Ottawa Issues New Regulation Setting Pipeline Companies' Financial Obligations

Recently, the Federal Government published its proposed Pipeline Financial Requirements Regulation. This new Regulation would implement some aspects of the new Federal Pipeline Safety Act that came into force in June 2016.

As we discussed earlier, the Pipeline Safety Act imposes greater obligations and liability on companies that operate federally-regulated oil and gas pipelines. An important part of the Pipeline Safety Act is the codification of the "polluter pays" principle (this is effected through changes to the National Energy Board Act). One of the key new items is absolute liability of up to $1 billion on a pipeline operator for a release, even where no fault or negligence is shown. Those companies that operate pipelines will be required to maintain financial resources necessary to pay the amount of their without-fault liability exposure.

The draft Pipeline Financial Requirements Regulation was issued on September 29, 2016, following public consultations last year. The draft Pipeline Financial Requirements Regulation provides more details about the new absolute (no fault) liability regime.

The most important item draft Pipeline Financial Requirements Regulation is the determination of the level of absolute liability (also referred to as the financial resource requirement) that will apply to different pipelines. According to the commentary, the level of liability is based on the level of risk associated with different types and sizes of pipelines. The approach taken is to look first at the commodity being transported (oil, gas, other) and then to look at the size of the pipeline. Larger pipelines will impose higher absolute liability on their operators. For oil pipelines, the level of absolute liability will be $200 million (for any pipeline with capacity of up to 50,000 barrels per day), $300 million (where the pipeline capacity is between 50,000 and 250,000 barrels per day) or $1 billion (where the pipeline capacity is more than 250,000 barrels per day). For gas pipelines, the level of absolute liability ranges between $10 million and $200 million, depending on the size of the pipe. For pipelines transporting other commodities, the level of absolute liability is $5 million. Where an operator has more than one unconnected pipeline, then the capacities are summed together to determine the level of absolute liability.

Another key item in the draft Pipeline Financial Requirements Regulation is the requirement for operators to maintain at least 5% of their financial resource requirement in "readily accessible form." This means that each pipeline operator must have the relevant amount (up to $50 million in the case of large oil pipelines) available as a letter of credit, insurance policy, cash or interest in a pooled fund with other pipeline operators.

Interested parties are invited to submit comments on the draft Pipeline Financial Requirements Regulation by October 28, 2016. It can be expected (based on comments in a news article) that some comments will state that the amount of readily accessible financial resource requirement is too low, and should be at least as high as 10% of the financial resource requirement (the 10% level was the Government's initial proposal).

Once the final Pipeline Financial Requirements Regulation is published, most pipeline operators will have one year to make their readily accessible financial resource requirement accessible. Note, however, that operators of the largest oil pipelines will immediately be subject to the $1 billion absolute liability level and will have to make their $50 million financial resource requirement available.