Federal Government Targets Oil and Gas Emissions in Methane Regulation Amendments and Emissions Cap

December 12, 2023

Written By Brad Gilmour, Sean Assie, Larissa Lees and Tao Browne

As leaders around the world gathered at the 28th meeting of Conference of the Parties to the United Nations Framework Convention on Climate Change (COP28), the Federal Government released details for a number of policy initiatives targeting greenhouse gas emissions (GHGs or emissions) in the oil and gas sector, including proposed amendments to federal methane regulations and a federal framework for an oil and gas emissions cap.¹

Both the Alberta and Saskatchewan governments have come out strongly against the policy initiatives targeting oil and gas sector emissions, claiming they intrude into the exclusive jurisdiction of the provinces over natural resources. Provincial push back against federal environmental policy has been at the forefront of inter-government relations since the two recent decisions from Canada’s courts that the federal government has exceeded their constitutional jurisdiction over environmental matters.²

This blog provides an overview of these policy initiatives and potential implications for future litigation and policymaking. 

1. Overview of Proposed Amendments to the Methane Regulations for the Oil and Gas Sector

Regulatory Approach

Performance-Based Approach

2. Overview of the Regulatory Framework to Cap Oil and Gas Sector Emissions

3. Implications of Oil and Gas Emissions Policy Initiatives

1. Overview of Proposed Amendments to the Methane Regulations for the Oil and Gas Sector

Methane reduction regulations were initially established by the federal government in 2018 to achieve a reduction target from the oil and gas sector of 40 to 45 percent below 2012 levels by 2025.³ Equivalency agreements are currently in place until 2024 for Saskatchewan and 2025 for Alberta and British Columbia which allow the provinces to achieve these objectives under provincial policies.  Alberta, pursuant to its own provincial regulations, reached the 45 percent reduction target for methane three years early in 2022.⁴

The federal government first announced its intention to reduce methane emissions from the oil and gas sector by at least 75 percent below 2012 levels by 2030 at the time it endorsed the Global Methane Pledge at COP26 in 2021. The proposed amendments now seek to achieve this new target through two approaches: (1) Regulatory approach which imposes certain prohibitions, technical and monitoring requirements; and (2) Performance based approach which sets out an alternative pathway for compliance to the regulatory approach.

Regulatory Approach

Despite not directly regulating most aspects of oil and gas activities in a province, the federal government has proposed amendments that impact how such activities operate including with respect to venting of emissions; emissions associated with combustion of hydrocarbon gas; and fugitive emissions.

i) Venting Emissions

When put into force, the amended methane regulations would prohibit venting subject to limited exceptions including: where venting is part of planned equipment maintenance or temporary depressurization of equipment or a pipeline and measures are taken to minimize the quantity that is vented; venting is necessary to avoid serious risk to human health or safety arising from an emergency situation; the heating value of the hydrocarbon gas or its flow rate are insufficient to sustain stable combustion; and/or the use of hydrocarbon gas destruction equipment or hydrocarbon gas conservation equipment would prolong an interruption of the hydrocarbon gas supply to the public. Additionally, all pressurized equipment must be physically connected to conservation or destruction equipment. As of 2027, facilities increasing gas production would be required to design and operate systems to eliminate venting. All facilities in the sector would be subject to the new requirements in 2030.

ii) Emissions Associated with Combustion of Hydrocarbon Gas

In respect of hydrocarbon gas destruction equipment, combustion systems must operate with a pilot flame; an automatic ignition device and an automatic flame failure detection system; and when hydrocarbon gas is routed to the system, it must maintain the stable combustion of hydrocarbon gas without generating any visible emission and have a carbon conversion efficiency of at least 98 percent. An exception for small gas volumes (less than 60 m³ per day) allows for use of catalytic oxidation systems with an efficiency of at least 85 percent.

Flaring, other than to avoid serious risk to human health or safety arising from an emergency, must be supported by an engineering study that concludes the use of hydrocarbon gas to produce useful heat or energy is not feasible in the circumstances. As of 2027, facilities increasing gas production would be required to design and operate systems to limit emissions during combustion and to eliminate routine flaring where feasible. All facilities in the sector would be subject to the new requirements in 2030.   

iii) Fugitive Emissions

The amendments introduce a risk-based approach to fugitive emissions wherein more frequent inspection schedules are required for facilities more likely to emit methane (12 times a year for screening and 4 times a year for comprehensive assessments) whereas facilities less likely to emit methane would require annual assessments. Upon detection of fugitive emissions, equipment repair must be completed within the permitted repair timeline which is dependent on the flow-rate of emissions (i.e., higher emissions would need to be addressed within 24 hours or 7 days whereas lower emissions can be addressed over several months. The proposed measures would come into force in 2027 for all facilities.

Performance-Based Approach

The proposed performance-based approach set out an alternative approach for compliance with the venting and fugitive emissions requirements. Instead, facilities may choose to install continuous monitoring systems for the facility’s potential methane emission sources. Upon detection of methane emissions, a mitigation response must be initiated according to timelines dictated by the emission rate. When detected emissions exceed a management trigger of 10kg/hr, an event analysis would also need to be conducted as part of mitigation actions. This alternative approach would come into force in 2027 and is an available compliance option for all facilities. 

