Update on Hydraulic Fracturing:Preparing for “Gasland 2”

Presentation to Canadian Bar Association In-House Counsel Sub-sectionNovember 22, 2012

Presented by:Alex MacWilliam403 268 2090alex.macwilliam@fmc-law.com

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Overview

• The Context

• The Process

• Legislative and Regulatory Management of Key Issues– Fracture Fluid Disclosure

– Well Integrity

– Water Usage

– Waste Disposal by Injection

• Fracturing Litigation – Liability Issues

• Lessons/Trends

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Don’t Worry

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Why are we here?

• Huge potential– 1,000 trillion cubic feet of shale

gas in Canada

• Public concern - perceived risks– Water use and contamination

– Earthquakes

– Climate change

• But don’t take our word for it…

Sources: NEB Energy Brief – Understanding Canadian Shale Gas, CBC: This Hour has 22 Minutes

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Public Perception

• Industry not out in front of the issue– Gasland

– Gasland 2 to be released soon

– Hollywood is also getting on the anti-fracking bandwagon

• Promised Land

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The Context

• Huge deposits of oil and natural gas in low porosity/low permeabilityformations

• Combination of two existing technologies – horizontal drilling and hydraulicfracturing – allows for economic production of these resources

• Vertical wells vs. Horizontal wells – horizontal drilling allows for far greaterexposure to the productive formation

• Multi-stage hydraulic fracturing creates multiple artificial pathways to thewellbore and thus vastly increases recovery rates of the resource

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Multi-Stage

HydraulicFracturing

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The Process

• Hydraulic fracturing operations generally involve four steps:– Injecting fluids into the formation to pressurize the rock

– Initiating and increasing fractures or fissures in the reservoir rock to createpathways from the wellbore into the formation to allow hydrocarbons to flow

– Pumping sand or other “proppant” into the newly created fissures to propopen these pathways

– Recovering back the fracturing fluid to surface and allowing hydrocarbons toflow to the wellbore

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Cement

Cement

Cement

Conductor Pipe

Surface Casing

Production Casing

Fresh Water Aquifer Zone

Shallow Producing Zone

Intermediate Producing Zone

Target Producing Zone

Well Construction

Source: Southwestern

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Vertical Conventional

HorizontalUnconventional

HorizontalConventional

Fracturing Layouts

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Legislative and Regulatory Management of Key Issues

• Increase in horizontal multi-stage fracturing operations has led toenhanced scrutiny of issues including:

– fracture fluid constituents (i.e.disclosure)

– well integrity

– water usage

– waste disposal by injection

• Issues have been recently considered by numerous U.S. and Canadianjurisdictions

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Fracture Fluid Disclosure

• Method of Disclosure– Pre-2010 - minimal public access to information

– 2010-2012 - many jurisdictions start to mandate disclosure

– competing models: direct public disclosure vs regulatory disclosure

– clear U.S. trend to direct public disclosure

• http://fracfocus.org

• numerous states (16) and Federal Bureau of Land Management now requiredisclosure - others are considering it

• DOE Secretary of Energy Advisory Board Shale Gas Subcommittee has expressedsupport for public disclosure

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Fracture Fluid Disclosure (con't)

• Method of Disclosure (con't)– 2011 BC Regulations - direct public disclosure

• http://fracfocus.ca/

– Alberta intends to require direct public disclosure by 2013

• Currently has non-detailed, regulatory reporting to ERCB

– CAPP supports direct public disclosure model

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Fracture Fluid Disclosure (con't)

• Degree of Required Disclosure– disclosure details vary among jurisdictions

– U.S. trend – increased detail and rigour in disclosure

• public interest rationale

– volumes, compositions, concentrations of additives usually disclosed• any ingredients vs “hazardous” ingredients only?

• formulary disclosure of chemical compounds used in fluid

– 2011 BC Regulation – detailed disclosure required

– Alberta – very general disclosure only• may change with direct public disclosure requirements

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Fracture Fluid Disclosure (con't)

• Trade Secrets– protections recognize legitimacy of competitive advantage concerns of

industry

• may also be reflected in required disclosure details

– process for claiming trade secret protection varies

– challenges may be limited (e.g. Texas)

– common exemptions for emergency, medical response

– 2011 BC Regulations incorporate trade secret protections

• Defers determination to federal hazardous chemical regulator

– Alberta may follow same path

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Fracture Fluid Disclosure (con't)

• Timing of Disclosure– generally post-operation

• for “tracking” purposes rather than direct control through permitting

• allows fluid design flexibility in field

– Wyoming and New York Proposed Regs are exceptions

• pre-operation disclosure and approval requirements

– New York Proposed Regs specifically prohibit deviation

• field flexibility concern

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• Large volumes of fluid are used in fracturing operations, magnifyingpollution risk

• Well integrity thus critical, closely scrutinized

• Two basic concerns for all wells– isolate the internal conduit of the well from the surface and sub-surface

environment (particularly freshwater aquifers)

– isolate produced fluid to a production conduit within the well

• All jurisdictions seek to establish minimum standards for casing, cementing,ongoing testing/monitoring, and reporting

– specifics vary among jurisdictions

– standards and enforcement being reconsidered in fracturing context

Well Integrity

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Well Integrity (con’t)

• Different approaches to regulating well integrity exist along spectrum– general/purposive approach (reliance on regulator discretion) vs. detailed

code

• Trend is toward more prescriptive detail in regulations, increased safetyrequirements

– DOE “SEAB” Sub-Committee recommendation

• Some U.S. jurisdictions require heightened integrity assurances forfractured wells

– Pennsylvania, New York Proposed Regs.

