Regulation of Oil and Gas in Alberta, CanadaPresentation to the Latin America and Caribbean Oil and Gas Seminar

Jim Dilay, Board Member, Energy Resources Conservation Board

Alberta, Canada

July 12, 2011

Overview

• Alberta Energy Industry Scope

• Structure of Regulation• Alberta Oil and Gas

Regulation− Purpose− Principles− Delivery

• Optimizing Recovery• New Technology • Conclusion

Alberta covers 661 190 km2 (255 285 miles2), an area comparable to Texas.

Ottawa 2847km (1769 miles)Vancouver

817 km (507 miles)

New York City 3270 km (2032 miles)

Mexico City

3973 km (2469 miles)

Anchorage 2277 km

(1415 miles)

Houston3018 km (1876 miles)

Alberta’s Location

Alberta

World Oil Reserves (billions of barrels - established)

Source: Oil & Gas Journal, January 2011

Only 13% of the world’s known oil reserves are accessible to international oil companies… One-half of those reserves are in Alberta’s oil sands.

Scope of Alberta Reserves

Conventional crude oil 0.24 billion m3

Bitumen 26.9 billion m3

in situ 21.5 billion m3 surface-mineable 5.4 billion m3

Natural gas 1025 billion m3

with CBM 1093 billion m3

Natural gas liquids 0.26 billion m3

Coal 33 billion tonnes

ST98-2011

Remaining established reservesend of 2010

Producing Oil & Gas Wells 176 166*

ERCB Regulated Pipelines 394 000 km

Gas Processing Plants 955 (633 sweet gas, 292 sour gas)

Oil Sands 61 in situ**, 8 surface mines 154 primary recovery projects 20 experimental projects

Upgraders 5 facilities (240 360 m3 per day capacity)

Coal Mines 12 plants (Annual production: 32.2 Mt)

Scope of ERCB Regulated Facilities

* Producing wells: 9709 bitumen, 35 484 conventional oil, 116 603 gas, 14 120 CBM and 250 shale.** As of January 2011

Structure of Industry

• Majority of (81%) of oil and gas rights owned by the people of Alberta

− Administered by Government of Alberta

− Balance are held by freehold mineral rights

owners Federal government

(National Parks, Indian Reserves).

• Alberta leases mineral rights to private businesses

− Businesses ask Government of Alberta to post mineral rights parcels

− Competitive bidding process for posted leases Highest bids earn rights

Structure of Industry…

• Private businesses develop oil and gas resources

− Require regulatory approvals

• Companies pay royalties on production

− To Government of Alberta for Crown leases

− To rights owner for freehold lands

• Oil and gas companies also pay taxes

− Federal and Alberta income tax

− Local government property taxes

Ownership of Rights in Alberta

Surface Rights• Private Landowners• Alberta Public Lands• Federal Lands

Mineral Rights

Companies mostly leasefrom Government of Alberta

Regulator (ERCB) must consider rights ofland owners and mineral rights holders

Purpose of Regulation

• Regulation to mitigate harms

− Public safety− Environmental damage− Resource waste− Inequities

• Information and technical knowledge

− Resource appraisal− Supply and demand

appraisal− Resource information and

history− Advice to Government

Technical advice and support for policy making

Authority to conduct public inquiries

Key Regulatory Principles

• Fair, just, and transparent• Affected parties have a right

to due process− right to notice and to know

the case to be met− right to participate in decision

(hearing)− right to impartial decision

maker − Decisions with reasons

• Identify and address issues before approval

− Regulatory certainty Appeal limited to error in

law or jurisdiction

• Effective and efficient− Appropriate regulation of

risks to prevent harms− Efficient for Government,

industry and public

Structure of Alberta Regulation

Regulatory Structure: Primary Regulatory Interfaces

ALBERTA ENERGY

Energy policyMineral rightsRoyaltyPre-drilling exploration

PUBLIC

Notice of applicationsInformationDirectly affectedPublic hearings

ENERGY RESOURCESCONSERVATION BOARD

Facilities/scheme approvalsInformation collectionand disseminationCompliance/inspectionsCorrelative rights

ALBERTA ENVIRONMENT

Environmental standardsand approvalsEnvironmental impactassessmentPollution control

