Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Energy–Oil & Gas, November 2011
The Energy Resources Conservation Board (ERCB) – the regulatory body overseeing natural resource production in Alberta – recently announced significant changes to the long-standing provincial well spacing framework. Released on October 6, 2011, Directive 065, in tandem with associated Bulletin 2011-29, outline the ERCB's amendments to the Oil and Gas Conservation Regulations (the Regulations). While the amendments are aimed mainly at efficient management of unconventional resources like coalbed methane (CBM) and shale gas, the new rules also affect conventional oil and gas.
Well spacing rules exist to promote conservation of reserves by preventing the drilling of more than one well in a certain area, referred to as a drilling spacing unit (DSU). Governed by the Oil and Gas Conservation Act and Regulations, DSUs have historically consisted of one quarter-section (160 acres) per oil well and one full section (640 acres) per gas well.
A target area is a further prescribed measurement within a DSU which mandates the specific placement of a well in order to promote the most efficient drilling mechanism. Under the Regulations, wells must be drilled within the target area and may be subject to an off-target penalty if they are deemed to fall outside the target area.
Suggestions that the well spacing framework was archaic and overly complex – as it was introduced in the early years of natural resource extraction and had not been updated as techniques and practices within the oil and gas industry progressed – prompted the ERCB to solicit stakeholder feedback with respect to the well spacing regime in November 2010 by issuing Bulletin 2010-39. The comment period for such feedback continued until January 21, 2011. Industry stakeholders responded with concerns over resource conservation while public concern was expressed regarding surface access and environmental impacts.
FOUR LEGISLATIVE CHANGES
On October 6, 2011, the ERCB responded to these stakeholder comments by announcing four significant legislative changes, effective immediately:
1. Removal of Well Density Controls for Lower Quality Reservoirs
The ERCB has removed well density controls for unconventional resources such as CBM and shale gas reservoirs throughout the province, as well as for conventional gas zones to the base of the Colorado Group in certain areas. Praised by industry as a move to promote exploration for unconventional gas resources, this change removes the need for well spacing applications for CBM and shale gas. Further, well spacing applications are eliminated for conventional gas to the base of the Colorado Group. According to the ERCB, the only exception to the removal of well spacing applications will be in cases where a special well spacing already exists, at which point a new spacing will be required.
2. Province-Wide Increase in Baseline Well Densities for Conventional Gas Reservoirs
The changes increase baseline well densities from one well per pool per standard DSU to two wells per pool per standard DSU for conventional gas reservoirs. This amendment received strong industry support, despite public stakeholder concern that such change may negatively impact the environment, surface rights, and urban planning.
The baseline well density changes are only applicable to those lands not subject to prior spacing approval and will not apply to a small section of Alberta lands as outlined in Schedule 13B to the Regulations. Further, they will not apply to CBM or shale gas, bolstering the province's commitment to developing unconventional resources.
3. Standardization of Province-Wide Target Areas for Standard DSUs
Electing to move forward with centralized target areas, the ERCB has standardized target areas throughout the province. For conventional oil wells, the central target area will be, at minimum, 100 metres (m) from all boundaries of the section. Gas wells will be divided into two categories. For gas wells located in the area outlined in Schedule 13A of the Regulations, the target area will be 150 m from the south and west boundaries of the DSU, while it will be 150 m from all areas of the DSU for gas wells located in areas outside those contained in Schedule 13A.
A small area of southeastern Alberta will remain unaffected by the standardization, retaining corner target areas for gas wells. The ERCB has advised industry and the public that wells drilled in accordance with previous DSU and target requirements, but which now conflict with the new well spacing requirements, shall remain on target and as such will not be penalized for being off-target.
4. Amendments to Regulations
The amendments to the Regulations simplify and modernize the historical well spacing framework. By amending sections 4.040(1) – 4.040(3) of the Regulations, the ERCB no longer requires applications to change the target area of the DSU or reduce DSU size (but continues to require applications for holding). Section 4.050(1) of the Regulations has been amended to permit a tract of land which is half the size of a normal DSU to be considered an independent DSU without having to apply to the ERCB. Those tracts which have common mineral ownership to the east or west but are less than half of normal DSU size will be joined with the adjacent DSU without having to apply to the ERCB. Further, Directive 065 eliminates the approval holder designation on those holdings which have been established by well spacing applications. Former mandatory notice requirements have also been eliminated, leaving a signed declaration of common ownership attached to the application as the sole requirement.
Seen by many as an attempt by the Alberta regulatory body to remove barriers to unconventional gas production, the four main changes may not have an immediate effect due to current low natural gas prices. The amendments to the Alberta well spacing framework have been supported by industry, which advocates increased unconventional resource development and elimination of red tape surrounding resource extraction generally. Significantly, the Alberta Energy tenure and royalty structures are not affected by the foregoing amendments.
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