• BC and Alberta have special rules for shallow fracturing– ERCB Directive 059: Well Data and Completion Data Filing Requirements

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• Fracturing operations may require significant volumes of water

• Permits generally required for withdrawal of ground/surface water– Permitting process and degree of oversight/control varies widely by

jurisdiction

– In some, applicants required to provide operational details and specificjustification for use request

• Trend toward more rigorous oversight, monitoring and disclosure

• Metering and reporting of water withdrawal becoming more common

• Recent suggestions to require public disclosure of fracturing water use– CAPP

– DOE “SEAB” Sub-Committee

Water Usage

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• Operators seek to minimize need for fluid disposal by recycling – but somefluid will remain in need of disposal

• Means of disposal should not risk contamination of surface/ground water,subsurface reservoirs/other wells

• Deep well injection is often preferred method

• Regulation of waste disposal by injection varies by jurisdiction– US federal/state regulations: EPA Rules or State “Primacy”

– Alberta

– British Columbia

Waste Disposal by Injection

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Waste Disposal by Injection (con't)

• Usual features of injection regulations/standards– Depth requirements

– Confined formations

– Well construction/integrity standards

– Monitoring, reporting requirements

• disposal well and “area of review” wells

• Nature of regulatory requirements similar across jurisdictions

• U.S. EPA undertaking detailed review and reassessment (2014 reporting)– increased standards expected

– “area of review”, other standards may change

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Fracturing Litigation

• Producers face litigation risks from:– landowners

– other producers

• Risks magnified where fracturing taking place:– on freehold lands

– near urban areas

– in jurisdictions with no history of oil and gas development (e.g. Quebec)

– in jurisdictions without highly developed regulatory regimes

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Fracturing Litigation (con't)

• U.S. has significant volume of fracturing litigation in both landowner andproducer contexts

– approx. 40 active private landowner lawsuits commenced

– none has proceeded to judgment

– also numerous lawsuits between producers

– significant body of law re rights and liabilities as between producers,particularly regarding subsurface trespass and “Rule of Capture”

• Canada has seen little fracturing litigation to date, all in Alberta– Ernst v. EnCana et al alleges contamination of a landowner’s water well from

hydraulic fracturing operations

– Zimmerman v. Quicksilver contains similar allegations regarding CBM wells

– CrossAlta v. Bonavista Energy alleges breach of a gas storage reservoir

– all lawsuits at early stages

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Fracturing Litigation (con't)

• Litigation commenced by private landowners– typical causes of action: trespass, nuisance, strict liability (Rylands v. Fletcher),

negligence, breach of contract

• Potential emerging tort: strict liability for ultra-hazardous activities

– typical relief sought: compensatory/remediation damages, damages fordiminution of property value/stigma claims, injury damages (environmentalillness claims), future medical monitoring costs, injunctive relief, punitivedamages

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Fracturing Litigation (con't)

• Litigation commenced by neighbouring producers– impacts alleged by other producers include

• Impacts on adjacent wellbores

• Reservoir damage

• Subsurface trespass/drainage issues

– potential impacts on adjacent wellbores: increase in pressure, fracturing fluidin production; fluid-to-surface events including well “kick” and blow-out

– risk of reservoir damage remote, but theoretically possible

– Canadian law regarding subsurface trespass/drainage issues is undeveloped

• “Rule of Capture” recognized but not yet considered in relevant context

• No definitive principles have emerged from U.S. cases

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Fracturing Litigation (con’t)

• Issues of Proof and Damages– Issues of proof may be challenging

• multiple producers operating in a relatively small area, subsurface “facts”, lack ofbaseline info, multiple exposures over many years

• fracturing fluid disclosure and baseline environmental assessments may simplifythese issues

• effective record keeping and monitoring by producers may be critical to both sides

– Damages issues also problematic

• required level of reclamation

• future monitoring requirements

• predicting future impacts

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Recent Canadian Developments

• January 2012 – CAPP releases Hydraulic Fracturing OperatingPractices guidelines

• August 2012 – BC OGC releases report linking 2009-2011fracturing operations in Horn River Basin to seismic events

– authors also note that more than 8000 high-volume fracturing jobshave been done in NE BC with no associated anomalous seismicity

• September 2012 – new PQ Natural Resources Minister saysQuebec will never allow fracking – despite an ongoing inquiry

• November 20, 2012 – Ontario Government announces itrequires scientific proof that fracking is safe before it will allowit – So what?

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Lessons and Future Trends

• Hydraulic fracturing has been safely conducted in thousands of wells inWestern Canada, suggesting there are no systemic or inherent risksassociated with the process

• Proliferation of horizontal multi-stage fracturing operations andheightened public scrutiny have resulted in regulatory re-evaluation andincreased litigation risks for producers

• Fracturing operations will likely be carefully scrutinized going forward, andsubjected to increasingly rigorous regulation and government oversight

• Guiding principles for legislative/regulatory reforms– elevation of best practices

– enforcement of best practices

– transparency in operations

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Lessons and Future Trends

• Producers will be well-served by establishing sound operational practices,adhering to or exceeding all regulatory requirements, and undertakingeffective and detailed monitoring and record keeping

• Producers and industry associations need to increase efforts to “set therecord straight” about fracturing

– “Gasland 2” due to air on HBO in 2012 - http://www.gaslandthemovie.com/

– “FrackNation” now in production - http://fracknation.com/

• International Energy Agency suggests operators follow “golden rule”:

– measure, disclose, engage

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QUESTIONS?

Presented by:Alex MacWilliam403 268 2090alex.macwilliam@fmc-law.com

The preceding presentation containsexamples of the kinds of issues companiesconcerned with Hydraulic Fracturing couldface. If you are faced with one of theseissues, please retain professional assistanceas each situation is unique.