Recent Oil and Gas Regulatory Developments in Alberta

Introduction

What follows is a brief overview of significant oil and gas regulatory developments occurring between April and November, 2005.  The scope is limited to consideration of Alberta Energy and Utilities Board ("EUB") decisions and policy changes, and judicial appeals of EUB and other regulatory decisions.

Judicial Decisions

Imperial Oil Resources Ltd. v. 8261617 Alberta Inc.[1]

This decision involved an appeal by Imperial Oil Resources Ltd. ("Imperial") from a decision of the Surface Rights Board ("SRB") which held that, as operator, Imperial was required to increase the compensation payable under certain surface leases.  As part of its appeal, Imperial argued that the SRB's decision was not supported by the evidence before it.

The Court found that in determining compensation, the SRB must consider the loss of use of the area under the lease and the adverse effect of the area under the lease on the remaining land, specifically the nuisance that might be caused by operations.  With these considerations in mind, the Court found that in making its decision, the SRB, without providing reasons, preferred the limited pattern of dealings suggested by the surface owner and in doing so, overlooked relevant evidence.  The Court found that while the SRB has a wide discretion to set compensation, it should have focused more on the loss of use and adverse effect.  Additionally, the Court found that although consideration of a pattern of dealing is a well established method of determining compensation, the SRB should have set compensation on the basis of a more generally accepted pattern of dealings in the area than that which was provided by the surface owner.  On the basis of the foregoing, the Court reduced the compensation payable by Imperial.

ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board)[2]

In 1959, the Board of Public Utilities Commissioners held that Carbon underground natural gas storage facilities ("Carbon") were  regulated assets.  In 2001, ATCO Gas and Pipelines Ltd. ("ATCO") applied to the EUB to have Carbon removed from EUB regulation.  This application was denied and the EUB held that Carbon was to remain within its jurisdiction until ATCO brought a successful application to sell Carbon.  In 2003, ATCO applied to the EUB for approval of a Carbon storage plan.  As part of its written argument, ATCO sought a separate process to consider the EUB's jurisdiction over Carbon.  In response, the EUB found that the application did not raise a jurisdictional issue and that as a result of the lack of opportunity to present evidence, hear argument and consider past acrimonious proceedings, it could not address ATCO's argument. 

ATCO appealed the EUB's decision to refuse to provide direction. In its appeal, ATCO argued that the EUB erred by ignoring the jurisdiction issue and that the EUB's decision was arbitrary and capricious given the fact that it ignored the Roles, Relationships, and Responsibilities Regulation Alta. Reg. 186/200. 

The Court found that the EUB did not err by refusing to deal with the issue of its jurisdiction over Carbon.  The EUB has the authority to determine its own procedure and hearing schedule and ATCO did not follow that procedure.  Furthermore, it would have been inappropriate for the EUB to decide this important issue without complete argument and evidence and the EUB was therefore within its jurisdiction not to decide the issue until a proper application was made.  Finally, the Court found that the EUB was not required to consider the Roles, Relationships, and Responsibilities Regulation Alta Reg. 186/200 as it was not raised by ATCO in accordance with proper procedure.

Sarg Oils Ltd. v. Environmental Appeal Board[3]

Pursuant to a sale of 16 oil wells in 1985 from Sarg Oils Ltd. ("Sarg") to Sundial Oil and Gas Ltd. ("Sundial"), Sarg confirmed with the Energy Resources Conservation Board ("ERCB") that Sundial was capable of taking a transfer of the associated well licenses.  Although the ERCB assured Sarg that it was possible to transfer the well licenses, Sundial was unsuccessful in doing so and as a result, Sarg remained the licensee of the wells.  As the wells were inoperative and Sarg was still named as the licensee, the ERCB ordered Sarg to abandon the wells.  When Sarg failed to do so, the ERCB had the work done itself.  The abandonment failed to meet environmental standards and environmental protection orders were issued by Alberta Environment requiring that Sarg clean up the site properly.  Sarg appealed these orders to the Environmental Appeal Board ("EAB").  The EAB upheld the orders and Sarg sought a judicial review of this decision.

The Court found that the EAB's decision was not equitable given the fact that Sarg did everything in its power to divest itself of its interest in the wells and had a reasonable expectation that the transfer of wells would be granted.  The Court also held that the EAB's decision breached the rules of natural justice as the factors surrounding Sarg's case required a more thorough examination of the ERCB's conduct and the reasons why Sarg was designated as licensee.  On the basis of the foregoing, the Court ordered that the report and recommendations be set aside and referred the matter back to the EAB for a new hearing.

