Regulating Shale Gas
Development in North
America – An Overview
CAPL 33rd 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
• Unresolved contentious
issues- horizontal drilling,
hydraulic fracturing and
trespass
Presentation Outline
• State and federal regulator
responses
• Summary – implications for
shale developers and
regulators in Canada
North American Shale Gas
U.S. Technology Driven Shale
Gas Plays
• Barnett Shale - 1991
• Fayetteville Shale – 2004
• Haynesville/Bossier – 2007
• Marcellus Shale
• Antrim, New Albany, Utica
Regulating Shale Plays in
Different Basins
• Shales - different geographic
settings, different physical
and chemical characteristics
• Challenge - No “one size fits
all regulatory scheme”
Projected U.S. Shale Gas
Supply
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
Canadian Shale Gas
From NEB – Energy Reports (2009) - A Primer for Understanding Canadian Shale Gas, www.neb-one.gc/clf-nsi/rnrgynfmtn/nrgyrpt/ntrlgs/
Horizontal Drilling & Trespass
• Horizontal drilling has
prompted subsurface trespass
concerns
• Texas -Browning Oil Co. Inc.
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
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!
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.”
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…”
Browning Oil
• Three oil and gas leases
executed in 1979 covering 3
tracts of land
• Leases executed before
upsurge in horizontal drilling
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
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
Browning Oil
• 1994 – operating agreement
executed between Browning
Oil and Marathon Oil that
includes acreage covered by
the 3 leases
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
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
Browning Oil
• Lessees proposed allocating
royalties to lessors based on
the share of production that
could be attributed to the
lessors’ tracts
Pooling and Royalties
• Lessees and lessors could not
agree on the method of
calculating the royalties
payable to the lessors
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
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
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
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
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…
Court Comment
• …these principles have no
application in the case of
horizontal wells that contain
multiple drill sites on tracts
owned by multiple
landowners.”
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?
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?
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
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
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
Fracing Fluids
• Fracturing fluids - typical
components
• 90% water
• 9.5% sand
• 0.5% other chemicals
Fracing – Why All the Fuss?
• BP Deep Horizon Well Blowout
- era of increased public
environmental and health
concerns
• Increased public scrutiny
Fracing & Alleged Water
Contamination
• Water contamination from
fracing chemicals
• Disclosure of frac fluid
contents
• Proprietary concerns
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
Fracing and Alleged Water
Contamination
• “Hydraulic Fracturing – 15
Statements for Regulatory
Officials” June 2009
• Lack of documented cases of
groundwater contamination
Fracing Fluid Disclosure
• Wyoming - regulatory
response
• As of September 2010 the
Wyoming Oil and Gas
Commission requires full
disclosure of fracing fluid
contents
Fracing Disclosure
• Texas - Bill SB 1049 proposed
to increase disclosure
regarding fracing activities
Fracing Disclosure
• Trend toward increased
disclosure - Montana,
Arkansas, Michigan, New York
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
U.S. Federal Response
• 2011 study to be completed in
2012
• Follow-up in 2014
Water Contamination
• April 16, 2011 – Waxman,
Markey and DeGette
Congressional Report
• 29 chemicals allegedly in
fracing fluids including lead
and benzene - possible
carcinogens
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
2011 Duke University Study
• “We found no evidence for
contamination of drinkingwater samples with deep
saline brines or fracturing
fluids”
Osborn et al, p. 8172
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
U.S. Federal Water Regulation
• Clean Water Act - 1972
• Safe Drinking Water Act
(SDWA) - 1974
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
Other Water Issues
• Fracing fluid partial flowback
• Proper fracing fluid storage &
disposal
• Volume of water used in
fracing
Federal Regulation
• 2004 – U.S. EPA study on
hydraulic fracturing for CBM
