There has long been debate as to whether vertical compulsory
pooling of oil and gas resources is possible in Alberta given that
pooling is usually done on an areal or horizontal basis. In
1997, Professor Nigel Bankes, in Compulsory Pooling Under the Oil
and Gas Conservation Act of Alberta", (1997) 35 Alta. L. Rev.
945-1012, argued that vertical compulsory pooling was possible in
principle, at least in certain situations, but noted at the time
that the Alberta Energy and Utilities Board had not received a
vertical compulsory pooling application. In a recent disposition
letter (the "Disposition Letter"), the Alberta
Energy Regulator (AER) has suggested that, in the right case,
vertical compulsory pooling may very well be ordered by the
The concept of vertical pooling can arise in the context of
split (shallow/deep) petroleum and natural gas rights where the
shallow rights and the deep rights are owned by different lessees,
and the leased minerals are proven to be within a common pool
spreading across formations, members or zones. Vertical pooling may
also conceivably be considered in situations of natural or induced
communication between pools, especially with the proliferation of
hydraulic fracture stimulation.
In December 2013, the AER received an application for vertical
compulsory pooling on the basis that communication between
allegedly separate pools having allegedly different ownership had
been induced by hydraulic fracture stimulation. In the Disposition
Letter, the AER dismissed the application on the ground that the
applicant had not proven that the zones it owned were
productive. However, the AER made some statements which
appear to confirm the AER's view that a vertical compulsory
pooling order is available in Alberta.
The AER noted that neither the Oil and Gas Conservation Act, RSA
2000, c. O-6 ("OGCA") nor the AER's Directive 065
specifically addresses vertical compulsory pooling. However, the
AER referenced Alberta Energy IL 98-14, found here, (which updated IL
88-24) as an Alberta Department of Energy policy document for the
AER to consider respecting vertical pooling. According to the AER,
this information letter acknowledges that sometimes the contact
between zones covered by shallow rights and deep rights agreements
can occur within the vertical dimension of a single pool. The AER
noted the suggestion in IL98-14 that if separate pools cannot be
established or maintained, an affected lessee may apply to the AER
for vertical compulsory pooling if voluntary pooling arrangements
cannot be negotiated. The AER concluded by saying that "the
AER considers that where there is either natural or induced
communication between pools, vertical compulsory pooling may be
considered as an option."
The AER's Disposition Letter is important given that
vertical pooling is unusual and compulsory vertical pooling has no
precedent in Alberta that we are aware of. It is noteworthy
that the AER, in its short Disposition Letter, did not attempt to
interpret section 80 of the OGCA, which provides the AER with the
jurisdiction to grant compulsory pooling orders, but based its
decision solely on Alberta Energy's policy. In our view,
it is arguable that the relevant provisions of the OGCA contemplate
pooling only on an areal basis.
While we are not aware of a compulsory vertical pooling order in
Alberta, it appears that the AER is prepared to make one in the
right circumstances. Unfortunately, the AER has not yet
provided any guidance as to what factors it might consider in
deciding whether a vertical compulsory pooling order is appropriate
in any particular case, although we expect the AER will apply a
similar framework as it does in other compulsory pooling
applications. The development of vertical compulsory pooling
orders in Alberta will potentially be significant, and may very
well be the subject of a future legal challenge.
BLG was counsel for one of the successful objecting parties in
relation to the application that gave rise to the Disposition
Letter. The applicant has requested a regulatory appeal
pursuant to section 38 of the Responsible Energy Development Act,
SA 2012, c. R-17.3. We will report on future developments
related to vertical compulsory pooling.
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The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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