA, sections 38 to 58 and sections 62 to 64)

The regime governing underground storage licenses is substantially the same as the one applicable to production licenses.

Ministerial Authorizations (PRA sections 69 to 91 and sections 113 to 118)

As we stated above a license holder will, in addition to the license, need additional ministerial authorizations to carry out certain activities.  There are seven such authorizations, namely:

• Geophysical or geochemical surveys (sections 69 and 70)
• Stratigraphic surveys (sections 71 and 72)
• Drilling (sections 73 to 79)
• Completion (sections 80 and 81)
• Workover and reconditioning (sections 82 and 83)
• Temporary or permanent well closure (sections 84 to 91)
• Junction pipelines (sections 113 to 118)

The rules regarding well drilling, well closure and junction pipeline authorizations are the most detailed.

Drilling authorizations are granted on a per well basis (section 73). They can be issued only after (i) issuance of the relevant environmental permit, if any, under the Environment Quality Act (Quebec), (ii) ministerial approval of the relevant well closure and site restoration plan required pursuant to PRA, sections 93 to 107, and (iii) ministerial approval of the guarantee required to be delivered in connection with such plan (section 75).  Drilling work must commence within the time period specified by the Minister and the latter must be notified when work commences (section 76).  The location of the well must be published in the relevant oil and gas and land registries (section 77).

A well must be closed before the expiry of a license (section 89). A well cannot be temporarily or permanently closed without the prior authorization of the Minister (section 84).  A permanent closure must be carried out in accordance with the relevant well closure and site restoration plan (section 87).  The location of the closed well must be published in the relevant oil and gas and land registries (section 90). The holder of an authorization must file a report with the Minister once the activity covered by the authorization has been completed (section 92).

The linkage of wells and other facilities by pipeline requires a junction pipeline authorization from the Minister (section 108).  A favorable decision from the Régie and the relevant authorization certificate under the Environment Quality Act (Québec) are conditions precedent to the issuance of a pipeline junction authorization (section 113).  The holder of a junction pipeline authorization need not be a holder of a production or underground storage license thus allowing pipeline operators and others to provide such services.

Social Acceptability. Projects that do not have social acceptability are unlikely to be approved. Having rights without broad local support will be insufficient. There is no legal definition of the phrase “social acceptability” but section 6 of the Sustainable Development Act (Quebec) lists 16 principles that must be adhered to by Quebec ministries and many government agencies.⁷  This list can serve as a reference.  It includes health and quality of life, environmental protection, economic efficiency, prevention of damage, and cultural heritage protection.  Social acceptability does not mean unanimity. Rather, it should be interpreted as requiring majority acceptance.  The wind power and mining industries offer many recent examples of how projects in Quebec achieved social acceptability and serve as useful precedents.

The PRA brings together a relatively large number of participants to analyze, review, approve and monitor oil and gas projects.  This scrutiny should assist the promoter of an oil and gas project in the early identification of local and other concerns that may impede social acceptability.  The participants include:

1. The Minister of Natural Resources and Wildlife charged with the application of the PRA;
2. The monitoring committees created pursuant to PRA, sections 25 and  52, designed to provide representation of local municipal, business and civic interests;
3. Each First Nation consulted by Government will have at least one monitoring committee member (PRA, section 25);
4. The Minister of Sustainable Development, Environment and the Fight against Climate Change in connection with environmental authorizations required under section 35.1 of  the Environment Quality Act (Quebec);
5. The public at large when the Bureau des audiences publiques sur l’environnement (BAPE) holds consultations and public hearings on proposed projects;
6. The BAPE when it reports on consultations and public hearings;
7. The Régie in connection with production and underground storage projects as well as junction pipelines (PRA, sections 38 and 113).
8. The independent experts that must certify permanent well closures (PRA, section  105), and
9. The Quebec Cabinet in connection with environmental authorizations required for production and underground reservoir licenses (PRA, section 42) and undertakings regarding Quebec economic benefits (PRA, section 53).

