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Regulating Shale Gas Development in North America – An Overview

Regulating Shale Gas Development in North America – An Overview. CAPL 33 rd Annual Conference Allan Ingelson, University of Calgary September 25 – 28, 2011. Presentation Outline. What can we learn from the U.S. shale gas experience? Overview

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Regulating Shale Gas Development in North America – An Overview

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  1. Regulating Shale Gas Development in North America – An Overview CAPL 33rd Annual Conference Allan Ingelson, University of Calgary September 25 – 28, 2011

  2. Presentation Outline • What can we learn from the U.S. shale gas experience? • Overview • Unresolved contentious issues- horizontal drilling, hydraulic fracturing and trespass

  3. Presentation Outline • State and federal regulator responses • Summary – implications for shale developers and regulators in Canada

  4. North American Shale Gas

  5. U.S. Technology Driven Shale Gas Plays • Barnett Shale - 1991 • Fayetteville Shale – 2004 • Haynesville/Bossier – 2007 • Marcellus Shale • Antrim, New Albany, Utica

  6. Regulating Shale Plays in Different Basins • Shales - different geographic settings, different physical and chemical characteristics • Challenge - No “one size fits all regulatory scheme”

  7. Projected U.S. Shale Gas Supply

  8. Canadian Shale Gas • National Energy Board (2009) • “It appears that there is potential for 1000 Tcf of shale gas in place within Canada if not more…High uncertainty, because gas shales are still in the initial stages of evaluation across Canada… www.neb-one.gc/clf-si/rnrgynfmtn/nrgyrprt/ntrlgs/prmrndrstndngshlgs2009/pr

  9. Canadian Shale Gas From NEB – Energy Reports (2009) - A Primer for Understanding Canadian Shale Gas, www.neb-one.gc/clf-nsi/rnrgynfmtn/nrgyrpt/ntrlgs/

  10. Horizontal Drilling & Trespass • Horizontal drilling has prompted subsurface trespass concerns • Texas -Browning Oil Co. Inc.

  11. Horizontal Drilling & Pooling • Browning Oil Co., Inc. and Marathon Oil Company v. Jimmie M. Luecke and Leona M. Luecke, 38 S.W.3d 625 (2000) Tex. App. LEXIS 7572; 149 Oil & Gas Rep. 127 Court of Appeals of Texas, 3rd District Austin

  12. Browning Oil - Trespass • Horizontal wells drilled under several tracts of land • Action by lessors against lessees for breach of the pooling provisions in the lease regarding royalties payable • The lessors won!

  13. Court Comment • “This dispute requires us to consider the applicability of traditional oil and gas concepts to horizontal wells… • “…several legal articles and treatises have advised lessees to seek amendments to existing leases prior to drilling horizontal wells.”

  14. Court Comment • “The parties executed the leases and amendments prior to the surge in horizontal drilling and likely did not contemplate the possibility of horizontal wells…”

  15. Browning Oil • Three oil and gas leases executed in 1979 covering 3 tracts of land • Leases executed before upsurge in horizontal drilling

  16. Browning Oil • Lessors entitled to 1/8 royalty on production from mineral they owned in each of the tracts • 1984 amendment to lease regarding pooling

  17. Browning Oil • State oil and gas conservation scheme • If a land tract is too small to satisfy state spacing units, lessees will pool acreage from several land tracts to satisfy the Texas conservation regulatory system

  18. Browning Oil • 1994 – operating agreement executed between Browning Oil and Marathon Oil that includes acreage covered by the 3 leases

  19. Browning Oil • November 1994 – Marathon attempted to negotiate an amendment to the leases with the lessors “to clarify the pooling authority for horizontal wells.” • The lessors refused to execute the proposed amendment

  20. Browning Oil • 1995 – Nevertheless the lessees completed the first of 2 horizontal wells crossing several tracts of land (one well crossed 7 tracts) • Lessees debated with the lessors the appropriate method for determining royalties for the lessors

  21. Browning Oil • Lessees proposed allocating royalties to lessors based on the share of production that could be attributed to the lessors’ tracts

  22. Pooling and Royalties • Lessees and lessors could not agree on the method of calculating the royalties payable to the lessors

  23. Pooling & Horizontal Wells • Issue - Whether the pooled units for the producing horizontal wells violated the pooling provisions in two leases regarding dilution of the lessors’ interests

