Canada: Regulating In The Green Era: The AER Rules Land Disturbance Not Justifiable By Short-Term Economic Advantage Of New Pipeline

In January 2017, in ABAER 001 - Bonavista Energy Corporation A Regulatory Appeal of Two Well Licences and an Application for a Pipeline Gilby Field (Bonavista case), the Alberta Energy Regulator (AER) issued the first of its decisions for 2017 confirming two horizontal gas well licenses it issued to Bonavista Energy Corporation (Bonavista) and denying Bonavista's application for an additional pipeline for the proposed gas production. While the wells were needed and the surface drilling location was optimal, the AER found that the short-term economic advantage of the extra pipeline capacity to Bonavista did not justify the impacts to landowners created by the additional disturbance to their lands.

Background

On June 8, 2015, Bonavista submitted non-routine applications for two additional horizontal gas wells to be drilled from an existing well site, which already had two wells Bonavista drilled in 2013. On June 29, 2015, Bonavista applied under part 4 of the Pipeline Act for approval to construct and operate an additional pipeline to transport natural gas from the well site to an existing compressor station. The public notice of the well license applications expired on July 8, 2015, and as the applications met the AER requirements and no statements of concern were received, the AER issued the horizontal well licences. On July 23, 2015, the landowners requested a regulatory appeal of the AER's decision to issue the well licences to Bonavista and registered a statement of concern against Bonavista's pipeline application.

Issues

The AER granted the Applicants' request for a regulatory appeal and set the matter down for a hearing to determine: (a) whether the AER's decision to issue the well licences should be confirmed, varied, suspended, or revoked and the lease site extended; and (b) whether the pipeline should be approved. In determining these issues, the panel considered the need for the project, impacts, mitigation strategies and whether Bonavista met the requirements for stakeholder engagement for the project.

Decision

The AER confirmed its decision to issue the well license but denied Bonavista's application for an additional pipeline. The panel applied the AER's legislative mandate to provide for the efficient, safe, orderly, and environmentally responsible development of energy resources, and considered the factors set out in Section 3 of the Responsible Energy Development Act General Regulation and Section 15 of Responsible Energy Development Act (REDA) which are the social and economic effects of the project; the effects of the project on the environment; and it impacts on landowners and their interests.

The panel found that while the wells were needed and the well site was the optimal surface location to drill them, the economics of the pipeline were not justified. The panel rejected the Applicants' objection to extend the lease to accommodate the drilling of the new wells on the ground that a small piece of land to the north of the extension would be difficult to farm. The panel found that Bonavista required the lease extension on a permanent basis to accommodate access for future servicing and accepted Bonavista's mitigation plans not to fence but to partially reclaim the lease.

With respect to other potential impacts of the project such as traffic and road use, water wells, noise and lights, visual impacts and property values, the panel found that Bonavista's proposed mitigation measures sufficiently address the impacts on landowners and met the AER requirements in Directive 008: Surface Casing Requirements to protect domestic water wells during drilling. The panel found that the AER does not regulate county road use, and road concerns can be addressed through Bonavista's practice of working with the county and its commitment to communicate directly with landowners on road mitigation issues. While the landowners did not present evidence of the potential negative impact of the two wells on their property values, the AER emphasized that matters of compensation, such as property values, are not within the AER's jurisdiction. The panel also found that the onus is on all involved to use reasonable efforts to participate in a manner that enables an effective and informative process to meet the goal of Directive 056 participant involvement program.

With respect to the pipeline application, Bonavista submitted that due to compressor capacity restraints, building a new 4-inch pipeline from the well site to the compressor would allow the two existing wells to flow through the new 4-inch pipeline at similar-to-current operating conditions while the two new wells would flow through an existing pipeline into a different gathering system and to another compressor. Bonavista provided an economic analysis which projected that its project payback would be achieved in approximately five months. For production optimization capital expenditures, Bonavista considered a project viable if payout occurs in less than six months. Bonavista also anticipated additional drilling in the area, which could create greater gas backout in the future.

The panel found that within six to seven months, production rates from the proposed two new wells will decline enough to eliminate the need for an additional pipeline to handle production from the four wells at the well site. Therefore, the need for extra pipeline capacity would be relatively short-lived. The panel found that having the additional pipeline available would minimally expedite production of the resources, however, the absence of an additional pipeline would not strand resources or prevent the eventual production of those resources as the production volumes would not be lost, but would be merely deferred and there was no evidence that reserve recovery would be hindered by the short-term deferral. The panel found that the modest increase in revenue in the short term, as provided by the second pipeline, was not a compelling reason to install the second pipeline in the face of the Applicants' opposition. The panel held that Bonavista's need for the proposed pipeline for possible future projects was speculative and that Bonavista could apply for a future pipeline project, without prejudice. Therefore, the AER denied Bonavista's application for a pipeline.

Implications

The Boanvista case, as the first in 2017, highlights the changes in AER's regulatory approach to energy resources in the era of transitioning to low carbon and renewables. Historically, the AER regulated energy development by assessing each application in isolation, one at a time as the applications were submitted, as Bonavista did with its applications. But times have changed and the AER has rolled out its new regulatory approach, the Integrated Decision Approach (IDA). The AER is working to expand it to include all energy development applications. The IDA is a single application, single decision approach that will allow operators to submit all applications for an energy project from start to finish as an integrated application using the new technology known as OneStop. An integrated application, which the AER will review as a whole, will include a broad range of activities, from a single well to a pipeline, a facility, public land dispositions and all construction, operational and reclamation plans and details.

While the IDA has not been fully implemented, the Bonavista case highlights some of its potential benefits. The Applicants argued that the existing pipeline had been installed only three years ago for production at the well site and that the need for a second pipeline reflected poor planning by Bonavista. It is possible that in a fully implemented IDA setting, the need for two additional wells and a pipeline may have been caught earlier at the initial planning of the existing wells and infrastructure.

As operators continue to strive to maintain adequate cash flow to meet financial obligations in the current economy, it is no surprise that Bonavista preferred to invest in production optimization rather than delay production. However, from the regulatory viewpoint, the AER has made it clear that the economics to the operator will not necessarily be its prime concern. The AER seems to have agreed with the Applicants that a delay in revenue to Bonavista would not justify their cost of having a second pipeline across their land. We will continue to monitor developments on these issues.

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