Offshore Oil: Risk and Regulation in Canadian Waters

Companies drilling for oil offshore of Newfoundland and Labrador face some of the most challenging physical risks anywhere in the world. Physical risk, such as spills or injury to persons or property, is an easily understood topic that garners a lot of attention. Some environmental groups suggest Canadians should simply ban drilling off the coasts of Canada. However, that would not reduce the risk to the global environment—it would merely export the risk to another region. If Canada is to produce the petroleum it needs, its citizens must accept some degree of physical risk, not for its own sake, but in order to minimize  other risks that they cannot afford to ignore—the economic, political, ethical, and regulatory risks that come with a fossil-fuel dependent economy.

Economic Risk: The physical risk cannot blind its citizens to the economic risk, or the risk to their standard of living if Canada does not drill. Only the rich have the luxury to focus on physical risk to the exclusion of all the other risks. It is interesting to note that in areas subject to offshore drilling moratoriums there is not a corresponding abandonment of the trappings of the petroleum economy.

Political Risk: The recent unrest in the Middle East and in Africa has reminded Canadians of the risks of doing business in politically unstable countries. Moreover, a majority of the known remaining supplies of oil in the world is in the hands of sovereign states and state-controlled entities. As a result, the price and availability of oil is increasingly becoming a political tool.

Ethical Risk: Do Canadians want to be in a position where they are forced to support regimes that commit atrocities? Companies must include ethical considerations in their decisions simply because these issues can affect their bottom line.

Regulatory Risk:  Countries with strong, mandated safety and environmental laws tend to promote safe drilling. In general, the higher the mandated safety and risk regulation, the lower the overall physical risk of the drilling. Isn’t it better for the planet to allow offshore drilling in countries, such as Canada, with strong environmental standards?

The Canadian Advantage: After the Deepwater Horizon incident in the Gulf of Mexico in April 2010, the Senate of Canada appointed a committee to evaluate the regulation of the offshore oil industry in Canada. It concluded that the regulation of the industry is more than adequate. The Senate Committee identified five Canadian advantages: 1) Canada has so-called goal-oriented regulation; 2) the boards each have a chief safety officer, who has the authority to shut down an operation for safety concerns; 3) and all facilities are required to possess a certificate of fitness stating that the equipment on the facility is fit for its use and designated purpose; 4)  the shared federal and provincial jurisdiction over the boards means that the persons most affected by drilling (the residents of the adjacent provinces) have a significant voice in decisions; and 5) the boards have no role in the collection of royalties.

Newfoundland and Labrador offshore production stands at 270,000 barrels per day and accounts for about 10 percent of all Canadian crude oil production. The CNLOPB is tasked with the regulatory responsibility to ensure safety, protection of the environment, and proper exploitation of the resources. The boards’ view of this responsibility is that worker safety and environmental protection will be paramount in all board decisions. The board has no part in royalties or taxes nor does it promote the industry. That is the role of governments.

This focus on safety in drilling and production has yielded results. Offshore of Newfoundland and Labrador, where the bulk of the oil production occurs, the largest oil spill to date occurred in 2007, when roughly 1,000 barrels of oil were spilled. This spill had minimal environmental effects, and there was no loss of life.

Thus Canadian offshore drilling does not create unmanageable risks to their environment. Although there is no doubt that the Deepwater Horizon disaster has made Canadian regulators more vigilant in regulating offshore drilling in general, Canadian law gives those regulators the power and authority to properly and safely regulate such drilling.

Alexander MacDonald, Q. C., is the managing partner at the St. John’s office of Cox & Palmer, practicing in energy law.