Implementation of the Indian Oil and Gas Act, 2009 and its Phase I regulations: Frequently Asked Questions (FAQs)
There appears to be a lot of change happening at Indian Oil and Gas Canada (IOGC): renewed emphasis on compliance and enforcement; the Phase I regulations change how royalties are reported; and, Phase II regulatory changes include changes in financial and royalty management – what is the rationale behind these changes?
- The Indian Oil and Gas Act, 1974 had remained virtually unchanged for 35 years while its regulations were last updated in 1995. The on-reserve oil and gas legislative and regulatory regime had not kept pace with provincial oil and gas regimes nor had it kept pace with industry and technological advancements.
- For IOGC to continue to be a modern regulator, it required modernization and new tools including:
- A modern Act with clear regulation-making authorities;
- Regulations that could be quickly updated in response to changes in provincial oil and gas rules or in response to industry and technological changes;
- Modern business practices to implement a new Act and new regulations; and,
- Updated informatics to support new business practices.
- IOGC Modernization is governed under the Modern Act, Regulations, and System (MARS) Portfolio of Projects.
Some industry stakeholders have expressed concerns that they were not informed of proposed Phase I regulatory changes until the changes were imminent. What will IOGC do to address this during development of the Phase II regulations?
- IOGC’s industry engagement efforts during development of the Phase I regulations included:
- Quarterly newsletters to all companies with active interests on First Nations reserve lands;
- Direct letters to all companies and to industry associations as key project milestones were achieved;
- Direct mail-out of printed copies of three Consultation Drafts (March 2014, May 2015, September 2017) of the Phase I regulations to all companies and to industry associations;
- Posting successive drafts of the proposed Phase I regulations on the First Nations Gazette three times (May 2015, early 2016, September 2017) for public review and comment; and,
- Posting the regulations on the Canada Gazette, Part I for a 90-day public review and comment period that began on May 18, 2018.
- However, IOGC commits to conduct Industry Engagement Sessions, like those held November 7 and 8, 2018, earlier during the process to develop the Phase II regulations.
- IOGC also commits to make use of industry advocates and associations to facilitate future industry engagement.
Phase II regulations
When are the Phase II regulations projected to be ready?
- IOGC currently projects that the Phase II regulations will become law between one and two years after the 2009 Act and the Phase I regulations come into force.
What changes to Royalty Management are forecasted in the Phase II regulations?
- IOGC is currently seeking direction from First Nations with oil and gas or the potential for such resources – from both IOGC’s Co-Management Board and the Indian Resource Council – on how to structure Royalty on First Nations reserve lands.
Compliance and Enforcement
At times, it can be challenging for industry to ensure an issue is directed to the proper person within their company. Will IOGC unilaterally take action to address industry non-compliance?
- IOGC commits that it will seek engagement, at a minimum, with any non-compliant company prior to taking any remedial action. IOGC’s industry stakeholders are expected to pay close attention to correspondence (letters, messages) from IOGC.
- IOGC’s renewed emphasis on Compliance and Enforcement is expected to be timely and consistent. To foster this process, IOGC commits to working in an integrated and cohesive manner. This is expected to result in more timely and accurate communications with any company believed to be non-compliant.
For instances of industry divestments or acquisitions, with whom would IOGC follow up?
- IOGC’s practice is to follow up with the responsible party/ies as identified in its records.
No significant questions have been raised on Environment mainly because the bulk of Environment regulations will be coming in the Phase II regulations.
First Nations’ Audit
Once an audit has been closed, can it be re-opened?
No significant questions have been raised on Finance mainly because the bulk of the Moneys Management regulations will be coming in the Phase II regulations.
For the new requirement of a "Communications Log," will IOGC stipulate a format and the extent to which consultation activities are recorded, especially beyond the initial meeting?
- The intent of this requirement is to ensure that meetings take place between assignees and First Nations. The format of the log will be up to each company and its purpose is to record communications about the initial meeting. No other consultation activities need to be recorded in a log.
How soon can industry apply for a continuance?
- There is no stipulation contained within either the 2009 Act or the Phase I regulations regarding how early an application for continuance may be made. However, if some data is out of date, an addendum may be required (e.g., updated production).
- An application for continuance should be made at the next review date.
