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The Canadian Pipeline Saga: Exploring the Limits of Cooperative Federalism

New energy infrastructure projects in Canada remain under attack, with project proponents facing increasing regulatory, political and financial risk. The focus on environmental stewardship, climate change initiatives and social license has continued to place pressure on the oil and gas industry, consistent with worldwide trends. However, the intensity of these issues in Canada has been particularly exacerbated by the need to transport landlocked resources to tidewater. The lack of pipeline capacity has become a key problem for Canadian producers.

Well-over three quarters of Canada's oil and gas production comes from the landlocked provinces of Alberta and Saskatchewan, with the vast majority of crude oil being transported to refineries in the United States. Limited pipeline capacity and restricted access to world markets combined with growing production has contributed to a significant discount in the Western Canadian Select benchmark for Canadian heavy oil to WTI (recently in excess of $30 per barrel, in comparison to a more typical discount in the range of $10 to $15). Even with the Keystone XL project poised to proceed (increasing pipeline capacity to the United States), Canadian producers still face limited ability to ship production to the west coast for export to potentially lucrative Asian markets.

The only existing option for Canada's oil producers to reach overseas market is shipping crude oil on the Trans Mountain pipeline system (the TMPL) through Alberta and British Columbia to reach the Westridge marine terminal at Burnaby, B.C. Any new pipelines to Canada's west coast would also need to pass through British Columbia. This has been largely opposed by B.C.'s coastal communities. With legislative powers constitutionally divided between the Canadian Parliament and the provincial legislatures, attempts to build new pipelines have seen the B.C. government and local municipalities assert their jurisdictional authority in direct opposition to the federal government and the other provinces.

Constitutional Landscape

While the provinces have legislative authority over property and civil rights, Parliament has authority over interprovincial and international works and undertakings. In the case of interprovincial pipelines, Parliament exercises its power through the National Energy Board (NEB) under the National Energy Board Act (Canada) (the NEB Act). Environmental jurisdiction over NEB-regulated pipelines is split between the federal government and the applicable provincial government. In addition, other approvals may be required under municipal bylaws. As such, in order for an interprovincial pipeline project to proceed, federal, provincial and municipal approvals are likely to be required.

Despite a long history of disputes over the boundaries of competing jurisdictional powers, Canada has aspired to achieve the ideal of cooperative federalism whereby its various jurisdictional authorities work together to achieve solutions that meet both national and regional needs. Although this is an inherently political concept, it has been recognized by the Supreme Court of Canada (SCC) and the NEB as the "dominant tide" of modern federalism.

Trans Mountain Pipeline Expansion Project

The development of interprovincial pipelines has posed a serious challenge to Canada's avowed commitment to cooperative federalism. In particular, the ongoing conflict over the construction of the TMPL expansion project has been a dramatic example.

In May 2013, Trans Mountain Pipeline ULC (Trans Mountain), operated by Kinder Morgan Canada, announced plans for the $7.4 billion TMPL expansion (TMX) project, including a twinning of the existing TMPL and three new tanker berths at the Westridge marine terminal, almost tripling the pipeline's capacity. The project immediately faced staunch opposition, including from the B.C. government, the Burnaby municipal government and a number of Indigenous groups and private organizations.

In response to Trans Mountain's proposal and Enbridge's previously announced Northern Gateway project, the B.C. government announced five minimum conditions to be met by its "partner governments" and the project proponent for its endorsement of any heavy oil pipeline project. These requirements included, among other things, the successful completion of the provincial environmental review process and the province receiving a "fair share" of the fiscal and economic benefits of the project.

Meanwhile, Burnaby opposed the project by intervening at the NEB hearing to approve the project and engaging in legal challenges outside of the hearing. The first of these took place in 2014 when Burnaby blocked Trans Mountain's access to city lands required to complete certain NEB-ordered studies on the basis that they violated its municipal bylaws. Applying the legal doctrines of federal paramountcy and interjurisdictional immunity, the NEB found that the subject bylaws were inapplicable or inoperative for the purpose of Trans Mountain's exercise of powers under the NEB Act and ordered Burnaby to allow temporary access to city lands for the conduct of the studies. Burnaby's application for leave to appeal to the Federal Court of Appeal was denied. Burnaby was also unsuccessful in related litigation in the B.C. Supreme Court and the B.C. Court of Appeal.

