Regulating Shale Gas Development in North America – An Overview

CAPL 33rd Annual Conference Allan Ingelson, University of Calgary

September 25 – 28, 2011

Presentation Outline

• What can we learn from the U.S. shale gas experience?

• Overview

• Unresolved contentious issues- horizontal drilling, hydraulic fracturing and trespass

Presentation Outline

• State and federal regulator responses

• Summary – implications for shale developers and regulators in Canada

North American Shale Gas

U.S. Technology Driven Shale Gas Plays

• Barnett Shale - 1991

• Fayetteville Shale – 2004

• Haynesville/Bossier – 2007

• Marcellus Shale

• Antrim, New Albany, Utica

Regulating Shale Plays in Different Basins

• Shales - different geographic settings, different physical and chemical characteristics

• Challenge - No “one size fits all regulatory scheme”

Projected U.S. Shale Gas Supply

Canadian Shale Gas

• National Energy Board (2009)

• “It appears that there is potential for 1000 Tcf of shale gas in place within Canada if not more…High uncertainty, because gas shales are still in the initial stages of evaluation across Canada…

www.neb-one.gc/clf-si/rnrgynfmtn/nrgyrprt/ntrlgs/prmrndrstndngshlgs2009/pr

Canadian Shale Gas

From NEB – Energy Reports (2009) - A Primer for Understanding Canadian Shale Gas, www.neb-one.gc/clf-nsi/rnrgynfmtn/nrgyrpt/ntrlgs/

Horizontal Drilling & Trespass

• Horizontal drilling has prompted subsurface trespass concerns

• Texas -Browning Oil Co. Inc.

Horizontal Drilling & Pooling

• Browning Oil Co., Inc. and Marathon Oil Company v. Jimmie M. Luecke and Leona M. Luecke, 38 S.W.3d 625 (2000) Tex. App. LEXIS 7572; 149 Oil & Gas Rep. 127 Court of Appeals of Texas, 3rd District Austin

Browning Oil - Trespass

• Horizontal wells drilled under several tracts of land

• Action by lessors against lessees for breach of the pooling provisions in the lease regarding royalties payable

• The lessors won!

Court Comment

• “This dispute requires us to consider the applicability of traditional oil and gas concepts to horizontal wells…

• “…several legal articles and treatises have advised lessees to seek amendments to existing leases prior to drilling horizontal wells.”

Court Comment

• “The parties executed the leases and amendments prior to the surge in horizontal drilling and likely did not contemplate the possibility of horizontal wells…”

Browning Oil

• Three oil and gas leases executed in 1979 covering 3 tracts of land

• Leases executed before upsurge in horizontal drilling

Browning Oil

• Lessors entitled to 1/8 royalty on production from mineral they owned in each of the tracts

• 1984 amendment to lease regarding pooling

Browning Oil

• State oil and gas conservation scheme

• If a land tract is too small to satisfy state spacing units, lessees will pool acreage from several land tracts to satisfy the Texas conservation regulatory system

Browning Oil

• 1994 – operating agreement executed between Browning Oil and Marathon Oil that includes acreage covered by the 3 leases

Browning Oil

• November 1994 – Marathon attempted to negotiate an amendment to the leases with the lessors “to clarify the pooling authority for horizontal wells.”

• The lessors refused to execute the proposed amendment

Browning Oil

• 1995 – Nevertheless the lessees completed the first of 2 horizontal wells crossing several tracts of land (one well crossed 7 tracts)

• Lessees debated with the lessors the appropriate method for determining royalties for the lessors

Browning Oil

• Lessees proposed allocating royalties to lessors based on the share of production that could be attributed to the lessors’ tracts

Pooling and Royalties

• Lessees and lessors could not agree on the method of calculating the royalties payable to the lessors

Pooling & Horizontal Wells

• Issue - Whether the pooled units for the producing horizontal wells violated the pooling provisions in two leases regarding dilution of the lessors’ interests

Pooling & Lease Provisions

• What did the appeal court say?

