Canada: Production vs. Storage Rights: ERCB Balances Competing Interests

Alberta's Energy Resources Conservation Board ("ERCB" or the "Board") operates as an independent, quasi-judicial agency of the Government of Alberta to ensure that the "discovery, development and delivery of Alberta's energy resources take place in a manner that is fair, responsible and in the public interest."1

Recently in Kallisto Energy Corp.2, the ERCB was charged with balancing the competing interests of an oil producer and the operator of a natural gas storage project.

The Facts:

Kallisto Energy Corp. ("Kallisto") applied to the ERCB for a licence to drill a vertical well from a surface location at 27-1 W5M: Lsd. 11 of Sec. 26 (the "11-26 well"), to produce oil from the subsurface area known as the Basal Quartz "A" formation.

CrossAlta Gas Storage & Services Ltd., BP Canada Energy, BP Canada Energy Company and TransCanada Pipelines Limited (collectively referred to as "CrossAlta") objected to the application.  As the owner and operator of a gas storage facility injecting gas into a depleted field, situated below the Basal Quartz formation, known as the Crossfield East Elkton A and D pools (the "Elkton Storage Reservoir"), CrossAlta was concerned about the possibility of inter-pool "communication" which would allow liquids to migrate between the two pools.  If there was effective communication, changes in reservoir pressure caused by production through the 11-26 well could cause gas that CrossAlta was storing on behalf of its customers to migrate into the Basal Quartz and to be produced through the well.

The Issues:

The Board considered three sets of issues in rendering its decision:

  1. the risk of communication with the Elkton Storage Reservoir;
  2. the rights of the parties and the public interest; and
  3. the mitigation of risks.

(1) The Risk of Communication:

At the hearing, Kallisto and CrossAlta agreed that the Basal Quartz "A" pool and the Elkton Storage Reservoir were in communication, but they disagreed with respect to the cause of this communication. Kallisto argued that the communication was naturally occurring, while CrossAlta maintained that it had been induced by hydraulic fracturing conducted at an earlier well at 7-25-27-1 W5M (the "7-25 well") in 2001.

Both parties submitted evidence designed to establish how or when communication first occurred, but the Board did not find this evidence to be conclusive one way or the other. Ultimately, the Board was not persuaded that the hydraulic fracture stimulation conducted at the 7-25 well was the only reasonable explanation for the communication and found that it was likely that the fracture stimulation merely enhanced a pre-existing communication. The Board went on to analyze the different geometry of the 7-25 well and the proposed 11-26 well location and determined that the spatial relationship between the 11-26 well and the Elkton Storage Reservoir was substantially different from that of the 7-25 well and the Elkton Storage Reservoir.  Specifically, it found that the proposed well, even if hydraulically fractured, would probably not create communication with the Elkton Storage Reservoir.

(2) The Rights of the Parties and the Public Interest:

CrossAlta submitted that it had a legal responsibility on behalf of its customers and shareholders to prevent interference with its proprietary rights. Having operated the gas storage facility since 1994, long before Kallisto had acquired any rights to produce the minerals located on the adjacent lands, CrossAlta effectively argued that its rights were more "established" than those of Kallisto.  CrossAlta further argued that Kallisto did not have any right to apply for or hold a licence for a gas well on Section 26 given that Kallisto did not have rights to a complete drilling spacing unit (DSU).  Board regulations require a gas well operator to hold one full section of land, whereas Kallisto only held the rights to a quarter section, the DSU for an oil well.

CrossAlta raised financial loss concerns, arguing that it and its clients could suffer economically if its clients lost confidence in its ability to inject and withdraw gas from the storage facility when required to meet its customers' needs. Moreover, on the public interest side, CrossAlta maintained that storage gas has the following recognized public benefits: "(1) market balancing, (2) security of supply regardless of demand, (3) price stability and protection against extreme price shocks, (4) production efficiency, and (5) prevention of the shut in of wells and facilities due to price instability."3

Kallisto acknowledged that it did not have the right to remove or convert storage gas from the Elkton Storage Reservoir and also indicated that its intention was to drill an oil well and not a gas well. Kallisto further recognized that, should a gas formation be encountered and determined to be economically producible, it would need to secure the DSU by voluntary agreement or a compulsory pooling order. However, Kallisto argued that CrossAlta was shrewdly trying to create a buffer zone around the Elkton Storage Reservoir and was effectively sterilizing Kallisto's right to develop its mineral interest and the interest of the freehold owners.

The Board noted that it must "address and balance the public interest in the areas of public health and safety, the protection of the environment, resource conservation, and economics while facilitating the efficient, effective and orderly development of Alberta's resources."4 While the Board accepted that the ability to store natural gas performs an important function, was of the opinion that "most, if not all, CrossAlta's arguments relate primarily to adverse impacts on its commercial interests and its customers, rather than to the broader public interests of Albertans."5

(3) Mitigation of Risks:

Given the evidence surrounding the geology of the area, the Board held that the risk of communication between the 11-26 well and the Elkton Storage Reservoir was low and that the magnitude of potential risk was not sufficient to deny the approval of Kallisto's application. The Board however, set out the following three conditions to reduce the possibility of potential communication and harm: "(1) The Licensee must obtain and immediately submit stabilized initial pressure data to the ERCB and CrossAlta. (2) The Licensee must not use fracture stimulation on the well that exceeds 40 tonnes unless consent has been given by the Board. (3) The Licensee must obtain and submit stabilized pre- and post-frac pressure data to the ERCB and Cross Alta."6

What does this mean?

The ERCB can and frequently will use the terms and conditions of a licence that it is granting to balance competing interests.  In cases involving conflicts between a party wishing to drill a well and the operator of a neighbouring gas storage unit, the Board's decision in Kallisto indicates that, in the absence of clear evidence of communication between the relevant areas, the Board is likely to permit the well to be drilled but to impose terms and conditions on the licensee of the well in order to mitigate, and hopefully eliminate, the risk of harm to the storage operator and its customers as a result of inadvertent communication.

Footnotes

1. "Mission Statement", 6 March 2012, online, Energy Resources Conservation Board
 http://www.ercb.ca

2. Kallisto Energy Corp., Decision 2012 ABERCB 005, online, Energy Resources Conservation Board
http://www.ercb.ca

3. Supra at para. 66.

4. Supra at para. 73.

5. Supra at para. 73.

6. Supra, Appendix 1 – Summary of Conditions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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