The AER-Unconventional Framework SPE Presentation February 19, 2014 Robyn Swanson C.E.T., P. Eng. Tel: 403-213-4250 E-mail: [email protected].

The AER-Unconventional Framework

SPE PresentationFebruary 19, 2014

Robyn Swanson C.E.T., P. Eng. Tel: 403-213-4250

E-mail: [email protected]

© 2013 IHS

Introduction

• Most recently the AER and industry have been faced with applying the existing rules to the development of resources that are being referred to as unconventional resources. The key/crucial question is do we require a complete new set of regulations to accommodate ‘unconventional resource’ development or are we able to work within the existing regulations with some minor tweaking?

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Introduction

Topics:

- Definitions- Current regulations- Proposed regulations- Conclusions- Questions

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Introduction

- The AER has identified the key challenges of unconventional oil and gas development to be

• management and protection of water,• performance assurance of multistage hydraulic fracturing

technology, and• regional effects of activities on the landscape.

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Definitions

- The AER defines unconventional oil as • tight oil: oil found in low-permeability rock, including sandstone,

siltstone, shale, and carbonates.

- The AER refers to unconventional natural gas as• tight gas: natural gas found in low-permeability rock,

including sandstone, siltstones, and carbonates,• shale gas: natural gas locked in fine-grained, organic-rich

rock,• coalbed methane (CBM): natural gas contained in coal.

- A friend defines Conventional Resources as “resources you make money on, unconventional resources are those you don’t make money on”.

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Definitions

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Definitions

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Current Regulations

- The BC OGC allows for project area development through Good Engineering Practise (GEP) approvals.

• Typically GEP’s are issued for gas or oil.• A GEP allows the operator an unlimited increase in well

density, and commingling if the approval is for more than 1 formation.

- Saskatchewan and Manitoba regulations do not make provision or contemplate unconventional resource development.

- In Alberta, currently there is no similar or equivalent approval to GEP that would allow unrestricted development within a specified project area.

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Current Regulations

- Existing spacing regulations allow for unlimited Coal Bed Methane (CBM) and shale gas development on a per drilling spacing unit basis.

- Operators need to be cognizant of honouring the target areas, to avoid offtarget penalties.

- Shale gas and CBM wells have historically had control well requirements but a moratorium has been placed on the requirement for additional CBM control wells, for now.

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Current Regulations

- The development of unconventional oil resources is done within the existing regulation.

- Currently, to increase the well density beyond the default, one oil well per quarter section you would need to submit an application for a holding.

- Generally, the AER approves incremental increases in well density on smaller land blocks of common ownership on a lessor and lessee basis.

- It can be several years before full cycle development to the operator’s satisfaction is achieved.

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Current Regulations

- Operators can be faced with postponements of spud dates while they await holding approvals or have to keep wells shut until the holding approval is issued.

- Wells may be temporarily non compliant for violating a buffer condition which can result in a high risk enforcement action and shut in.

- Delays in spacing approvals can be compounded by uncertainty in well classification.

- The AER has guidelines with respect to oil versus gas well classification.

- Recently, the exploitation of high liquids tight gas plays has resulted in well classification confusion.

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Current Regulations

- In my opinion, the confusion results primarily from the higher liquids volumes that are produced in the horizontally drilled wells.

- Often when these same zones are developed with vertical wells they are clearly gas wells.

- Once you have your spacing in place and well classification sorted out then you have to contemplate and apply for good production practise (GPP), concurrent production (CCP) commingling and/or enhanced recovery if it is an oil play.

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Proposed Regulations

- About a year or so ago, December 2012, the AER released Regulating Unconventional Oil & Gas in Alberta – A Discussion Paper and invited feedback from industry.

- In the December 2012 discussion paper the AER proposes regulation of unconventional resources with a risk based and/or play focused regulation.

- July 2013 issued an update to their Unconventional Regulatory Framework (URF)which is a presentation describing the current regulations for oil and gas development and how the AER will respond to new development.

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Proposed Regulations

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Proposed Regulations

The AER has defined a risk based regulation as• a decision-making framework used to ensure that a regulatory

response is applied at a level that is proportional to the severity of the risk.

The AER describes a play focused regulation as the following• A play represents a three-dimensional entity that is the target of

oil or gas development. It has a number of characteristics that can be used to describe it, including

- the specific geological formation,

- areal extent, geographic location,

- types of fluids in the rock,

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Proposed Regulations

- other geological and reservoir characteristics and

- often targets the source rock.

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Proposed Regulations

- Because each play may require slightly different regulation the play based regulatory framework will induce the AER to develop a risk profile and appropriate regulatory responses that are play specific.