  24. Pooling & Lease Provisions • What did the appeal court say? • The Court commented that for pooling to be valid, it must be done in accordance with the method and purposes specified in the lease

  25. Pooling & Lease Provisions • The Court commented that parties to an oil and gas lease must strictly comply with its terms – this includes the pooling provisions

  26. Pooling & Lease Provisions • Lessors argued that the purported pooled units for 2 horizontal wells violated the lease provisions • Both the trial court and appellate court agreed with the lessors

  27. Court Comment • “Even though traditional legal principles of oil and gas law would afford the lessors royalties on all production if a vertical well were drilled on their land…

  28. Court Comment • …these principles have no application in the case of horizontal wells that contain multiple drill sites on tracts owned by multiple landowners.”

  29. Question • As freehold leases have been drafted with vertical wells in mind, could the trespass issue arise in Canada as more horizontal wells are drilled?

  30. Subsurface Trespass ? • When a horizontal well is fraced and natural gas is produced from an adjacent land parcel to which another company holds the mineral rights, is there a subsurface trespass?

  31. Subsurface Trespass ? • Will the lessee of the adjacent property be able to prove damages? • U.S. case law based on the rule of capture – Canada not a rule of capture jurisdiction

  32. Horizontal Drilling & Water Contamination • 2011 Texas Tribune Headlines - “Does Gas Drilling Put Radiation in Texas Water?” March 11, 2011 • “Even in Texas, Concerns Grow About Gas Drilling” April 25, 2011

  33. Hydraulic Fracing & Shale Gas • Fracing process dates back to the 1860’s • 1930’s - injection of non explosive fluids used • 1949 - “hydrofrac’ patent issued to Halliburton Oil Well Cementing Company

  34. Fracing Fluids • Fracturing fluids - typical components • 90% water • 9.5% sand • 0.5% other chemicals

  35. Fracing – Why All the Fuss? • BP Deep Horizon Well Blowout - era of increased public environmental and health concerns • Increased public scrutiny

  36. Fracing & Alleged Water Contamination • Water contamination from fracingchemicals • Disclosure of frac fluid contents • Proprietary concerns

  37. Fracing and Alleged Water Contamination • Statement of Scott Kell, on behalf of the Groundwater Protection Council (GWPC) Testimony to the House Committee on Natural Resources, Subcommittee on Energy and Mineral resources, Washington D.C. June 4, 2009

  38. Fracing and Alleged Water Contamination • “Hydraulic Fracturing – 15 Statements for Regulatory Officials” June 2009 • Lack of documented cases of groundwater contamination

  39. Fracing Fluid Disclosure • Wyoming - regulatory response • As of September 2010 the Wyoming Oil and Gas Commission requires full disclosure of fracing fluid contents

  40. Fracing Disclosure • Texas - Bill SB 1049 proposed to increase disclosure regarding fracingactivities

  41. Fracing Disclosure • Trend toward increased disclosure - Montana, Arkansas, Michigan, New York

  42. U.S. Federal Response • February 8, 2011 - EPA Draft Hydraulic Fracturing Study Plan • Examine potential for fracing impacts on drinking water resources and human exposure to fracing chemicals

  43. U.S. Federal Response • 2011 study to be completed in 2012 • Follow-up in 2014

  44. Water Contamination • April 16, 2011 – Waxman, Markey and DeGette Congressional Report • 29 chemicals allegedly in fracing fluids including lead and benzene - possible carcinogens

  45. Water Contamination • Drilling and fracing - Duke University Study, May 17, 2011 • “Methane contamination of drinking water accompanying gas-well drilling and hydraulic fracturing” by Stephen G. Osborn et al vol. 108 no. (20) PNAS, May 17, 2011 www.pnas.org/cgi/doi/10.1073/pnas.1100682108

  46. 2011 Duke University Study • “We found no evidence for contamination of drinking-water samples with deep saline brines or fracturing fluids”Osborn et al, p. 8172

  47. 2011 Duke University Study • …In aquifers overlying the Marcellus and Utica shale formations of northeastern Pennsylvania and upstate New York, we document systematic evidence for methane contamination of drinking water associated with shale gas extraction.” Osborn et al, p. 8172

  48. U.S. Federal Water Regulation • Clean Water Act - 1972 • Safe Drinking Water Act (SDWA) - 1974

  49. Alleged Water Contamination in Texas • Alleged water contamination from methane – EPA issued an emergency environmental protection order to Range Resources Dec. 7, 2010 • Company subsequently cleared

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