NAFTA claim for compensation arising out of Québec shale gas ban

Environmental, Energy and Resources Law

November 20, 2012

Québec's Bill 18, titled "An Act to Limit Oil and Gas Activities", was passed by the Québec National Assembly in June, 2011, and had the effect of revoking rights which had already been granted to explore and produce oil and gas in the St. Lawrence River basin west of longitude 64°31'27" (roughly the entire area upstream of the western tip of Anticosti Island).  The further grant of exploration rights was also prohibited.

Bill 18 also explicitly stated that no compensation was payable by Québec as a result of the revocation.

Lone Pine Resources Inc. has now given notice that it intends to sue the Canadian government under the provisions of Article 11 of NAFTA, which protects investors against arbitrary expropriation and expropriation without compensation by the NAFTA member states.  Lone Pine alleges that its leases totalling 33,460 acres were revoked as a result of Bill 18, and is claiming $250 million in compensation.

While NAFTA Article 11 claims resulting out of a regulatory change do not often result in any recovery for the compaining party (the right of each state to pass regulations to protect the environment not being considered an expropriation), a claim such as this (with existing licenses explicitly cancelled without compensation) may well have have a better chance of success, and may also result in claims by other producers whose rights were cancelled without compensation as a result of Bill 18.


Article 1110 of NAFTA provides that:

1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except:

(a) for a public purpose;

(b) on a non-discriminatory basis;

(c) in accordance with due process of law and Article 1105(1); and

(d) on payment of compensation in accordance with paragraphs 2 through 6.

2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ("date of expropriation"), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.