One argument raised by critics against the PRA concerned the expropriation right granted to production and storage licensees. The fear of many is that the expropriation right is unfettered and will lead to many forcible dispossessions.  The right of expropriation is similar to the one provided in the Mining Act (Quebec).  Mining industry experience shows that this right is seldom used.  This is likely also to be the case under the PRA. The numerous steps required to obtain production and storage licenses as well as the transparency of the process is likely greatly to limit, if not alleviate, the need for expropriation.  Authorities are reluctant to issue environmental and other authorizations if expropriation is involved.  Thus, it is likely that projects will be sculpted to avoid expropriation in order to garner social acceptability.

Strict liability.  The PRA at section 119 enshrines the polluter pay principle and establishes a limited strict liability regime for the holders of production and underground storage licenses as well as the holders of pipeline junction authorizations. The strict liability will include damage caused by force majeure.  Above the strict liability limit to be determined by regulation, the normal rules apply and fault will have to be proven (section 119).

Established Companies. The PRA betrays a strong preference for well-funded and technically advanced companies.  Simply stated, major oil and gas players have greater credibility. Compliance with the PRA regulatory framework requires considerable administrative, technical and financial resources. The PRA places great emphasis on best practices and optimal recovery and the Régie will have to be convinced as to the technical and commercial merits of any oil or gas production or underground storage project. The strict liability regime requires the licensee to demonstrate its ability to meet its polluter pays obligations as well as its site restoration and mine closure obligations. All this means that social acceptability is easier to obtain if the promoter can demonstrate deep technical sophistication coupled with actual experience.

Agnostic. To the relief of many parties interested in Quebec oil and gas, the PRA is agnostic as to the technologies used to extract oil and gas or as to the location of such activities, provided that such techniques allow for the optimal extraction of a resource whilst complying with the objectives set out at section 1 of the PRA (section 123). To its critics the PRA fails by not expressly prohibiting fracking and offshore exploration and drilling. The latter is even expressly envisaged at sections 59 and 249. Note that drilling in the St. Lawrence River remains off limits as provided in An Act to limit oil and gas activities (Quebec).⁸  Although the PRA does not ban fracking it is unlikely that Government would welcome a fracking project, at least not in the early days of the Quebec oil and gas industry. Premier Couillard is on record as being skeptical about the current state of the art and suspects that public opinion will remain opposed for some time.

Flexibility.  The PRA’s heavy reliance on regulations allows Government quickly to adjust the oil and gas regime to reflect public opinion across Quebec or in any given region.  Moreover, the Minister may withdraw land from oil and gas activities if it considers it in the public interest (PRA, section 131) or suspend the validity of an exploration, production or underground storage license should it be challenged before the courts (PRA, section 134).  Such flexibility can act as a vital safety valve should a project become problematical.

Conclusion

Quebec has no intention at this time to promote oil and gas or its new law. Quebec hopes that industry will accept the PRA as evidence that it is serious about allowing some oil and gas activities. Quebec is well aware that natural gas can serve as a transition fuel in trucking, shipping, heavy industry and remote communities and has incorporated natural gas in many of its economic and development policies. Quebec also acknowledges that oil will continue to be an essential part of Quebec’s energy mix for some time and recognizes that oil also has important non-energy uses. Oil is used as feed stock in industrial processes and Quebec’s light oil appears ideally suited to higher value added uses.  All this to say that some oil and gas development dovetail’s with Government’s energy and regional development policies.

*Erik Richer La Flèche is a partner at Stikeman Elliott LLP. He has advised corporations, lenders and governments on M&A transactions and large capital projects (infrastructure, mining, electricity, oil and gas) in more than 35 countries, including the Chad-Cameroon pipeline (1996-2001). Among other things, he is currently advising on electricity and oil and gas in Quebec.
1.  Bill 106, An Act to implement the 2030 Energy Policy and to amend various legislative provisions, 1^st Sess, 41th Leg, Quebec, 2016.
2.   An Act respecting the Régie de l’énergie, CQLR, c R-6.01.
3.   Hydro-Quebec Act, CQLR, c H-5.
4.   Environment Quality Act, CQLR, c Q-2.
5.   Mining Act, CQLR, c M-13.1.
6.   Regulation respecting petroleum, natural gas and underground reservoirs, RSQ, c M-13.1, r 1.
7.   Sustainable Development Act, CQLR, c D-8.1.1.
8.   An Act to limit oil and gas activities, SQ 2011, c 13.