CANADIAN ENVIRONMENTALASSESSMENT AGENCY (CEAA)

ALBERTA SUSTAINABLERESOURCE DEVELOPMENT/SURFACE RIGHTS BOARD

Surface access and rights-of-way on privately owned land

NATIONAL ENERGY BOARD

Gas exportFederally-regulatedpipelines

ALBERTA HUMAN RESOURCESAND EMPLOYMENT

Occupational healthand safety

Oil and Gas

Industry

Separation of Policy and Regulatory Functions

• Department of Energy− Energy policies− Mineral tenure− Setting royalties− Administering royalties

• ERCB− Authorization of projects− Compliance

Monitoring and Reporting Inspection Enforcement

− Closure Suspension Abandonment

− Information Data collection Information dissemination

• Alberta Energy sets and administers royalties

− Important for royalties to be “competitive” and not discourage investment

• Royalty features can positively influence industry

− Royalty credits for drilling − Royalty incentive for EOR

can enhance recoveries and life-time value of resource developments

− Incentives (credits against royalties) for value add activities (e.g., gas plant NGL/ethane extraction for petrochemical feedstocks)

Economic Policy and Regulation

• The ERCB’s mission is to ensure development is safe, fair, responsible and in the public interest

- Created in 1938 70+ years of regulatory

heritage

- Independent decision maker Adjudication Operational regulation

- 9 Board Members Chairman and Board

members appointed by Government

- 900 staff Technical experts

- 9 field centres throughout Alberta

The ERCB

• ERCB legislation requires it to:

− Consider the public interest, having regard to the social and economic effects of the project and the effects of the project on the environment.

− To effect the conservation of, and to prevent the waste of, the energy resources

− To control pollution and ensure environment conservation

• Resource conservation is a foundational element of the ERCB

Public Interest Regulation

• Preventing waste of resources

− Flaring and venting limits Directive 060

• Conserving reservoir energy− Restrictions on high gas-oil

ratio production

• Protecting reservoirs− Commingling controls

Prevent cross-flow between formations

Prevent contamination (e.g., sour gas into sweet zones)

− Injection (waste water, acid gas) control Prevent contamination of

recoverable resources Prevent harm to off-set

wells

Resource Conservation

• Reservoir equity and orderly development

− Common carrier, processor− Well density (“spacing”) limits− Pooling and unitization− Facilities proliferation

• Optimizing recovery− Maximum production rate

limitation relaxation for enhanced recovery Applies to larger pools

− Encourage but not regulate enhanced recovery Smaller pools

− Encourage cycling of retrograde hydrocarbon rich gas reservoirs

Resource Conservation…

• Optimizing oil sands recovery

− Operating criteria for oil sands mines ID 2001-07 sets out a

minimum recovery ratio ERCB experts evaluate

recovery compliance

− Gas over bitumen Shut-in of gas production

that may harm future bitumen recovery

− In situ application review Ensure valuable resource

not bypassed

− Minimum in situ recoveries Special approval to stop

steaming if not met

− Performance reporting ERCB experts assess

recovery, steam strategies

Resource Conservation…

• Important that regulation not impede appropriate use of new technology

• ERCB is enhancing its role in technology development

− Bulletin 2010-44− Single-contact (Chief

Operations Engineer)− Work with parties to assess

and validate new technologies

− Review requirements to encourage responsible innovation

• Unconventional resources regulatory framework

− Adapt regulations to better suit unconventional gas, tight oil and oil sands

− Play-based approach− Focus on regulation of risks

(versus prescriptive rules)

New Technology

New Regulatory Challenges

• Important that regulation recognize and address emerging issues

− Appropriate and timely regulation of risks to prevent harms

− Efficient for Government, industry and public

• Oil sands− Cap rock integrity

Use of thermal recovery for shallow oil sands reservoirs

− Water use and recycle− Tailings elimination for mines

• Aging infrastructure− Well and facility integrity− Abandonment of inactive

sites

• Alberta has long history of comprehensive regulation of a large resource base

• Separation of fiscal policy and delivery of regulation

• Expert application of science and technology to promote resource conservation and recovery optimization

• Regulatory improvement to adapt to new technology, changing resource development focus and emerging risks

Effective Regulation

jim.dilay@ercb.ca