- Play focused regulation would be defined by characteristics such as

• Geology• Geographic area and corresponding land use• Technology being employed• Fluids produced, and other• Reservoir properties.

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Proposed Regulations

- These characteristics would be used to determine the level or type of risk that development of the play might generate.

- This would be done early on in the identification of the unconventional resource play so as to attempt to develop strategies to mitigate risk for the play including taking into consideration Provincial and regional policies that affect oil and gas development in Alberta such as Water for Life and the Land-use Framework.

- The key takeaway here is the AER’s existing regulatory requirements and processes will remain effect unless modified for a specific play.

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Proposed Regulations- What will it look like and how do you qualify as a play?- Any exploration play, begins with the drilling of an exploratory

well. - So how do you get an area declared as play?

- from Regulating Unconventional Oil & Gas in Alberta.

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Proposed Regulations

- Eventually the AER will formally declare a resource play based on resource potential and development activity.

- The AER intends to establish performance indicators and measures to monitor and evaluate whether regulatory outcomes are being achieved in a play.

- AER may adjust or change the play boundaries and specific requirements as the play evolves and matures.

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Proposed Regulations

- The regulatory outcomes prescribed for Unconventional Resource plays will address:

• Water management• Waste management• Air quality• Conservation• Orderly development• Public safety• Information and advice

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Proposed Regulations

- In the early stages of exploration, individual operators will be submitting individual applications for well licenses, pad approvals, holdings, etc.

- At some stage of development an individual operator may submit a project plan approval for their lands (geographic area) in a specific formation.

- Assuming the AER would get several such project plans and feel they have sufficient information regarding the play development they may (and this where things get a bit murky for me) require• The operators who have submitted and received approval for

project plans to collaborate on the multi company play development plan, OR

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Proposed Regulations

• The AER may decide, with or without operator consultations, to declare a particular geographic area and formation as a Play Development Area.

- At this point the AER will identify expected outcomes, modifications to existing AER requirements, and new requirements and/or regulatory processes for that play in a Board Order

- Hence, the reason I said earlier that rules and requirements may/can change as a play develops and matures.

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Proposed Regulations

- The AER Play Board Order will require operators within the play declared area follow all current regulatory requirements except where modified or superseded by play-focused requirements in the Board Order.

- The play development plans must address

1. Water management practices

2. Surface Infrastructure development

3. Subsurface reservoir management

4. Stakeholder engagement

5. Life cycle wellbore integrity

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Proposed Regulations

- The AER will review and approve plans that are complete and satisfactorily address the five issues.

- It is not clear to me that reservoir management strategies such as commingling, well density, GPP, CCP and ER are part and parcel of the play OR project development plan submission while addressing the five issues.

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Proposed Regulations

- Whether you are applying for a project plan or play development plan you will have to apply for a Pad Approval

- The Pad Approval can be applied for outside of the project or play development plan or be a part of either of those submissions

- The purpose of the pad approval is to:• reduce effects on the environment and land use• streamline and improve the efficiency of the application and

approval process for repeat activities that occur on one location• support early multiwell production operations

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Proposed Regulations

• enable bundling of approvals for drilling and completing multiple wells and surface equipment on one pad

- The pad approval could be issued for a period of upto 3 years from the approval date.

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Proposed Regulations

- Finally how would the AER monitor the operator or operators for compliance assurance

- The monitoring could be handled through • Audits• Regular evaluations, by the AER, of the Plan’s effectiveness• Requirements for regular/annual reports and/or

presentations• A monitoring protocol in the Project or Play Development

plan that the operators /applicant stipulates

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Conclusions

- Regardless of whether the AER proceeds with the proposed Unconventional Regulatory Framework the existing regulations will remain in place and will continue to apply.

- The URF will introduce another level of requirements and compliance for which regulations may not exist.

- The URF will require collaboration between and amongst the operators; that may or may not be realistically achievable.

- A Project or Play Development plan approval does not necessarily provide approval for holdings, GPP, CCP, ER, etc. - these may have to be applied for outside of, or in addition to the Plan Approval.

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Conclusions

- Who takes responsibility for the Play Development Plan Approval? Presumably the Plan Approval would be issued to only one of the operators who would be responsible for the compliance assurance for the Plan.• I strongly encourage operators to stay engaged and on top of the

proposed URF as the AER proceed with their implementation strategy, part of which includes meeting with key stakeholders and representatives from appropriate government departments to discuss the Play Development Plan approach and determine best practices.

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QUESTIONS?

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