• The Court commented that for pooling to be valid, it must be done in accordance with the method and purposes specified in the lease

Pooling & Lease Provisions

• The Court commented that parties to an oil and gas lease must strictly comply with its terms – this includes the pooling provisions

Pooling & Lease Provisions

• Lessors argued that the purported pooled units for 2 horizontal wells violated the lease provisions

• Both the trial court and appellate court agreed with the lessors

Court Comment

• “Even though traditional legal principles of oil and gas law would afford the lessors royalties on all production if a vertical well were drilled on their land…

Court Comment

• …these principles have no application in the case of horizontal wells that contain multiple drill sites on tracts owned by multiple landowners.”

Question

• As freehold leases have been drafted with vertical wells in mind, could the trespass issue arise in Canada as more horizontal wells are drilled?

Subsurface Trespass ?

• When a horizontal well is fraced and natural gas is produced from an adjacent land parcel to which another company holds the mineral rights, is there a subsurface trespass?

Subsurface Trespass ?

• Will the lessee of the adjacent property be able to prove damages?

• U.S. case law based on the rule of capture – Canada not a rule of capture jurisdiction

Horizontal Drilling & Water Contamination

• 2011 Texas Tribune Headlines - “Does Gas Drilling Put Radiation in Texas Water?” March 11, 2011

• “Even in Texas, Concerns Grow About Gas Drilling” April 25, 2011

Hydraulic Fracing & Shale Gas

• Fracing process dates back to the 1860’s

• 1930’s - injection of non explosive fluids used

• 1949 - “hydrofrac’ patent issued to Halliburton Oil Well Cementing Company

Fracing Fluids

• Fracturing fluids - typical components

• 90% water

• 9.5% sand

• 0.5% other chemicals

Fracing – Why All the Fuss?

• BP Deep Horizon Well Blowout - era of increased public environmental and health concerns

• Increased public scrutiny

Fracing & Alleged Water Contamination

• Water contamination from fracing chemicals

• Disclosure of frac fluid contents

• Proprietary concerns

Fracing and Alleged Water Contamination

• Statement of Scott Kell, on behalf of the Groundwater Protection Council (GWPC) Testimony to the House Committee on Natural Resources, Subcommittee on Energy and Mineral resources, Washington D.C. June 4, 2009

Fracing and Alleged Water Contamination

• “Hydraulic Fracturing – 15 Statements for Regulatory Officials” June 2009

• Lack of documented cases of groundwater contamination

Fracing Fluid Disclosure

• Wyoming - regulatory response

• As of September 2010 the Wyoming Oil and Gas Commission requires full disclosure of fracing fluid contents

Fracing Disclosure

• Texas - Bill SB 1049 proposed to increase disclosure regarding fracing activities

Fracing Disclosure

• Trend toward increased disclosure - Montana, Arkansas, Michigan, New York

U.S. Federal Response

• February 8, 2011 - EPA Draft Hydraulic Fracturing Study Plan

• Examine potential for fracing impacts on drinking water resources and human exposure to fracing chemicals

U.S. Federal Response

• 2011 study to be completed in 2012

• Follow-up in 2014

Water Contamination

• April 16, 2011 – Waxman, Markey and DeGette Congressional Report

• 29 chemicals allegedly in fracing fluids including lead and benzene - possible carcinogens

Water Contamination

• Drilling and fracing - Duke University Study, May 17, 2011

• “Methane contamination of drinking water accompanying gas-well drilling and hydraulic fracturing” by Stephen G. Osborn

et al vol. 108 no. (20) PNAS, May 17,

2011 www.pnas.org/cgi/doi/10.1073/pnas.1100682108

2011 Duke University Study

• “We found no evidence for contamination of drinking-water samples with deep saline brines or fracturing fluids”

Osborn et al, p. 8172

2011 Duke University Study

• …In aquifers overlying the Marcellus and Utica shale formations of northeastern Pennsylvania and upstate New York, we document systematic evidence for methane contamination of drinking water associated with shale gas extraction.” Osborn et al, p. 8172

U.S. Federal Water Regulation

• Clean Water Act - 1972

• Safe Drinking Water Act (SDWA) - 1974

Alleged Water Contamination in Texas

• Alleged water contamination from methane – EPA issued an emergency environmental protection order to Range Resources Dec. 7, 2010

• Company subsequently cleared

Other Water Issues

• Fracing fluid partial flowback

• Proper fracing fluid storage & disposal

• Volume of water used in fracing

Federal Regulation

• 2004 – U.S. EPA study on hydraulic fracturing for CBM concluded “fracturing poses little or no threat” to drinking water

