Canada: Energy @ Gowlings: June 26, 2012

Edited by Paul Harricks

• Production vs. Storage Rights: ERCB Balances Competing Interests
• Public Private Partnerships: Policy and Execution Dilemmas
• BC Hydro Releases its 2012 Draft Integrated Resource Plan

Production vs. Storage Rights: ERCB Balances Competing Interests
By: Sarah MacLeod

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.}

Public Private Partnerships: Policy And Execution Dilemmas
By: Myron Dzulynsky

Once limited to a few jurisdictions (including Australia, the United Kingdom and certain parts of Europe), private involvement in the procurement of public infrastructure through concession or similar arrangements (referred to in this article as public private partnerships, or PPP) have become increasingly attractive to governments worldwide. For any government looking to introduce PPP, or broaden its use of PPP as a delivery model, there are a number of questions that must be addressed. A few of these questions are set out below.

Politics: Involving private enterprise in public infrastructure cannot avoid the political reality in which it takes place. Different countries have different views as to the appropriate role of private enterprise in such undertakings. Any model must take into account these often divergent such views (including public perceptions with respect to PPP), while at the same time ensuring that politics do not so impede the development of the model that it defeats the benefits of the model.

Where PPP can be used: Some jurisdictions have looked to PPP's primarily in the transportation sector. There seems little reason, however, why PPPs cannot be used in broader government infrastructure sectors. For example, in the Canadian PPP model, there have been more social infrastructure projects (hospitals, detention centres, data centres, courthouses, etc.) than transportation projects. At times, there may be a predisposition to include or exclude certain subsectors based on constitutional jurisdictions within a particular country. To the extent that a country can develop a model which is flexible, one may ask why it should be restricted on such a basis.

Facilitating certainty: T attract foreign participants, and thereby increase competition, in its PPP market, countries need to provide some level of certainty to prospective participants. Certainty can be viewed on various levels, but in the context of PPP, it is suggested that there are a few key issues. First, the legal regime must provide an adequate framework for PPP participants to understand what they are bidding to. Second, PPP documentation must provide sufficient information to permit participants to properly evaluate risk and pricing, and thereby provide strong bids from which the government can choose. Third, the host government must provide certainty of process. A process should be one that is understood by all, consistent, transparent and, to the extent possible, free from political interference. With respect to the last of these, in certain jurisdictions (including a number of provinces in Canada) PPP participants have lauded the involvement of specialized government agencies which are not only advisory in nature, but are actually the procuring agency for various projects. One advantage of such an agency is that it can transcend some of the jurisdictional difficulties referred to above. Fourth, PPP participants are generally attracted to markets where there is certainty of deal-flow which can justify the significant pursuit costs that are associated with the PPP model. Robust deal pipelines can be hampered by a number of factors, including actual infrastructure needs, delivery capability, and financial strength (to name a few). One of the ways to address pipeline concerns is to first bring to market social infrastructure projects, which may be more numerous and smaller (in the latter case also facilitating development of PPP expertise in government in a smaller project context).

Choosing the Delivery Approach: There are arguments in favour of various PPP models (build finance, design build finance, build finance maintain, design build finance maintain, etc.) For example, some would argue that, in the absence of a design feature in a procurement process, proponents cannot bring full value to the infrastructure project in question. Similarly, many suggest that, in the absence of a long-term operational and or maintenance component (at least 20 years), governments may not fully realize one of the benefits of the PPP model "being the healthy tension between construction provider and operations and maintenance or facilities management provider".

The role of equity. One of the elements of the PPP model is the inclusion of an equity provider. While this may be part of a construction company, or operations and maintenance provider, it can also be a separate financial investor who is prepared to participate in a consortium involving construction and operations and maintenance participants. The type of equity participant that may be attracted to a particular PPP model may depend upon the structure of a particular PPP project (with most financial investors preferring a longer-term equity component). A longer term equity component may also have the collateral effect of encouraging a secondary market in infrastructure projects, which can in turn attract new investors into a country's infrastructure market.

BC Hydro Releases Its 2012 Draft Integrated Resource Plan
By: Henry Ellis and Bryan Millman

On May 28, 2012, BC Hydro released a draft of its Integrated Resource Plan 2012 (the "Plan"), a long-term forecast on the supply and demand for electricity in British Columbia. The Plan contains 14 recommended actions to meet the province's future electricity demands. BC Hydro aims to meet those demands via energy conservation and efficiency, supplemented by the purchase and construction of cost-competitive and reliable clean energy resources. The Plan does not commit BC Hydro to any specific capital projects; recommended courses of action are subject to subsequent approval and consultation requirements. Each recommended action is briefly highlighted below. For ease of reference, a table following this article lists all 14 recommendations.

BC Hydro anticipates that peak demand for electricity will grow by 50 per cent over the next 20 years, before accounting for the savings that can be achieved by current conservation and efficiency measures. Moreover, the province's load resource balance indicates that ratepayers will need an additional 4,900 gigawatt hours of energy by fiscal 2021. BC Hydro anticipates that an additional 12,500 gigawatt hours will be needed by 2031; however this figure is contingent upon the proposed Kitimat LNG plants proceeding as planned.

To close the gap between future electricity demands and existing supplies, BC Hydro will encourage residential, industrial, and commercial customers to implement energy conservation measures to reduce electricity consumption during peak periods. Further, BC Hydro plans to employ smart meters and revamped government codes and measures to assist in educating residential consumers to be more cognizant of energy conservation.

To bolster the effect of conservation, BC Hydro plans to increase the province's current energy supply by building Site C, a proposed hydroelectric dam on the Peace River in north-east British Columbia. Site C is projected to be operational by 2020. BC Hydro also intends to increase energy efficiency by creating improvements to existing infrastructure, such as installing a sixth generating unit in the Revelstoke Generating Station and reinforcing the transmission line from Prince George to Terrace.

Until Site C and infrastructure improvements are operational, BC Hydro plans to pursue readily-available energy resources to meet the province's short term energy needs. A combination of market purchases, power from the United States as part of the Columbia River Treaty, and reliance on the Burrard Thermal Generating Station are available options.

The development of energy procurement options from clean energy producers for projects that would come into service in the 2016-2018 time period is another recommended action. The majority of this additional energy is expected to come from wind, run-of-river and biomass projects, yet geothermal, wave, and tidal projects may be considered as well.

Contingency arrangements, should electricity demand grow faster than forecasted, are also contained within the Plan. Major developments in the gas industry along the province's north coast and in the Horn River Basin could significantly alter the Plan's energy forecast. BC Hydro will continue to monitor those potential projects and develop a range of options to satisfy associated energy needs. The Plan also includes further contingency options such as exploring the viability of pumped storage projects and natural gas-fired energy generation.

The Clean Energy Act directs BC Hydro to examine whether there exists any potential for the production of electricity for the purpose of export. As the Plan explains, current market conditions are not conducive to the export of electricity.

BC Hydro is seeking public and stakeholder feedback on the Plan between May 28 and July 6, 2012. Pursuant to the Clean Energy Act, a final version of the Plan will be submitted to the Minister of Energy by December 2012.

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.