New Environmental Rules Could Jeopardise Oil Sands Leases in Canada

Oil Sands Expropriation Looming

The provincial government of Alberta has announced plans to introduce new land and wildlife conservation rules that will affect about 20% of the province's oil sands zone, including active leases by major players like Nexen, Canadian Natural Resources (CNR), Imperial Oil, BP, and Statoil. The area would potentially cover two million hectares, with 14 energy and 10 mining companies owning assets in the proposed conservation zone. However, the proposal is still in draft form and will not be voted upon by the Alberta cabinet before early July 2011.

While observers claim to have been surprised by the move, Mel Knight, Alberta's minister for sustainable resource development, maintains that his government had been working openly on the conservation plans for the Lower Athabasca Region and that the industry had been consulted from the start. The draft legislation would foresee compensation for affected lease-holders, including the initial price of the exploration and development lease acquisitions, reclamation costs, and interest. Companies active in Alberta's oil sands have been crying foul given the fact that some of their assets have already resulted in proven hydrocarbon finds, the foregone profits of which they would ask to be compensated for as well. In that regard, the Alberta government has signalled its willingness to discuss the application of the potential new regulation on an individual basis, potentially allowing companies to keep leases and developments in exchange for greater regulatory scrutiny. However, no new leases will be issued on the protected land. In response to the new plans and potential mitigation efforts, Cenovus' chief executive officer Alan Reid, quoted by the Globe and Mail, has stated that: "It all depends on what activities can be carried out in these areas". He further maintained that the precedent in Alberta supports a compromise approach.

The Political Component

The debate over Alberta's plan is also likely to have a bearing on the general election campaign. The opposition Liberals, seeking to close the growing poll lead logged by Prime Minister Stephen Harper's Conservatives, unveiled their election platform earlier this week. The party is differentiating their position from that of the Conservatives by pledging to cancel tax breaks for the oil sands industry and introducing a cap-and-trade emissions system (see Country Intelligence:Canada: 4 April 2011: Election 2011: Canadian Liberals Unveil Platform with Eye on Middle Class). With the polls opening on 2 May, how the environmental debate plays with eco-conscious voters in Ontario and Quebec could prove the difference between the Conservatives winning an overall majority or again being left the largest party but without a majority.

Outlook and Implications

While the issue could prove decisive in determining the strength of any newly elected Canadian government, investments in the Canadian oil sands would be hurt if the draft legislation is passed. Many development projects in the Athabasca region had only just picked up again in 2010, after a number of high-level expansion cancellations during the 2008–09 financial and economic crises. Future development prospects are still high for the Canadian oil sands, but effective expropriation through environmental regulation will surely deter some investment in the country, and thus significantly hinder production expansion. It remains to be seen, whether Alberta can afford to play this short-sighted election card with its economic future at stake.

Providing a more balanced view on the proposed conservation legislation, the Canadian Association of Petroleum Producers (CAPP) has said in a statement that the affected area does not include the province's most prospective regions, and rather revolves around the "periphery". However, CAPP did maintain that its next step upon the potential passing of the conservation rules would be to ensure a fair compensation scheme for its members for losses arising from foregone booked value, a longstanding issue in Canada that has gained new momentum on the back of the electoral campaign.