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A legal perspective on NS shale oil Will Alaska’s leasing and unitization laws help or hinder the development of oil production directly from oil source rocks? Alan Bailey Petroleum News
Great Bear Petroleum is moving ahead with a drilling program near the Haul Road on Alaska’s North Slope, testing the possibility of oil production directly from the prolific source rocks of the region. But, assuming the company succeeds in achieving the start of commercial production, using the horizontal drilling and fracking techniques that have proved so successful elsewhere in North America, how appropriate for this mode of development are the Alaska statues and regulations that govern the access to and development of state land for oil production?
The Alaska legal process involves the competitive sale of leases over land tracts to companies interested in oil and gas exploration. Following a decision to develop a commercially viable hydrocarbon resource, leases that straddle the resource are generally combined into what is termed a unit, to enable all companies with working interests in land containing the discovered hydrocarbons to pool their interests as a single legal entity for hydrocarbon production.
During the Alaska Shale Conference on July 31 Louisiana Cutler, a lawyer with K&L Gates LLC, explained some of the potential pitfalls of the current Alaska legal framework, should shale oil development proceed in the state.
Lease terms A state lease generally exists for a term of seven to 10 years, while a unit, designed to promote the efficient use of the state’s natural resources, will extend the terms of any leases it contains, as a field is brought into production. The eventual expiry of a lease gives a company owning the lease an incentive to move ahead with exploration and development. That type of legal arrangement was configured around a conventional oil field development in which multiple wells draw from a discrete pool of oil in a reservoir rock, Cutler explained.
A shale oil development, in contrast, involves the “unlocking” of oil from an oil source rock that is regional in extent, rather than drawing oil from a distinct and isolated pool. And each well in a shale oil development accesses oil just from source rock in its immediate neighborhood, rather than being in communication with a complete oil pool along with other production wells.
That lack of subsurface communication from one well to another reduces the justification for unitization in a shale oil development, Cutler said. Not only that. With a shale oil resource extending across a broad area of territory, and with every well functionally independent, it may not be in the state’s best interests to push a company into drilling into every one of its leases within a standard lease term — the rational development of a leased area of shale oil resource may require deferral of drilling in some leases relative to others.
Confusing language? In addition to these general questions over the legal framework for shale oil development, the current laws, being based on conventional developments, contain language that could cause some head scratching when it comes to legal interpretations for shale oil.
For example, it is not completely clear from the regulatory language for unitization whether unitization could legally be applied to a shale resource. In addition, the regulations relating to unitization often refer to a something called a “potential hydrocarbon accumulation.” Is a shale oil resource a “potential hydrocarbon accumulation,” in the same sense as a conventional oil pool targeted in a conventional exploration project?
Regulations for unit agreements also include the concept of a “participating area,” a specification of a conventional oil or gas pool with unified ownership rights for hydrocarbon production. Would this regulatory language need modification, to accommodate a continuous shale oil resource?
State statutes for ensuring the conservation of hydrocarbon resources also contain some provisions relating to issues such as drilling agreements and contracts. Would these types of agreements and contracts, structured for a conventional development, be applicable in a shale oil situation?
In summary, the current state leasing and unitization system really needs to be reviewed, to ensure that it can promote the exploration, development and production of shale oil in a “measured and deliberate way,” avoiding a shale-oil land rush in a Wild-West atmosphere, Cutler said.
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