EUB Decisions

Decision 2005‑058: Intrepid Energy Corporation ‑ Application for a Well Licence Sturgeon Lake South Field (June 7, 2005)

            Intrepid Energy Ltd. ("Intrepid") submitted an application to the EUB for a licence to drill a directional oil well extending from a surface location on the shore of Sturgeon Lake to a bottomhole location underlying the lake.  Intrepid also applied for a flaring permit, which was considered along side the associated emergency response plan ("ERP") for the well.  Interventions were filed by affected landowners, some of whom had formed the Sturgeon Lake Cabin Owners Group, and the Municipal District of Greenview No. 10.  Of concern to the landowners were noise, safety, emergency response planning, lifestyle impacts and the possibility of an adverse impact on property values.  The Municipal District was primarily concerned with road construction and use issues.

            The EUB considered the need for the well, which was undisputed, and then responded to the landowners’ expressed concerns.  In approving the application, the EUB required Intrepid to comply with the limits set out in EUB Guide 38.  Further, with regard to spill response, although it was not required, the EUB directed Intrepid to become a member of a spill co-operative prior to spudding the well.  In response to resident concerns about impacts on the lifestyle of this primarily recreational community, the EUB asserted that a condition should be placed on the well licence directing that drilling and testing occur in the non‑summer months.

            Lastly, with regard to the ERP, the EUB noted that in its design, Intrepid had exceeded the requirements of EUB Guide 71, however it did direct Intrepid to ensure that additional air monitors be placed on stand-by during drilling in the sour zones.

            Of note in this Decision is the EUB’s assertion of the need for continuing co-operation and communication between and among all affected parties.  It was recommended that the parties set up mechanisms to maintain dialogue and to review any future development and activity.

Decision 2005‑059: Canadian Natural Resources Limited ‑ Application for New Primary Recovery Scheme (June 7, 2005)

Canadian Natural Resources Limited ("CNRL") applied to the EUB for approval to operate three new schemes for the recovery of crude bitumen within a reduced drilling spacing unit to optimize recovery.  Several area residents opposed the application based on concerns about health impacts, acid deposition in the area, emissions and noise, impacts on groundwater supplies, pedestrian safety and CNRL's consultation with area residents.

The interveners did not raise any concerns with respect to the need for reduced spacing and the EUB found that reduced spacing was appropriate to allow for optimal recovery of resources.  In terms of traffic concerns, the EUB found that 24 hour trucking was appropriate, taking into consideration CNRL's commitment to restrict trucking on a certain road.  Based on the fact that CNRL could satisfy the first two issues raised, the EUB approved the applications.

In the EUB's view, trucking, pipelining, noise, air emissions and groundwater production should be considered from a regional perspective.  The EUB expressed concern with the fact that CNRL did not provide a knowledgeable panel member respecting these regional issues.  The EUB felt that this would have helped it to understand how regional issues are addressed and whether they are being resolved.  Specifically, the EUB was concerned with the lack of co-operation with respect to gas conservation and the lack of activity with respect to the advancement of alternatives for the pipelining of crude bitumen production.  Although this did not prevent approval of the reduced spacing applications, the EUB addressed the issue of ongoing communication between CNRL and affected parties.  The EUB noted that if remaining concerns were not resolved, the affected parties could file an objection to the forthcoming well licence applications.

Decision 2005‑060: Compton Petroleum Corporation ‑ Applications for Licences to Drill Six Critical Sour Natural Gas Wells, reduced Emergency Planning Zone, Special Well Spacing, and Production Facilities Okotoks Field (Southeast Calgary Area) (June 22, 2005)

Following a pre-hearing meeting on October 23, 2003, and an extensive public hearing held from January 11 to March 4, 2005, the EUB released this decision on June 22, 2005, which was of considerable interest to many in the Calgary area.  Compton Petroleum Corporation ("Compton") had applied to drill six horizontal sour gas wells, construct and operate associated facilities, reduce the emergency planning zone ("EPZ") with a corresponding reduction in the emergency awareness zone ("EAZ") and for a reduced spacing zone.

Compton 's applications were met with stiff and vigilant opposition from area residents, land developers, the Calgary Health Region and the City of Calgary.  This opposition was based primarily on the location of the proposed wells, just 1.1 km east of the City of Calgary boundary and 4.5 km from the nearest communities located within the City of Calgary.  Although there had been sour gas activity in and near the area of concern since 1969, as a result of population growth, the EUB adopted a particularly stringent approach in dealing with public safety issues.

