Improving oil and natural gas exploration, reducing impacts to the land-base and expediting payment of royalties to the Province were behind the amendments to drilling license regulations announced by the provincial government in late July, according to a British Columbia Ministry of Energy and Mines spokesperson.
“British Columbia is in the process of updating regulations for Crown-owned natural gas subsurface rights – a commitment made in our Natural Gas Strategy,” said the ministry spokesperson.
The changes concern new rules for grouping oil and gas tenures, a redefinition of earning wells and an extension of the validation table used to measure earnings produced by an earning well.
“The changes made [in July] improve the B.C. oil and gas tenure system now, in advance of a full modernization of the Petroleum and Natural Gas Act planned for next year,” he said.
The grouping rules have been modified to ensure that tenure holders are devoting their resources toward areas where oil and gas production is most likely to be fruitful, rather than attempt to prove they are performing adequate exploration activities by drilling in remote – and potentially less profitable – areas.
Previously, producers were limited to grouping only two tenures within a four-kilometer radius, unless a greater number of tenures within that radius were each smaller than four gas spacing areas.
The gas spacing area is a unit of land used to administer tenures, comparable to a section of land.
It is the responsibility of tenure holders to show that they are making an effort to find oil and gas resources. The original regulations were designed to ensure that producers were doing that work, but the government decided they are no longer appropriate in the age of horizontal drilling and multi-well pads.
“Certainly, the ability to group wells to convert petroleum licenses to tenure in a more sensible way is probably the most important development,” said Geoff Morrison, BC Operations Manager with the Canadian Association of Petroleum Producers (CAPP), discussing the amendments.
“Conventional wells were one well per pad,” he continued. “And so you would put many wells over a geographic area. And then you would be able to group them. And then you would be able to delineate the resource and say, ‘We’re going to convert these drilling licenses into a lease for production.’ And that was always useful.
“But now with shale gas and [multi-well] pads, where you’re drilling five, ten, fifteen, whatever number of wells off a single pad, you’re not covering the same geographic distance on the surface.”
However, the producers are exploring a substantial amount of the subsurface through long horizontal wells.
“And so the [original] regulations were drafted [in a way] – which was sensible – that would reflect the way industry developed the resource. But now when you’re working off a single pad, you’re not able to capture the same land-base.”
That explains the change to the grouping rules.
“This new ability to group wells is a reflection of the evolution from conventional to unconventional resource, and that’s an improvement,” Morrison added.
Prior to the drilling license regulation amendments, an earning well was defined as the first well drilled in a particular geological zone or depth of rock on a tenure or the first well drilled into a particular gas spacing area within that tenure.
Multi-well pads have also complicated that regulation, as there can now be several wells passing through one spacing area. Attempting to drill their wells in the order they would prefer, according to the original regulation, could be disorderly and potentially hazardous.
Producers are now able to choose which well to use as an earning well for each drilling space, as long as that well has generated well reports and well data that provides sufficient information about the resource in the spacing area.
A drilling license can only be converted to a lease that allows the tenure holder to produce oil gas after that license has been explored by a drilling well.
“There [was] this inability to start flowing resources to the surface in a way that produces revenue for the company and royalties for the government,” Morrison said of the past rules.
“Under the old system – the old grouping rules – you would potentially have to create a new well pad and a new road at some distance to justify the capture of a specific resource. And, in a sense, government did that to encourage companies to go out and explore new areas, because there was geological uncertainty. There was a benefit to the Crown for encouraging companies to go out and maximize and delineate that resource,” he continued.
“But now, with shale gas, you already know how big it is ahead of time. There’s not geological uncertainty. And so you’re basically forcing companies to spend money that they don’t really need to do to prove where the resource is because it’s known now. That’s the change.
“It’s a recognition that shale gas development is different than conventional gas. So, from industry’s perspective, these help the industry to develop the resource more orderly. And there’s obviously some cost savings to the industry as well.
“That’s a benefit in the low price environment.”