Canada: Vertical Compulsory Pooling Of Oil And Gas Resources Appears To Be Available In Alberta by Michael A. Marion and Chidinma Thompson, September 16, 2014, Mondaq
There has long been debate as to whether vertical compulsory pooling of oil and gas resources is possible in Alberta given that pooling is usually done on an areal or horizontal basis. In 1997, Professor Nigel Bankes, in Compulsory Pooling Under the Oil and Gas Conservation Act of Alberta”, (1997) 35 Alta. L. Rev. 945-1012, argued that vertical compulsory pooling was possible in principle, at least in certain situations, but noted at the time that the Alberta Energy and Utilities Board had not received a vertical compulsory pooling application. In a recent disposition letter (the “Disposition Letter”), the Alberta Energy Regulator (AER) has suggested that, in the right case, vertical compulsory pooling may very well be ordered by the AER.
The concept of vertical pooling can arise in the context of split (shallow/deep) petroleum and natural gas rights where the shallow rights and the deep rights are owned by different lessees, and the leased minerals are proven to be within a common pool spreading across formations, members or zones. Vertical pooling may also conceivably be considered in situations of natural or induced communication between pools, especially with the proliferation of hydraulic fracture stimulation.
In December 2013, the AER received an application for vertical compulsory pooling on the basis that communication between allegedly separate pools having allegedly different ownership had been induced by hydraulic fracture stimulation. [What happened to the regulator and industry promise that fracs never go out of zone?] In the Disposition Letter, the AER dismissed the application on the ground that the applicant had not proven that the zones it owned were productive. However, the AER made some statements which appear to confirm the AER’s view that a vertical compulsory pooling order is available in Alberta.
The AER noted that neither the Oil and Gas Conservation Act, RSA 2000, c. O-6 (“OGCA”) nor the AER’s Directive 065 specifically addresses vertical compulsory pooling. However, the AER referenced Alberta Energy IL 98-14, found here, (which updated IL 88-24) as an Alberta Department of Energy policy document for the AER to consider respecting vertical pooling. According to the AER, this information letter acknowledges that sometimes the contact between zones covered by shallow rights and deep rights agreements can occur within the vertical dimension of a single pool. The AER noted the suggestion in IL98-14 that if separate pools cannot be established or maintained, an affected lessee may apply to the AER for vertical compulsory pooling if voluntary pooling arrangements cannot be negotiated. The AER concluded by saying that “the AER considers that where there is either natural or induced communication between pools, vertical compulsory pooling may be considered as an option.”
The AER’s Disposition Letter is important given that vertical pooling is unusual and compulsory vertical pooling has no precedent in Alberta that we are aware of. It is noteworthy that the AER, in its short Disposition Letter, did not attempt to interpret section 80 of the OGCA, which provides the AER with the jurisdiction to grant compulsory pooling orders, but based its decision solely on Alberta Energy’s policy. In our view, it is arguable that the relevant provisions of the OGCA contemplate pooling only on an areal basis.
While we are not aware of a compulsory vertical pooling order in Alberta, it appears that the AER is prepared to make one in the right circumstances. Unfortunately, the AER has not yet provided any guidance as to what factors it might consider in deciding whether a vertical compulsory pooling order is appropriate in any particular case, although we expect the AER will apply a similar framework as it does in other compulsory pooling applications. The development of vertical compulsory pooling orders in Alberta will potentially be significant, and may very well be the subject of a future legal challenge.
BLG was counsel for one of the successful objecting parties in relation to the application that gave rise to the Disposition Letter. The applicant has requested a regulatory appeal pursuant to section 38 of the Responsible Energy Development Act, SA 2012, c. R-17.3. We will report on future developments related to vertical compulsory pooling. [Emphasis added]
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