Of particular concern for the EUB was Compton 's proposed EPZ application, which reduced the EPZ from the calculated 11.94 and 14.97 km radiuses to a modified 4 km radius with an EAZ of 8 km.  In part, Compton 's rationale for the reduced EPZ was that it included a large and highly populated portion of the City of Calgary, in which it could not effectively implement the required emergency response activities on its own.  The modified EPZ presented by Compton did not include communities within the City of Calgary limits.

The EUB found that four of the six wells could be developed and operated safely, but that licences would only be granted if Compton 's ERP, which at the time of the hearing was incomplete, was completed and approved by the EUB.  The EUB also provided that the ERP had to incorporate an integrated approach, engaging the affected municipalities and the Calgary Health Region with respect to public safety measures to be employed within and outside the EPZ.  The EUB further asserted that an EPZ of 9.7 km, consisting of a 5 km evacuation zone and a 4.7 km sheltering zone, with an EAZ of 15 km would be appropriate .

In addition to the above, the EUB set out a timeline for further action.  By August 15, 2005, Compton was to advise the EUB of its desire to continue with the applications. Compton was required to file a complete revised ERP after engaging all affected parties in a consultative process no later than November 1, 2005.  On January 1, 2008, any licences for wells not yet spud would be cancelled.  On July 1, 2021, or 15 years from approval of the first well licence, all wells and facilities at the site of concern must be abandoned, with abandonment of the currently existing well occurring 7.5 years from the approval of the first of the new licences.  Lastly, the EUB attached 14 conditions to the approval of the subject licences, many of which related to the protection of the affected public.

Compton sought an extension of the August 15, 2005 deadline due to concerns respecting its progress working with the Calgary Health Region as per the direction of the EUB. Accordingly, this deadline was extended to November 1, 2005.  In recognition of the obvious need for an extension for the ERP submission, the EUB has allowed Compton until January 1, 2006, to submit its complete ERP, should it desire.  While much of this public saga has been resolved, the key issues remain outstanding although it is clear that a final resolution is imminent.

Decision 2005‑062: Compton Petroleum Corporation ‑ Application for a Well License (June 21, 2005)

Compton applied to the EUB for a license to drill a vertical well to obtain gas production.  The interveners each own an interest in the lands upon which the proposed well was to be located, close to the City of Calgary's eastern boundary, and raised concerns about the location of the well, future development potential, land use, compensation and devaluation of their lands.

The EUB found that there was a need for the well, which was not opposed by the interveners.  In terms of location of the well, the EUB acknowledged that the different well locations proposed would restrict urban development in different ways.  As this well would be a low‑pressure sweet gas well, it would be possible for it to exist in green spaces or in commercial or light industrial areas with minimal impact provided that there was a buffer for well servicing  as well as proper planning by all stakeholders.  Upon consideration of all factors, the EUB approved a location for the well, which would have an acceptable level of impact on present and future operations and development.

Decision 2005‑067: OMERS Energy Inc. ‑ Application for a Well License and Associated Pipeline Battery (June 28, 2005)

OMERS Energy Inc. ("OMERS") applied for licensing for a well, pipeline and gas battery on lands owned by the Grykuliaks.  The Grykuliaks raised issues regarding construction and timing, a change of the conveyed substances, above ground structures, weed control, soil assessment, abandonment, reclamation and remediation and the routing of the pipeline.

On consideration of the evidence, the EUB found that there was nothing demonstrating that there would be any negative impact associated with the applications, other than with respect to operational issues.  Overall, the EUB found that the applications were in the public interest and complied with economic, orderly and efficient development. The EUB therefore approved OMERS' applications on the conditions that: (1) the application for a facility licence would be approved only for the purpose of constructing and operating a single‑well gas battery; (2) OMERS must test the Grykuliaks' water before and after drilling; and (3) OMERS must construct the access road to the well site as a high grade gravel road.

In terms of corporate structure, OMERS had contracted the services of Guard Resources Ltd. to administer the oil and gas assets on a day‑to‑day basis.  The Grykuliaks indicated that they were unclear as to who would bear responsibility for any problems.   Further to this, the EUB found that OMERS had ultimate responsibility and that contracting out day‑to‑day work was consistent with the practices of many oil and gas companies in Alberta.

