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Canada Weighing Energy Export Controls

For the first time in 22 years a surviving relic of Canadian energy trade regulation -- volume control on natural gas and oil exports -- has popped up on the national agenda for review and change. The renewed interest comes when British Columbia is poised to become the departure point for tankers bound for Asian markets with liquefied Canadian gas.

Proposals are being sought from all concerned for a new formula that will enable the federal government to continue keeping tabs on commitments to foreign markets yet eliminate any remaining drag on supply projects.

The review was triggered by a pro-development overhaul of energy and environmental regulation that Canada's Conservative majority government enacted in June over vehement protests from left-leaning opposition parties and green groups. The reform package included abolition of mandatory public hearings and environmental assessments from procedures for granting licenses for long, large oil and gas export sales arrangements.

But the new regime retained a key trade policing section of the National Energy Board (NEB) Act, which created the agency in 1959. The provision -- known as Canada's "surplus test" -- still says: "The Board shall satisfy itself that the quantity of oil or gas to be exported does not exceed the surplus remaining after due allowance has been made for the reasonable requirements for use in Canada, having regard to the trends in the discovery of oil or gas in Canada."

In launching the review, the NEB refrained from specifying details of its preferences for the next generation of export regulation. But the board's call for proposals made it plain that the board hopes to use a light-handed version of policing and is looking for ways to improve efficiency.

The call for suggestions says the NEB proposes to create a surplus test that will be standardized for both gas and oil, and that will "reduce the information required for long-term export license applications." For arrangements that are already in place, the board seeks a monitoring formula that will "modernize the reporting requirements to simplify the regulations and reflect current market conditions."

In reviewing the last vestiges of trade controls, the NEB also wants to hear suggestions for exempting Canadian gas imports -- a major growth front in energy trade with the United States -- from requiring board authorizations.

The national rule has a long pedigree and deep roots in popular political sentiment. The regime copied supply protections that the Alberta government and its Energy Resources Conservation Board (ERCB) adopted as a result of a public inquiry soon after the 1947 Leduc discovery near Edmonton launched the modern Canadian industry.

The inquiry was led by prominent business figure-turned-civil-servant R.J. Dinning, who had a taste for government control. Dinning's energy inquiry registered a strong majority of Alberta public opinion that was highly possessive of natural gas as a key ingredient for growth by a wide range of industries from pottery to petrochemicals, as well as a cleaner and cheaper heating fuel than coal.

The Dinning commission recommended maintaining tight control on out-of-province gas sales -- to any destinations including the rest of Canada as well as the United States -- by limiting them to volumes deemed to exceed a 50-year supply for foreseeable Alberta needs, including economic and population growth. After much debate, the ERCB devised a less-restrictive but still stringent 30-year requirement. The NEB adopted a matching rule.

The provincial and national export regulations spawned periodic marathon hearings before the boards. Canadian suppliers and consumers jousted over encyclopedia-length reports assessing current reserves, demand and projected growth on both sides of energy markets.

The economic debates inflamed economic nationalist and environmental opinion, and employed squads of lawyers and expert witnesses from the earth sciences and engineering until the onset of energy deregulation under a 1985 federal-provincial policy agreement known as the Western Accord.

After a few last rounds of surplus test wrangling, the NEB largely put a stop to the protectionism-versus-free trade duels with a landmark decision handed down in 1987. The ruling devised a light-handed version of export policing that has prevailed to this day, known as the "market-based procedure" (MBP).

The national MBP is a complaint-based method that dropped the years-long mandatory gas inventories and that transferred the onus for policing export volumes over to markets from regulatory gurus. While Alberta has retained elements of the old reserves bean counting, the NEB has let exports go ahead unless alternative Canadian buyers step forward to demonstrate that they are denied supplies on terms comparable to deals with foreign consumers. No such complaints have been made by Canadian personal or business consumers, although Atlantic region provincial governments prodded the NEB into holding surplus test hearings in the late 1990s on fledgling markets opened up by the Sable Offshore Energy Project.

The MBP cured technical headaches by enabling exporters to rely on periodic supply and market assessments by the NEB instead of generating their own projections.

Export approvals have also been accelerated by clearly dividing them into two classes: short-term permits for two years or less and long licenses that typically last for up to 20 years.

Since 1985, the volume of Canadian pipeline exports to the United States that move under long-term licenses declined from almost 100% to 64% in 1990, 27% in 2000 and about 1% as of 2011.

But long licenses are making a comeback because they are sought for overseas tanker shipments by sponsors of liquefied natural gas (LNG) projects on the Pacific Coast of British Columbia. The NEB has granted 20-year export licenses to two LNG projects over the past year and is reviewing an application for a third request for a 20-year permit (see NGI, Aug. 6).

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