In May 2016, after an exhaustive hearing, the NEB found that the TMX project was in the public interest and recommended it for approval by the federal government. In the fall of 2016, the federal government made a number of key decisions. The government rejected the Northern Gateway pipeline project on environmental concerns and imposed a moratorium on crude oil tankers in northern B.C. However, recognizing the significance of increasing access to markets for Canadian oil, the government approved the TMX project, subject to 157 conditions, including the requirement for Trans Mountain to meet its stated commitment to apply for, or seek variance from, provincial and municipal permits and authorizations that apply to the project.

Shortly thereafter, in an unprecedented revenue-sharing deal, Trans Mountain agreed to pay British Columbia between $25 and $50 million annually for the first 20 years of operation of TMX. In exchange, the B.C. government publicly confirmed that Trans Mountain satisfied its five conditions and committed to implement a timely and efficient process for all provincial regulatory matters relating to the project. In January 2017, Trans Mountain received an environmental assessment certificate from the B.C. government, which approved the construction and operation of TMX subject to 37 conditions, several of which interrelate with or expand upon specific NEB conditions.

Despite the key federal and provincial approvals having been granted, over the course of 2017, Burnaby repeatedly rebuffed Trans Mountain's efforts to respond to requests for additional information that would allow it to obtain certain approvals and permits under Burnaby's bylaws. In December 2017, once again applying the legal doctrines of federal paramountcy and interjurisdictional immunity, the NEB found that Burnaby's actions were not a legitimate exercise of municipal bylaws and granted an order relieving Trans Mountain of its obligation to comply with the subject bylaws.

Meanwhile, a new B.C. government had been elected in mid-2017 by a very narrow margin after campaigning to use "every tool in the toolbox" to stop the TMX project. The new B.C. government obtained intervenor status in judicial review proceedings challenging the federal government's approval of TMX. Together with Burnaby, it has also applied to the Federal Court of Appeal for leave to appeal the latest NEB decision.

Most recently, in January 2018, the B.C. government announced that it would seek to temporarily prohibit companies from expanding shipments of diluted bitumen (effectively barring the TMX project) until a scientific advisory committee concludes that diluted bitumen can be effectively cleaned up if spilled in water. Declaring the proposal "unconstitutional", the Alberta government responded by banning wine imports from British Columbia and striking a committee to look at further retaliatory measures. In February 2018, the ban was rescinded after the B.C. government agreed that it would first ask the courts to provide an advisory reference on whether its proposal is constitutional.

Trans Mountain has delayed construction as it works to finish permitting.

Related Developments

In July 2017, the SCC released its decision in Chippewas of the Thames First Nation v. Enbridge Pipelines Inc. The appeal was brought by the Chippewas of the Thames, alleging that the NEB process failed to fulfil the Crown's constitutional duty to consult and accommodate their concerns in connection with the NEB's decision to modify an existing pipeline in Ontario. The SCC confirmed that, although "[t]he constitutional dimension of the duty to consult with Indigenous groups gives rise to a special public interest," it is not a right to "veto" projects. The SCC found that the NEB had taken appropriate steps to enable the participation of the Chippewas of the Thames in the decision process and required the proponent to take appropriate accommodation measures. The SCC added that the process with Indigenous groups is "a cooperative one with a view towards reconciliation" which inherently requires balance and compromise.

Despite the various decisions over the course of the last year supporting the ability of proponents to construct federally-approved interprovincial pipelines, the regulatory landscape has recently become more complicated. In February 2018, the federal government announced that it would overhaul the existing federal environmental assessment process by replacing it with the proposed Impact Assessment Act (IAA) and replacing the NEB Act with the proposed Canadian Energy Regulator Act, establishing the Canadian Energy Regulator in place of the NEB. Among other things, the new IAA is intended to enable more comprehensive impact assessments and greater Indigenous and public consultation. Further politicization of the environmental review process is also possible, with projects to be approved if determined to be in the public interest, in contrast to the existing approach where the decision-making authority must determine whether any significant adverse environmental effects of the project are justified in the circumstances. At a minimum, the establishment of new regulatory agencies interpreting a number of new approval criteria is likely to create additional uncertainty, potential delay and increased political risk for project proponents.

Conclusion

Looking back to the beginning of 2017, many commenters had expressed cautious optimism that the approval of the TMX project would be a critical signal for attracting domestic and offshore investment to Canada. However, a year later, after several new challenges and legislative proposals, the Canadian regulatory landscape has become less predictable. This stands in stark contrast to the United States, which has taken aggressive measures to attract investment and ensure its competitiveness globally. Perhaps the only certainty for the Canadian oil and gas industry is that Canada's commitment to cooperative federalism – and the ability to construct major energy infrastructure projects – will continue to be tested in the coming year.