2. Overview of the Regulatory Framework to Cap Oil and Gas Sector Emissions

Recent statements from federal Minister of Environment and Climate Change Canada, Steven Guilbeault, indicated that the federal government was rethinking its approach to its long-planned regulations to cap emissions for oil and gas in light of the recent Court decisions finding the federal government has exceeded their constitutional jurisdiction in environmental matters. Minister Guilbeault indicated that those Court decisions added to the complexity of the regulations, resulting in the government delaying its planned release date for the draft regulations—originally expected in the spring of 2023 and then expected to coincide with COP28.⁵ Instead, the federal government released the Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap (the Framework). The regulations are now expected to be released in the Spring of 2024 and enter into force sometime in 2025. Formal written comments on the Framework may be submitted by February 5, 2024, to PlanPetrolieretGazier-OilandGasPlan@ec.gc.ca

In the Framework, the federal government set out its plan to implement a national emissions cap-and-trade system through regulations to be made under the toxic substance provisions of the Canadian Environmental Protection Act, 1999. The proposed cap-and-trade system will apply to facilities engaged in specified activities (discussed below) and sets a 2030 emissions cap for the oil and gas sector at a level that is between 35-38 percent below 2019 levels (emissions cap) while providing mechanisms to emit up to a level between 20-23 percent below 2019 levels (upper legal bound). The federal government plans to phase in the system between 2026 and 2030; however, no details in this regard are provided. Additionally, the regulations will require that emissions from the oil and gas sector decline over time to reach net-zero by 2050.

Under the Framework, oil and gas facilities will be allocated an individual emissions allowance which they would not be permitted to exceed subject to the compliance exceptions. It is proposed that the emissions allowance would initially be allocated “free of charge” (free allocation) to be set based on a baseline production level and an allocation rate for a given product or activity (CO₂e tonnes/unit of product produced). The total free allocation would be adjusted up or down on a facility basis should the facility’s production rise or fall by more than a predetermined percentage from the baseline production level.

Facilities would be able to use certain compliance mechanisms, which include emissions trading amongst facilities; multi-year compliance periods to give more time to facilities to achieve reductions; banking of emissions allowances for up to two compliance periods (six years); the ability to purchase a limited amount of carbon offset credits; and the ability to contribute to a decarbonization fund. Consideration is also being given to the use of internationally transferred mitigation outcomes (ITMOs), which are an accounting entry that reflects a quantity of emissions reductions or removals that occurs in one country and that are voluntarily authorized and transferred for use towards another country’s climate target.⁶

The emissions cap-and-trade system will apply to liquefied natural gas facilities and upstream oil and gas facilities, including offshore facilities that are engaged in the following list of mostly provincially regulated activities:

1. Bitumen and other crude production, including upstream oil gathering pipelines when they are part of a covered facility (other than bitumen extracted from surface mining and bitumen extracted from petroleum refining);
2. Surface mining of oil sands and extraction of bitumen;
3. Upgrading of bitumen or heavy oil to produce synthetic crude oil;
4. Production and processing of natural gas and production of natural gas liquids, including upstream gas gathering pipelines when they are part of a covered facility; and
5. Production of liquefied natural gas (collectively, the covered activities).

Under the proposed regulations, all covered facilities, including new facilities, will be prohibited from emitting any emissions from a covered activity unless they have first registered to the system. The cap-and-trade system will apply to all direct emissions and indirect emissions from the facility (which include those emissions generated through the production of thermal energy, electricity or hydrogen used or produced by the facility). It will also account for emissions reductions from transfers of captured emissions between facilities as well as permanent storage.

Finally, all covered facilities will be required to submit annual reports, including reporting direct and indirect emissions and production. Facilities will be required to use the yet-to-be-announced quantification methods specified in the regulations. These annual reports will have to be verified by a third party that complies with requirements set out in the regulations.

3. Implications of Oil and Gas Emissions Policy Initiatives

There has been considerable push back from Alberta and Saskatchewan in respect of these oil and gas emissions policy initiatives on the basis that the initiatives impermissibly intrude into exclusive provincial jurisdiction over natural resources and on the basis of technical feasibility.⁷ In response, the federal government has stated that the proposed oil and gas emissions cap will “cap GHG emissions, not production” and that it has “engaged with industry to assess the level of technically achievable emissions reductions by 2030.” However, the Canadian Association of Petroleum Producers have challenged this assertion, claiming that the cap “could result in significant curtailments—making this draft framework effectively a cap on production”.⁸

Given the stated concern with the constitutionality of the policy initiatives, there is a likelihood these initiatives would ultimately be challenged in court. Notably, there has yet to be an express confirmation from the Supreme Court of Canada (SCC) that the federal government has jurisdiction over the regulation of emissions beyond the carbon pricing mechanism upheld in the References re Greenhouse Gas Pricing Pollution Act.⁹ In that decision, the SCC upheld the federal government’s proposed mechanism for carbon pricing on the basis of the doctrine of national concern under the peace, order and good government power granted to it under subsection 91 of the of the Constitution Act, 1867. In contrast, in the SCC’s ruling in Reference re Impact Assessment Act, the majority expressly concluded that a designated project’s anticipated GHG emissions are not a matter of federal jurisdiction.¹⁰

While it is possible that the Federal Government may rely upon the doctrine of national concern, it is expected that the federal government will rely on the criminal law power granted to it under subsection 91(27) of the Constitution Act, 1867 to justify its methane regulation amendments and emissions cap. We note that although the methane regulations are currently in place, the regulations have yet to encounter a constitutional challenge. As such, it is uncertain as to whether the methane regulations and the proposed emissions cap would be upheld as constitutionally valid under the criminal law power and instead be considered an invalid intrusion into provincial jurisdiction over natural resources under subsection 92A of the of the Constitution Act.

Bennett Jones has experience in all aspects of energy and natural resource law, including in respect of capital projects in the oil and gas sectors, and in developing strategies for industry to manage and adjust to changes in environmental and regulatory laws. Bennett Jones represented the Attorney General of Alberta at the Alberta Court of Appeal and the SCC in Reference re Impact Assessment Act.  If you have any questions about the potential impact of the oil and gas emissions policy initiatives on your business, contact one of the authors of this post.

Authors