Oil & Gas Meets Electricity: Flare Gas Energy Projects in Western Canada

May 23, 2019 | Chad Eggerman

In Western Canada “energy” is often considered to be mainly petroleum, oil & natural gas. “Energy” is not often thought of as including electricity generation, as it might be in other jurisdictions. In order to successfully develop a flare gas power generation project, the oil & gas industry must work together with power producers in order to connect the feedstock (gas from oil wells) to the generation (turbines to burn the gas). Oil wells produce “waste” gas as a by-product of the oil extraction process which is often burned or flared-off into the atmosphere and thus referred to as “flare gas”. Instead of flaring off the gas, the flare gas is captured and converted into usable electricity and either used on site or sold into the grid. The ability to be paid for power creates an incentive for oil & gas producers to reduce their greenhouse gas emissions through converting waste flare gas into electricity. Currently, waste gas is flared from oil wells primarily in Saskatchewan and Alberta but also to a lesser extent in Manitoba.

The important stakeholders in a typical flare gas project are (i) the purchaser of the power (in Saskatchewan, SaskPower or City of Swift Current; Alberta, private power producers; Manitoba, Manitoba Hydro), (ii) the supplier of the gas (potentially any oil & gas producer with flares on oil wells), (iii) the developer of the project and (iv) the oil & gas producer and landowner to host the power generation facility.

In Saskatchewan, an important stakeholder in a flare gas project will likely be a First Nation and/or the First Nation Power Authority.

The key agreements in a flare gas project are: (i) Feedstock (or Gas) Supply Contract(s) between gas supplier(s) and developer/operator, (ii) Development Agreement between project host and developer/operator, (iii) construction contract between builder and developer/operator  and (iv) power purchase agreement between project owner and utility.

Land and environmental compliance and permitting can be more complicated with flare gas projects as both oil & gas and power laws and regulations must be addressed.

Flare gas projects have a similar major risk as biomass projects – securing feedstock supply for the duration of the power purchase agreement. Getting a lender to finance a flare gas project often turns on the lender’s interpretation of the basis for security of feedstock supply. Accordingly, those developers embarking on a flare gas project are prudent to employ experts in procuring natural gas, in addition to specialists in producing power.

Our projects lawyers at Miller Thomson can draw on experience from both the oil & gas industry and renewable energy projects and are better-positioned to advise on environmental matters for flare gas projects than others with more narrow expertise.

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