Service wells – how would a Disposal Lease / Licence be continued if service wells won’t be used in continuance reviews?
- Water disposal wells can be only be used to continue a water disposal contract (i.e., they may not be used to continue an oil and gas contract).
Would a non-producing well in a valid / active unit be continued indefinitely?
- Yes, as long as the unit is valid, all subsurface contracts within it will be continued indefinitely.
In the case where there is a new applicant for continuances – for example, a company acquires leases on First Nations reserve lands – how does the company apply for a continuance under the new regulations?
- Continuances made under the new regulations must be made using a form letter which includes a checklist of information that may be required in an application.
- In addition, the regulations stipulate what information MUST be in the application.
- These documents will be available on IOGC’s Internet website.
- A company can always call IOGC if they have any questions.
If a company has a well producing in a spacing unit on reserve, adjacent to a spacing unit with a producing off-reserve well, why does the company still receive an Offset Notice?
- Under the new regulations, all contract holders will receive an Offset Notice when an off-reserve well is producing in a spacing unit adjacent to a spacing unit on First Nations reserve lands. The Minister does not have any discretion.
- When a contract holder receives an Offset Notice, the contract holder can respond under section 96(1)(c) to indicate that there is a well producing from the offset zone.
- Note that, in the future, if the offset well is shut-in while the triggering well continues to produce, there will be compensatory royalty obligations without further notice. A company must be vigilant and monitor triggering well status and activity within a status.
Why is a First Nation interest in the triggering well indicated in an Offset Notice?
- A First Nation interest in the triggering well is indicated because IOGC would receive a royalty share of the production from the triggering well if there are First Nation reserve lands within that spacing unit for the triggering well.
- The offset First Nation land would be paid a compensatory amount on the Crown or Freehold Share of production from the triggering well.
Gathering and submitting data can sometimes be challenging for industry – what changes are being introduced to assist industry?
- IOGC is a member of Petrinex and it is anticipated that automated data exchange between Petrinex and IOGC will begin to be implemented by Q4 of FY2019-2020.
- Reporting systems and reporting dates will be aligned with what industry is familiar with and already using to report their projects outside of reserve lands.
Why does it take IOGC so long to finalize royalty calculations?
- The existing royalty regime is based on self-assessment principles. This means companies pay royalty now and IOGC will finalize later the amount actually owed based on available data.
- Presently, Gas Cost Allowance and Trucking Costs can take two years. This has been so for many years. Effort is being made to enhance transparency and timeliness of IOGC’s royalty assessment process.
- There are multiple factors that have an impact on accurate royalty calculations:
- Audit / recalculation – deal with amendments, GCA, and Trucking
- Working hand-in-hand with industry to address and to mitigation issues – working on a case-by-case basis in the interim whenever there are issues
- IOGC acknowledges that challenges do exist
IOGC’s Royalty Statements are too complex and not user-friendly – are there efforts underway to address this?
- Updating IOGC’s Royalty Statements are currently out of scope for the MARS Project. Yet IOGC continues to strive for certainty – the accurate assessment of royalty that reduces the instances of underpayment or overpayment.
- In response to industry’s request that Royalty Statements be made available in comma-separated values (CSV) format, IOGC is currently working on system changes that would enable this new feature.
Miscellaneous – Not Related to 2009 Act and new regulations
What is IOGC’s timeline to implement and be compliant with Alberta’s MRF?
- As stipulated in the Act and regulations, it is the responsibility of royalty payers to submit data and to calculate and pay an amount based upon their information.
- IOGC is exploring options for the automated calculation of Alberta’s MRF. The challenge is to settle upon a solution that is both cost-effective and efficient. Current considerations include:
- Under existing data-sharing agreements, IOGC does not have access to all the data required to implement and to calculate MRF;
- Even if IOGC did have access to all data required for calculation, IOGC would not be able to verify or to validate the accuracy of submitted data; and,
- Royalty Management regulations are not included in the Phase I regulations and so there is considerable risk that any solution developed now would only be a "throwaway" interim solution resulting in sunk costs that could not be recovered.
- The 2009 Act provides for closer IOGC co-operation with provincial authorities. In the future, IOGC would have advance notice and greater input into changes in provincial royalty regimes.