Regulatory Considerations for Unconventional Resource Development Ron Stefik, AScT

1. Regulatory Considerations for Unconventional Resource Development Ron Stefik, AScT Resource Conservation Branch April 17 | 2009

2. Veteran of Government Service!

3. Overview Horn River Regional Field – Devonian shale gas • the play • Experimental Schemes • OGC Development Order • water disposal Heritage Regional Field – Triassic Montney tight gas • the play • OGC Development Order (proposed) Unconventional Gas Regulatory Challenges

4. Horn River Basin – Simplified Cross-section NorthWest SouthEast T= 175 C (347 F) Pi ~ 50 MPa (7250 psi) T= 135 C (275 F) Pi ~ 38 MPa (5500 psi) Bank edge higher silica more calcareous Slave Point Carbonate Muskwa/Otter Park Shale 100 m Depth = 2500 m TVD k = 250 nD ~ 0 - 50 m Middle Devonian Carbonate Keg River/ Pine Point Carbonate 50 m Klua/Evie Shale Carbonate platform (wet) TOC ~ 5.7 % OGIP > 500 Tcf (including Cordova Embayment)

5. Horn River Basin

6. Horn River – Experimental Schemes • Experimental Scheme approval allows • evaluation of production techniques. • “methods that are untried and unproven in the particular application”. • OGC will introduce a detailed guide for making application. • approval area limited in size to near-term activity.

7. Horn River – Experimental Schemes • 3-year confidentiality for all well data, including production. • annual Progress Reports submitted. • a total of 64 Experimental approvals (many inactive); • 21 Horn River formation - (Muskwa/Otter Park and/or Klua/Evie) shale. • 8 Maxhamish Lake/Liard Basin area - Exshaw shale.

8. Unconventional Gas Resource Development • Premise: • Central pad locations - multiple horizontal wells. • High well density. • Reservoir quality variation is gradational over long distances. • Significant core sampling.

9. Horn River Basin Development Scheme Approval • The OGC has worked with the industry Horn River Producers Group – proposed order that covers multiple sub-surface issues. • minimum data gathering requirements. • area based on OGC field outline, updated quarterly. • applies to wells with objective of Muskwa/Otter Park and/or Klua/Evie. • normal Well Authorization application and approval process still applies.

10. Horn River Basin Development Scheme Approval • Drilling Samples • 1st well on pad: • 5 m intervals from 50 m above shallowest reservoir, usually Debolt - vertical well to TD, or - horizontal well to KOP. • 10 m intervals in build and horizontal section. • Subsequent wells on a pad: • sampling required on one well in each stratigraphic unit, in each dominant direction. • exempt from sampling above KOP. • from KOP to TD at 10 m intervals. • submit proposed program to OGC, contacted only if modification required.

11. Horn River Basin Development Scheme Approval • Logging • 1st well on pad, full OH logs: • vertical well, to TD. • horizontal well, to “point of resistance” (~ 60 degrees). • neutron log to within 25 m of surface. • horizontal well, gamma ray log to TD. • Subsequent wells on a pad exempt, except for: • minimum of gamma ray log (MWD / OH / cased hole) from base of surface casing to TD. • submit proposed program to OGC, contacted only if modification required.

12. Horn River Basin Development Scheme Approval Example pad – minimum data requirements • First well on pad: • samples 5 m intervals, 10 m in build &hz • full OH logs (point of resistance if hz) • neutron to 25m from surface • GR to TD • All other wells on pad: • exempt from samples • full GR logs • (OH/cased/MWD) • One well in opposite direction: • samples only below KOP • full gamma log (OH/cased/MWD)

13. Horn River Basin Development Scheme Approval Reservoir pressure tests: • Pi - minimum of 1 test per 4 km radius (measured from well head). • Exempt from annual pool testing. Gas well deliverability tests: • Exempt from absolute open flow (AOF) potential testing. Gas analysis: • samples from minimum of 2 wells/pad, during initial production year. Note – any additional tests or analyses require report submission.

14. Horn River Basin Development Scheme Approval Example pad – minimum data requirements • Initial reservoir pressure: • 1 test per 4 km radius, each formation 4 km • Gas analysis: • 2 wells/pad, each formation • Annual reservoir pressure: • all wells exempt • AOF test: • all wells exempt

15. Horn River Basin Development Scheme Approval Production: • Muskwa/Otter Park & Klua/Evie formations may be commingled. • written notification to OGC; • intervals (separate UWIs for each formation). • production allocation factors (may base on “h” value). • BC-11 form for each UWI, when commence production.

16. Horn River Basin Development Scheme Approval • Good Engineering Practice (GEP) • As development expands beyond Experimental Schemes, operators are expected to apply for GEP approvals. • removes well spacing and target area restrictions for a specific area. • “streamlined” application requirements - ownership or consent from registered owner of petroleum and natural gas rights essential. • gas target buffer distance of 100 m (normal is 250 m). • notice of application posted OGC website for 3-week period, allow possible objections to be filed.

17. Horn River Field – Water Disposal • Application required for Produced Water Disposal to an underground formation. • Normally for by-product salt water disposal (SWD). • Approvals issued under Section 94 of the Drilling and Production Regulation include by definition ”…produced water or recovered fluids from a well completion or workover…”. • Slick water fracs, significant volumes of flow-back water. OGC encourages re-use of this water where possible.