• 2005 - hydraulic fracturing exempted from the SDWA

Bill Introduced in 2009

• Fracking Responsibility and Awareness of Chemicals Act •Designed to specifically regulate hydraulic fracturing

Federal Response 2011

• On August 11, 2011 a high level advisory panel to US Secretary of Energy released preliminary DOE recommendations on issues surrounding shale gas production

Federal Recommendations 2011

• U.S. DOE Recommendation - need immediate and longer-term actions to reduce environmental and safety risks of shale gas operations with a particular focus on protecting air and water quality

Federal Recommendations 2011

• U.S. DOE - increase industry transparency surrounding shale gas production processes and promoting industry best practices

Federal Recommendations 2011

• U.S. DOE Recommendation - “Make information about shale gas production operations more accessible to the public”

Federal Recommendations 2011

• U.S. DOE Recommendation - create a Shale Gas Industry Operation organization committed to continuous improvement of best operating practices

Federal Recommendations 2011

• U.S. DOE Recommendation – research and development to improve safety and environmental performance

Alberta Energy Minister

Implications for Canadian RegulatorsFri, Oct 15, 2010 Calgary Herald

Alberta Shale Gas Research & Development

• 2010 Alberta Upstream Petroleum Research Fund –High Priority Public Policy Research Issue – Assessment of Risks of Hydraulic Fracturing

Other Shale Gas Development Issues

•Noise•Cumulative effects

Alberta Fracing

• Regulated under ERCA & OGCA

• ERCB Directive 059: Drilling and completion data filing requirements -

Fracing Regulation in Alberta

• “Must submit – “type, quantity, and size of propping agents, type and volume of carrier (fluids), additives, type and quantity of plugging agents, feed rates and pressures”

B.C. Fracing

• B.C. Oil and Gas Commission•Oil and Gas Activities Act (OGAA): 2008 to 2010 – water withdrawals •Maintain a record of fracturing fluid and produce records upon request

B.C. Fracing

• Best Noise Control Guideline (2009)

Quebec

• Much more limited oil and gas development experience than in Alberta or B.C.

Quebec - Utica Shale Lease Map

Economic Benefits Shale Gas Development in Quebec

From SECOR Advisory firm report for the Quebec Oil and Gas Association:

• Based on gas price of $6/Mcf and 10% royalty rate

Economic Benefits Shale Gas in Quebec

• Utica shale play could generate between 5000 and 19,000 direct/indirect job opportunities

• Between $278 million and $1 billion in annual royalties for the province

Economic Benefits Shale Gas in Quebec

• $1.85 million in value added to Quebec and 33 jobs per well during drilling• 28 jobs per 100 wells during production which could last for more than 50 years

Environmental Concerns

• Water impacts

• Air quality impacts

Summary

• As with CBM development the U.S. shale gas experience can assist in identifying some potential issues that Canadian regulators and operators may encounter

Summary

• As with CBM, shale types in different basins exhibit different characteristics (ex. the volume of water in different shales)

Summary

• There is no effective “one size fits all” regulatory approach

Summary

• As with CBM development, different chemical and physical properties of shales within different basins may prompt differences in state and provincial regulatory requirements

Summary

• Notwithstanding shale gas development in Texas since 1991, water contamination from fracing fluids and methane migration continue to be contentious issues

Summary

• In light of the August 2011 U.S. DOE recommendations, potential shale gas fracing impacts on water are under investigation

Summary

• Texas, Wyoming, and several other states and the U.S. Federal Government are moving toward increased disclosure of fracing fluid contents

Summary

• Development of shale gas best management practices has been recommended by the U.S. DOE

Summary – Shale Gas Issues That Can Arise in Canada

• Alleged water contamination from fracing

• Drilling and methane migration

Summary – Shale Gas Issues That Can Arise in Canada

• Methane emissions

• Trespass

• Noise

• Cumulative effects

Summary – Issues That Can Arise in Canada

• Trespass - adequacy of Canadian freehold leases to address issues raised by horizontal drilling for shale gas

Summary – Issues That Can Arise in Canada

• Trespass - Does the freehold lease you are going to rely on that was drafted with vertical wells in mind, need to be amended before horizontal wells are drilled?

Acknowledgments

• Richard Steed, MSc. (SEDV) student

Thank you

• Questions