[See also: News Release]

File 8000-A000-13
17 December 1997

To: ALL COMPANIES UNDER THE BOARD'S JURISDICTION AND INTERESTED PARTIES

Re: Implementation of the Fair Market Access Procedure for the Licensing of Long-term Exports of Crude Oil and Equivalent

The attached Memorandum of Guidance sets out the Fair Market Access procedure ("FMA procedure") to be followed by applicants for long-term crude oil and equivalent ("crude oil") export licences issued by the National Energy Board ("the Board") under Part VI of the National Energy Board Act ("NEB Act").

With regard to the Part VI Regulations ("Regulations"), the Board has considered the views and recommendations of interested parties and concurs that some provisions in the existing Regulations are inconsistent with the new market-based approach to regulating the long-term exportation of crude oil. Therefore, the Board is proceeding with recommending that the Governor-In-Council approve amendments to the Regulations by removing therefrom subsections 25(b) and (d) in their entirety, by amending subsection 25(c) by removing paragraph 25(c)(ii) therefrom, and by removing subsection 25(f) therefrom, with the exception of paragraph 25(f)(v).

The Board is further recommending that the Regulations be amended by adding a new subsection requiring an applicant to demonstrate the manner in which it has informed buyers of the crude oil available for sale and the manner in which it has given interested buyers the opportunity to purchase that crude oil.

Michel L. Mantha
Secretary

Attachment

File 8000-A000-13
17 December 1997

MEMORANDUM OF GUIDANCE

Fair Market Access Procedure for the Licensing
of Long-term Exports of Crude Oil and Equivalent

I. Introduction

By letter dated 5 February 1996, the Minister of Natural Resources Canada ("the Minister") asked the National Energy Board ("the Board"), pursuant to subsection 26(2) of the National Energy Board Act ("NEB Act"), to develop for her consideration a market-based procedure for the review of crude oil and equivalent ("crude oil") export licence applications. The Minister requested that the procedure be modelled along the lines of the Complaints Procedure which is used as part of the Market-Based Procedure in assessing applications for long-term natural gas exports, or the Fair Market Access ("FMA") procedure used to assess electricity permit applications.

After having considered the natural gas and electricity models, the Board determined that, having regard to the characteristics of crude oil supply and markets and to the economic interests of Canadian crude oil producers and consumers, the FMA model is well suited to the licensing of crude oil exports. The Board's views are more fully set out in its letter of 27 May 1996.¹ That letter sought the views of interested parties on the appropriateness of using such a model.

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1 Board letter dated 27 May 1996 to "Interested Persons" entitled "Proposed Procedure for Dealing with Crude Oil and Equivalent Export Licence Applications".

After having considered the views of interested parties, the Board, in October 1996, recommended to the Minister that its proposed FMA procedure for crude oil and equivalent be implemented. The Board further recommended that upon acceptance of this recommendation, the Board would review its Part VI Regulations ("Regulations") to determine whether they continued to be consistent with the new market- based approach inherent in the FMA procedure. The Board's recommendation was accepted by the Minister in December 1996.

II. The Fair Market Access Procedure

The FMA procedure for dealing with the licensing of long-term exports of crude oil and equivalent is set out below.

Any party wishing to export crude oil from Canada on a long-term basis must demonstrate that it has provided fair market access to potentially-interested Canadian refiners and marketers (i.e. "buyers"). This places two obligations on an export licence applicant (the "Applicant"):

• The Applicant must inform potential Canadian buyers of the volumes and type(s) of crude oil associated with the proposed export; and
• If any Canadian buyer expresses an interest in purchasing all or part of the available volumes, the Applicant must enter into good faith negotiations with that potential buyer and negotiate on the same basis as it has negotiated, or which it is in the process of negotiating, with its export customer(s). The Applicant is obligated only to disclose to potential Canadian buyers the volumes, type(s) of crude oil and the term associated with the proposed export. The Applicant is not required to provide pricing information at this stage of the procedure.

Upon receipt of notification, potential Canadian buyers will have 30 days to formally notify the Applicant of their interest in purchasing all or part of the available volumes of crude oil. If Canadian buyers express an interest in purchasing the crude oil, the parties would enter into negotiations, recognizing that simultaneous negotiations may be occurring, or may already have occurred, with potential export customers.

The proposed procedure is premised on the belief that the crude oil market will normally operate to satisfy the requirements of Canadian buyers at fair market prices. There is a shared responsibility on the part of both the Applicant and the Canadian buyers to ensure that Canadians are given an opportunity to obtain crude oil on similar terms and conditions as are made available to export customers. Once negotiations have begun, both the Applicant and the potential buyers are expected to negotiate in good faith.

Once the Applicant has determined whether or not there is any interest on the part of Canadian buyers and it has negotiated in good faith with such buyers, the Applicant may file a complete export licence application with the Board. Upon receipt of an application, and upon satisfying itself that an Applicant has complied with the filing requirements of the Regulations, the Board will set the application down for a public hearing. In the absence of any filings by Canadian crude oil buyers or other interested parties expressing serious concern with the application, the Board would normally proceed with a written hearing.

To demonstrate that it has complied with the FMA procedure for crude oil, the Applicant will have to demonstrate that:

In addition, in fulfilment of its mandate, the Board will take into account all other relevant public interest considerations, including the need for the applied-for licence.

In summary, the Board will issue an export licence if it is satisfied that its discretion should be exercised in favour of granting of an application for a crude oil export licence, having regard to whether the Applicant has:

• satisfactorily demonstrated that it has provided fair market access;
• fully complied with the filing requirements of the Regulations;
• filed any supplementary information as may be required by the Board; and
• adequately addressed all relevant public interest considerations.

The burden of proof will rest with the Applicant that the applied-for crude oil export licence should be issued.

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