18. Horn River Field - Water production well water disposal (& source?) well Current water source = surface lakes ground level Possible Quaternary gravel channel sources? Fresh water <1,000 PPM TDS ~ 400 m depth Debolt formation (water saturated) 20,000 PPM TDS Deep formation water 30,000 – 100,000 PPM TDS (seawater 35,000 PPM) Horn River shale ~ 2500 m depth

19. Horn River Field – Water Disposal • Application required for initial injection test, OGC guideline. • Conditional Injection Test approval (if zone favourable); • specify test injection volume. • production test, verify no hydrocarbon potential. • OGC posts public notice (web site) to begin objection period. • if injection test successful, and 3 week objection period concluded without valid concern, final approval.

20. Heritage Regional Field – Montney “A” Simplified Cross-section West (Groundbirch) ~36 miles East (Swan Lake) Doig ss & Doig Phosphate shale (variable presence and prouctivequality) increasing pressure gradient to west Pi= 38 MPa Pi= 21 MPa Upper Montney 130 m Avg Depth ~ 2400 m TVD generally poorer quality to west fine silt / shale fine sand / silt (overpressured) Lower Montney 170m Belloy carbonate OGIP = 87 Tcf ( ~250 Tcf in fairway?)

21. Heritage – Montney “A” 875 miles2 OGIP ~ 87 Tcf Good Engineering Practice (GEP) approvals. - No inter-well spacing or horizontal drilling restrictions.

22. Heritage Montney Production

23. Heritage Montney Development Scheme Approval • OGC has drafted an area based order, similar to Horn River sub-surface issues. • minimum data gathering requirements. • defined area – Heritage regional field, updated quarterly. • wells with objective of, or completion within, Triassic Montney formation. • normal Well Authorization application and approval process still applies.

24. Heritage Montney Development Scheme Approval – Sneak Preview

25. Heritage Montney Development Scheme Approval • Drilling Samples • 1st well on pad: • 5 m intervals from 50 m above shallowest anticipated reservoir - vertical well to TD, or - horizontal well to KOP. • 10 m intervals in build and horizontal section. • Subsequent wells on a pad: • sampling required on one well in each stratigraphic unit, in each dominant direction. • exempt from sampling above KOP. • below KOP at 10 m intervals. • submit proposed program to OGC, contacted only if modification required.

26. Heritage Montney Development Scheme Approval • Logging • 1st well on pad, full OH logs: • vertical well, to TD. • horizontal well, to “point of resistance” (~ 60 degrees). • ** this may be waived where adequate logged wells within 250 m! • neutron log to within 25 m of surface. • horizontal well, gamma ray log to TD. • Subsequent wells on a pad exempt, except for: • minimum of gamma ray log (MWD / OH / cased hole) from base of surface casing to TD. • submit proposed program to OGC, contacted only if modification required.

27. Heritage Montney Development Scheme Approval Reservoir pressure tests: • Pi - minimum of 1 test per 4 km radius (measured from well head). • Exempt from annual pool testing. Gas well deliverability tests: • Exempt from absolute open flow (AOF) potential testing. Gas analysis: • sample from minimum of 2 wells/pad, during initial production year. Note – any additional tests or analyses performed require report submission.

28. Heritage Montney Development Scheme Approval • Production • Montney is treated as a single formation for the purpose of production reporting. • commingling approval/notification not required for Upper/Middle/Lower Montney zones. • not separate UWIs for each completion event. • single BC-11 form when commence production.

29. Heritage Montney Development Scheme Approval Good Engineering Practice (GEP) • Numerous GEP approvals have been granted, to multiple operators. • removes well spacing and target area restrictions for a specific area. • “streamlined” application requirements - ownership or consent from registered owner of petroleum and natural gas rights essential.

30. Heritage Montney Development Scheme Approval Good Engineering Practice (GEP) • gastarget buffer distance of 150 m (normal is 250 m). • buffer distance may be reduced < 150 m where consent from off-setting rights owners submitted. • where GEP has not yet been approved, 150 m target area buffer applies to individual gas spacing areas. • Notice of application posted OGC website for 3-week period, to allow possible objections to be filed.

31. Regulatory Challenges – Optimal Well Spacing • Impact of well spacing and sequence of stimulation/production on ultimate recovery. • Ideal distance (lateral and vertical) between horizontal well bores for drainage? • “In-fill” drilling and stimulation possible if intersect fractures from off-setting producing well? Regulator to require specific density and order of operations?

32. Regulatory Challenges – Acid Gas Disposal • Horn River gas C02 ~ 10+ % • Montney gas H2S ~ 0.0-0.3% Large production volumes = large disposal requirements! Acid gas disposal wells: • Heritage Montney > Belloy aquifer • 1 approved: • max rate of 62 103m3/d. • observation well required. • 2 other applications received. • Horn River > Devonian aquifer?

33. Regulatory Challenges - Trespass • Fracture stimulation consideration? • Regulation currently addresses horizontal trespass of a wellbore (spacing areas). • Large frac treatments, possible to connect to formations above or below title interest. • Regulator to limit horizontal well placement? • X # meters from top or base of zone? • formula limiting frac size, based on distance from top or base of zone? • Off-target production penalty formula is based on interpretation of “pay” section. In unconventional gas, what is pay?

34. Regulatory Challenges – Microseismic Data • Seismic data, or enhanced completion data? • Not seismic data/reports for land tenure purposes. • If completion data, • must submit to regulator, • released 3 months to 3 years from rig release date, depending on well classification. • File data with the well being observed/fraced, not the well in which signals are received.

35. Summary • Two proposed Development Approvals for unconventional resources; • capture the “right amount” of data for • evaluation and development • streamlining for industry and the regulator • challenges/opportunities remain

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