concluded “fracturing poses
little or no threat” to drinking
water
• 2005 - hydraulic fracturing
exempted from the SDWA
Bill Introduced in 2009
• Fracking Responsibility and
Awareness of Chemicals Act
• Designed to specifically
regulate hydraulic fracturing
Federal Response 2011
• On August 11, 2011 a high
level advisory panel to US
Secretary of Energy released
preliminary DOE
recommendations on issues
surrounding shale gas
production
Federal Recommendations
2011
• U.S. DOE Recommendation need immediate and longerterm actions to reduce
environmental and safety
risks of shale gas operations
with a particular focus on
protecting air and water
quality
Federal Recommendations 2011
• U.S. DOE - increase industry
transparency surrounding
shale gas production
processes and promoting
industry best practices
Federal Recommendations 2011
• U.S. DOE Recommendation “Make information about
shale gas production
operations more accessible to
the public”
Federal Recommendations
2011
• U.S. DOE Recommendation create a Shale Gas Industry
Operation organization
committed to continuous
improvement of best
operating practices
Federal Recommendations 2011
• U.S. DOE Recommendation –
research and development to
improve safety and
environmental performance
Implications for Canadian Regulators
Alberta Energy Minister
Fri, Oct 15, 2010
Calgary Herald
Alberta Shale Gas Research &
Development
• 2010 Alberta Upstream
Petroleum Research Fund –
High Priority Public Policy
Research Issue – Assessment
of Risks of Hydraulic
Fracturing
Other Shale Gas Development
Issues
• Noise
• Cumulative effects
Alberta Fracing
• Regulated under ERCA &
OGCA
• ERCB Directive 059: Drilling
and completion data filing
requirements -
Fracing Regulation in Alberta
• “Must submit – “type, quantity,
and size of propping agents,
type and volume of carrier
(fluids), additives, type and
quantity of plugging agents,
feed rates and pressures”
B.C. Fracing
• B.C. Oil and Gas Commission
• Oil and Gas Activities Act
(OGAA): 2008 to 2010 – water
withdrawals
• Maintain a record of
fracturing fluid and produce
records upon request
B.C. Fracing
• Best Noise Control Guideline
(2009)
Quebec
• Much more limited oil and gas
development experience than
in Alberta or B.C.
Quebec - Utica Shale Lease Map
Economic Benefits Shale Gas
Development in Quebec
From SECOR Advisory firm
report for the Quebec Oil and
Gas Association:
• Based on gas price of $6/Mcf
and 10% royalty rate
Economic Benefits Shale Gas
in Quebec
• Utica shale play could
generate between 5000 and
19,000 direct/indirect job
opportunities
• Between $278 million and $1
billion in annual royalties for
the province
Economic Benefits Shale Gas
in Quebec
• $1.85 million in value added
to Quebec and 33 jobs per
well during drilling
• 28 jobs per 100 wells during
production which could last
for more than 50 years
Environmental Concerns
• Water impacts
• Air quality impacts
Summary
• As with CBM development the
U.S. shale gas experience can
assist in identifying some
potential issues that Canadian
regulators and operators may
encounter
Summary
• As with CBM, shale types in
different basins exhibit
different characteristics (ex.
the volume of water in
different shales)
Summary
• There is no effective “one size
fits all” regulatory approach
Summary
• As with CBM development,
different chemical and
physical properties of shales
within different basins may
prompt differences in state
and provincial regulatory
requirements
Summary
• Notwithstanding shale gas
development in Texas since
1991, water contamination
from fracing fluids and
methane migration continue
to be contentious issues
Summary
• In light of the August 2011
U.S. DOE recommendations,
potential shale gas fracing
impacts on water are under
investigation
Summary
• Texas, Wyoming, and several
other states and the U.S.
Federal Government are
moving toward increased
disclosure of fracing fluid
contents
Summary
• Development of shale gas
best management practices
has been recommended by
the U.S. DOE
Summary – Shale Gas Issues
That Can Arise in Canada
• Alleged water contamination
from fracing
• Drilling and methane
migration
Summary – Shale Gas Issues
That Can Arise in Canada
• Methane emissions
• Trespass
• Noise
• Cumulative effects
Summary – Issues That Can
Arise in Canada
• Trespass - adequacy of
Canadian freehold leases to
address issues raised by
horizontal drilling for shale
gas
Summary – Issues That Can
Arise in Canada
• Trespass - Does the freehold
lease you are going to rely on
that was drafted with vertical
wells in mind, need to be
amended before horizontal
wells are drilled?
Acknowledgments
• Richard Steed, MSc. (SEDV)
student
Thank you
• Questions