Decision 2005‑080: Highpine Oil & Gas Ltd. ‑ Application for a Oil Effluent Pipeline (August 2, 2005)

Vaquero Energy Ltd. ("Vaquero") (ultimately acquired by Highpine Oil & Gas Ltd.) applied to the EUB for a licence to construct and operate an oil effluent pipeline and two spare crossings.  The Jacobs, who own land along the proposed pipeline route, voiced concerns about the potential interference of the pipeline with their future land development, potential contamination of their water well and the state of the survey cut line.  Prior to any development in the area, Vaquero attempted to meet with area residents to outline its development plans, however it was not until much later in the process that the Jacobs became involved.

All parties involved felt that there was a need to produce the well and the EUB Examiners were satisfied that a pipeline was the most appropriate option.  In terms of pipeline routing, the Examiners found that the route preferred by Vaquero would result in the least disturbance and was therefore the most environmentally appropriate.  As Vaquero and the Jacobs were not able to conduct a site visit early in their negotiations to reach a decision on how to minimize impacts, the Examiners recommended that the parties conduct a joint site visit in the event that the pipeline proceeds.

Vaquero recognized that the pipeline could result in negative impacts on the Jacobs' land and proposed commitments to mitigate any problems that could otherwise arise.  These commitments included the clean up and repair of the surveyed right of way on the Jacobs' property, reduction of the right of way post‑construction, shaping the right of way to reduce visual impact, testing the Jacobs' water wells, planting trees on the well site and at each end of the right of way, repairing any fence damage, elimination of unwanted/unauthorized access to the Jacobs' property and the installation of conduits across the right of way for the installation of utilities lines provided that a location can be agreed upon by both parties. The Examiners found these commitments to be adequate and expected that they would be carried out in good faith.  The Examiners provided that if the commitments were not met, the EUB should be advised and reassess whether the circumstances warrant a review of the disposition.  To avoid this, the Examiners encouraged the parties to discuss specifics with respect to the implementation of these commitments.

The Examiners also found that both parties attempted communication and negotiations in good faith, however, failed to understand each other's concerns.  Despite this, the Examiners felt that the commitments made by Vaquero would provide an opportunity for the parties to develop a positive working relationship.

Decision 2005‑089: Standard Energy Inc. ‑ Application for Two Pipelines and a Facility (August 9, 2005)

Standard Energy Inc. ("Standard") applied to the EUB for approval to construct and operate two pipelines and a single‑well gas battery .  The owners of the lands on which the proposed pipeline and facility would be located expressed several concerns, including the removal of the pipeline upon abandonment, the production stream through the pipeline and the use of an independent third‑party construction monitor.

The EUB did not agree that the pipeline should be restricted to transporting production from only one well as it felt that this could result in the proliferation of pipelines, given the fact that Standard had plans to drill more wells in the area.

In terms of the landowners' request that the license be conditional on the removal of the pipeline upon abandonment, the EUB suggested that such a condition would not guarantee that a pipeline would be removed by the licensee and that its practice, therefore, is to consider the appropriate abandonment procedure at the time the pipeline is no longer required.  The EUB found that any concerns the landowners may have in this regard would be adequately addressed through EUB practices and policies and legislative provisions and protections and render such a condition unnecessary.

Finally, given the fact that Standard had committed to having its own construction monitor on site, the EUB did not require it to provide for the cost of an independent third‑party monitor.

EUB Policy Developments

Directive 024 ‑ Large Facility Liability Management Program (issued September 20, 2005)

            This Directive sets out in detail the design and operation of the Large Facility Liability Management Program ("LFP").  Broadly, the LFP applies to sulphur recovery gas plants, stand alone gas plants and in situ oil sands processing plants with a capacity of 5000 cubic metres per day or greater, which are current, historic and future licensed.

The stated purpose of the LFP is to prevent suspension, abandonment, remediation and reclamation costs associated with large facilities from being borne by the public when a licensee no longer exists.  In addition, minimizing the exposure of the Orphan Fund created by the unfunded liability of facilities is desired.

Like the Licensee Liability Rating ("LLR") program, formulae are employed to ascertain the risk involved with each applicable licensee.  Key is the determination of a Liability Management Rating Assessment ("LMR"), which is a comparison of a licensee's deemed assets, to its  deemed liabilities in the LLR and LFP.  Based on the LMR, the EUB will require security to be paid by the licensee to offset costs of a defunct facility.

            The LFP, and the Orphan Fund protection of facilities within it, became effective on October 1, 2005, with the first monthly assessment for affected facilities on November 5, 2005.

