OTTAWA—The Canadian government faces a $250-million suit from a U.S. energy producer over Quebec’s environmental stance, raising new questions about the wisdom of investor rights treaties Ottawa is planning with China and the European Union.

Lone Pine Resources Inc. has declared its intention to use its power under the North American Free Trade Agreement (NAFTA) to challenge Quebec’s crackdown on fracking, a controversial drilling technique for releasing oil and natural gas from underground shale rock formations.

Under NAFTA’s Chapter 11 dispute resolution provisions, the governments of Canada, the U.S. and Mexico can be sued by private companies that believe their interests as foreign investors have been harmed by discriminatory actions in one of the three countries.

Quebec has abundant shale gas formations but the provincial government has declared a moratorium on fracking while it studies the environmental impact of the technology, which some say consumes unacceptable volumes of water and may be contaminating groundwater. Quebec also passed legislation in June banning drilling below the St. Lawrence River.

Lone Pine contends it deserves $250 million in compensation by Ottawa for the Quebec government’s expropriation of its drilling permit, which it says violates Canada’s obligations to treat foreign investors from other NAFTA countries fairly.

Critics of NAFTA’s Chapter 11 provisions say the threatened suit by Lone Pine drives home the risks of bilateral investor protection treaties, which they say are being increasingly used by private companies to challenge government regulations in Canada and elsewhere.

“We’re seeing more and more of these cases for increasingly higher amounts and they are attacking non-discriminatory government regulations,” said Scott Sinclair, a senior research fellow with the Canadian Centre for Policy Alternatives.

He said Ottawa will almost certainly be subject to more of these challenges if Prime Minister Stephen Harper’s government puts in place planned investor protection deals with China and the European Union.

Sinclair said the federal government should cease signing these type of treaties until Ottawa can ensure that the right of governments in Canada to bring in environmental, public safety and other regulations “is fully protected” under the bilateral agreements.

In a statement Thursday, Lone Pine, which is registered in Delaware, confirmed its intent to take action under Chapter 11 but said it “will continue to attempt to engage the government of Quebec in a constructive dialogue and to find a mutually agreeable solution on these issues.”

Quebec’s moratorium on the use of fracking to produce natural gas will stay in place until 2014, when the province is expected to complete its review of the drilling technique.

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