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Canada's NEB to Crack Down on Shale Gas Regulations

U.S. safety and environmental concerns are spreading north across the border into Canada, where the National Energy Board (NEB) is stepping up scrutiny of natural gas and oil operations from exploration to transportation.

At industry conferences in Halifax and Calgary, NEB members signaled that regulatory focus will sharpen on shale gas, pipeline maintenance and offshore drilling -- and not just as a temporary reaction to developments in the United States, but for months or years to come.

A target date of early 2011 has been set for completion of the first in a planned series of reports on Canadian shale gas, NEB Vice Chairman Sheila Leggett said. The initial assessment will focus on the Horn River Basin in northeastern British Columbia, where a long lineup of producers are introducing large-scale horizontal drilling and multiple fracturing with sometimes hazardous fluids into a subarctic region of muskeg swamps and boreal forest while TransCanada Corp. seeks approval for a pipeline into the region.

Further assessments are likely of budding shale drilling in Atlantic Canada and especially Quebec, where low prices have slowed down but far from killed plans by the Alberta-based gas supply industry to use the new technology on northern extensions of developments in Pennsylvania and New York State. Prospects of substantial development in the region east of Montreal and south of the St. Lawrence River, driven partly by projected cost savings of producing for export next to eastern U.S. markets without paying long-distance pipeline tolls, have ignited a noisy review by the Bureau d'audiences publiques sur l'environnement du Quebec.

The provincial government, always starved for revenues and seeing shale gas as a potentially significant source of royalties and taxes, is encouraging the industry. The same goes for distributor Gaz Metro, while a newly formed Quebec Oil and Gas Association has recruited as president one of the province's most prominent business leaders, Andre Caille, a former head of Hydro Quebec.

But French Canadian protests before the environmental watchdog agency mimic -- and draw some of their information from -- shale gas resistance groups in the two northeastern U.S. states.

While the field activity side of gas development is under provincial jurisdiction in Canada, environmental and safety concerns invariably spill over into pipeline and export issues before the NEB. Leggett urged industry to take all such matters seriously. "The NEB must constantly be aware of the balance between the environment, the economy and social concerns in order to ensure that the energy sector operates safely, responsibly and in the interests of all Canadians. This is something paramount in the minds of NEB board members and staff," she said.

As a practical example, Leggett also predicted it will take "many months" to complete a safety and environmental review of arctic drilling that started out as a technical study last winter but escalated into a full-scale public inquiry as a result of the BP oil spill in the Gulf of Mexico. The case has escalated from reconsidering traditional requirements for exploration equipment and preparations to include capabilities to drill relief wells in case of blowouts into "a thorough examination of the best available information concerning the hazards, risks and mitigation measures associated with offshore drilling activities in the Canadian Arctic," Leggett said. Procedures include ensuring that wary public interest groups are in attendance by subsidizing intervener costs.

In Calgary, an annual fall international pipeline conference heard a warning from NEB member Bob Vergette. Without mentioning company names, the occasion revived vivid industry memories of a 1990s plague of stress corrosion-cracking leaks, explosions and fires in the Canadian natural gas pipeline network that led to a lengthy board inquiry and expensive overhauls including development of new inspection equipment. A similar form of metal fatigue is among the suspected culprits being investigated as explanations are sought for a break and spill on a Canadian oil export pipeline in Michigan this summer.

Vergette pointed to a potential Achilles heel in the Canadian approach to pipeline regulation - ready acceptance of rate settlements known as "incentive tolling agreements." The packages routinely include provisions for cutting costs and divvying up the savings in the forms of toll savings for shippers and increased earnings for pipelines.

The agreements sometimes blur lines between costs of keeping up pipe "integrity" and routine operations and maintenance (O&M) expenses, Vergette observed. "There are O&M cost reductions that are not identified as 'integrity' costs that can nevertheless affect integrity. An example is maintenance staff reductions."

While saying he was only expressing one NEB member's opinion rather than announcing new policy, Vergette delivered a clear message to pipelines and their shippers alike that the board is aware of the dangers of cutting corners and watching out for any such practices. "Companies should be wary of the potential impact on pipeline integrity of a continuing focus on containing costs over the years. Maintenance and integrity costs should be considered a legitimate cost of providing service (for rate-making purposes), and reducing costs should not take precedence over ensuring proper maintenance and integrity, safety and environmental protection," Vergette said.

"Pipelines in Canada are aging," the NEB member observed. "Given the ability of existing technology to extend physical life...effective maintenance programs can result in very old pipelines continuing to operate safely. However, older pipelines require more maintenance than new ones."

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