Directive 001 ‑ Requirements for Site‑Specific Liability Assessments in Support of the EUB's Liability Management Programs (revised September 20, 2005)

            This Directive, a component of the LFP Initiative, and previously issued November 3, 2003, has been updated to include a new appendix, which specifies the requirements for site‑specific liability assessments that are subject to Directive 024, and for large gas plants governed by Directive 006.

            This new appendix outlines the process and minimum reporting requirements for site‑specific liability assessments and large gas plants.  Of primary importance is that a complete liability assessment must contain: a suspension plan; an abandonment plan; a Phase I environmental site assessment, which meets or exceeds Alberta Environment guidelines as provided in AENV publication T/573; a Phase II environmental site assessment, which meets or exceeds CSA Z769‑00; a remediation plan; a surface reclamation plan; and estimated costs for completion, suspension, abandonment, remediation and reclamation of the site.  The details of each of the above requirements are provided in the new appendix.

Directive 006 ‑ Licensee Liability Rating (LLR) Program and Licence Transfer Process (revised September 20, 2005)

            This Directive, previously issued on June 1, 2004, has been amended to include provisions that aim to equalize gas plant licensees within the LFP and LLR programs.  Specifically, through October 27, 2006, the deemed liability of 40 well equivalent gas plants will be determined in accordance with the EUB's Facility Well Equivalent Table.  Those gas plants considered to be 20 or 10 well equivalent will be deemed in the same manner as non‑gas facilities through September 30, 2006.  Detailed requirements for each category are set out for each in this Directive accordingly.

Directive 018 ‑ Negotiated Settlement Rules (formerly Informational Letter [IL] 98‑04 revised: Negotiated Settlement Guidelines) (issued June 10, 2005)

            In keeping with the EUB's commitment to pursue alternative methods of conflict and dispute resolution, this Directive sets out the guidelines for the negotiated settlement process for utilities.  This negotiated settlement process is increasingly being utilized and encouraged by the EUB for use by stakeholders.  The Directive articulates the principles behind the process, namely that parties exercise good faith,  that the process be open and fair,  that the process be performed confidentially and on a without‑prejudice basis,  that the process be sufficiently flexible to enable unique situations and that sufficient information be made available prior to commencement of and throughout the process.  Other areas outlined in the Directive include the role of the EUB and its  staff, the role of mediators and the evaluation and acceptance of settlement agreements.

Directive 019 ‑ EUB Compliance Assurance‑Enforcement (issued July 27, 2005)

            This Directive outlines a new approach taken by the EUB with respect to enforcement.  This Directive, effective January 1, 2006, replaces Information Letter [IL] 99‑4 and results in part from the EUB's direction in May, 2004, to simplify the process by removing automatic escalation and to implement a risk‑based and consistent process.  The objectives of this Directive are to maintain and/or improve overall compliance rates; develop a streamlined and proactive approach; manage non‑compliance consistently; and measure and report compliance performance. 

The new enforcement framework is based on risk.  The EUB has developed a Risk Assessment Matrix, which considers both the qualitative measures of the consequence of non-compliance activity and the qualitative measures of the likelihood of those consequences.  The activity is then assessed a risk level, which will determine the tier of enforcement as either Tier 1 (low risk) or Tier 2 (high risk).  Each risk level has an enforcement process designed to ensure compliance.  Persistent non-compliance results in an assessment of either low risk non-compliance or high risk non-compliance with each yielding respective enforcement processes. 

Key to the new system is voluntary self disclosure, which rewards proactive licensees who report their own non-compliance with an opportunity to avoid enforcement if the non-compliance is corrected or addressed voluntarily.  The anticipated result is to reward those who act responsibly and proactively, which in turn should lead to improved safety, environmental protection, conservation of the resource and increased confidence in the regulatory process.

Directive 056 ‑ Energy Development Applications and Schedules (issued September 12, 2005, replacing Guide 56, October 2003 edition)

            One of the most commonly utilized EUB publications, Guide 56, has been updated and renamed as a Directive.  While most of the content remains similar, there have been some significant changes.  Foremost are the changes to the licensing application process, specifically those respecting surface facilities.  Modifications have been to made to facilitate the submission of these applications through the Electronic Application Systems and schedules have been revised accordingly.  There have also been changes to the requirements for pipeline license applications.  These have been modified to conform to the new Pipeline Regulation Alta. Reg. 91/2005, which came into force on May 31, 2005.  Lastly, the Directive contains an assortment of clarifications, minor additions and deletions to provide greater consistency, clarity and consistency within various aspects of the license application process.


[1][2005] A.J. No. 509.

[2][2005] A.J. No. 758.

[3][2005] A.J. No. 923.

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