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Applying state statutes to shale oil State officials say current Alaska laws will work effectively for the management of unconventional oil development in the state Alan Bailey Petroleum News
While Great Bear Petroleum continues drilling shale oil test wells on Alaska’s North Slope, expressing increasing confidence in achieving eventual success in what would be Alaska’s first unconventional oil development, questions have been raised over the applicability of Alaska’s current oil statutes and regulations to shale oil. Would laws designed for conventional oil fields involving distinct oil pools in reservoir rocks work effectively in a situation where oil is extracted from a continuous oil source rock zone?
State officials have told Petroleum News that the laws will work effectively for shale oil, and that no modifications to the laws are required.
Land leasing Alaska’s Department of Natural Resources, the state agency responsible for the oversight and regulation of oil development on state land, sells land leases to companies interested in oil and gas exploration. To encourage timely exploration and development, the leases have terms, generally of seven to 10 years, after which they expire.
Following the discovery of a commercially viable hydrocarbon resource, leases that straddle the hydrocarbon pool are generally, but not necessarily, combined into what is termed a unit, to enable all companies with working interests in land containing the discovered hydrocarbons to pool their resources as a single legal entity for hydrocarbon production. And the formation of the unit extends the lease terms, allowing adequate time for oil or gas field development to proceed.
The Alaska Oil and Gas Conservation Commission, or AOGCC, the agency that ensures that the state’s oil and gas resources are not wasted through inappropriate development, and which also ensures that rights of ownership of produced oil and gas are protected, defines rules for hydrocarbon pools in an oil or gas field, when that field is developed. And the agency specifies “participating areas,” distinct hydrocarbon pools, often at different levels within a field: Each participating area has a specified ownership, thus enabling the hydrocarbon production to be appropriately allocated to the various companies with ownership interests in the field.
Hydrocarbon pools Questions around the applicability to shale oil of this regulatory and legal scheme for exploration and development revolve around whether the concepts of oil pool, participating area or unit have any meaning in a situation where oil permeates a source-rock shale unit that is regional in extent. Rather than drilling wells into a distinct oil pool in a reservoir rock, with fluid pressure communication between all wells accessing the oil in the pool, a shale oil development involves the drilling of many individual wells across a shale oil fairway, with each well extracting oil from shale in its immediate neighborhood, with no pressure or fluid communication between adjacent wells.
And, in addition to questioning the relevance of oil pool related statues to shale oil, a law firm operating in Alaska has questioned whether the time limits on state leases might discourage shale oil development by forcing a developer to drill in all of its leases within a relatively short timeframe, rather than allowing progressive development across a shale oil fairway, enabling the intense multi-well drilling that is characteristic of a shale oil play to start at one point and expand from there.
No change needed There is no need to change any of the state statutes to accommodate shale oil, Bill Barron, director of Alaska’s Division of Oil and Gas, told Petroleum News Sept. 24.
The placing of time limits on leases to encourage timely exploration and development applies to a shale oil play in just the same way as it does in a conventional play, Barron said. In fact, a conventional play may involve multiple exploration targets across an extensive area, in an analogous manner to a shale oil fairway, he said. It is the responsibility of an operator to plan its leasing, exploration and development activities to accommodate the timing requirements.
“There needs to be a plan of development and that becomes the responsibility of the leasing party,” Barron said.
Moreover, were the leasing rules for unconventional and conventional oil plays to differ, a significant problem would arise in situations where unconventional and conventional resources are stacked at different levels within the same land tract, Barron pointed out.
And, while it is true that the concepts of units and oil pools have little relevance in a shale oil play, rather than trying to change the statutes, the existing statutes can be applied to a shale oil development by simply not unitizing. In effect, the shale oil accessed by each shale oil well becomes a “unit” for that well, with each well having its own clearly defined ownership.
“To my knowledge no other state has unitized on shale … shale doesn’t meet the requirements for unitization,” Barron said.
Combined plays It is possible to envisage a situation in which a conventional oil pool, under development, would be stacked above or below a shale oil zone, also under development. In that case a participating area would be defined for the conventional pool, but that participating area would not extend vertically into the shale oil.
However, were the conventional oil field to be unitized, the unit boundary would extend vertically through the shale oil. In that particular situation, the unit boundary, where it intersects the shale oil horizon, would define the limits of a separate participating area within the shale oil — outside the unit boundary the shale oil participating area would cease to exist, Barron said.
The only issue that the state has encountered in selling leases over a shale oil play relates to the legal right of an operator to hold a lease beyond its expiry date if there is at least one producing well within the lease, Barron said. That arrangement works for a conventional play in which that one well can be in communication with an entire oil pool. But in an unconventional play an operator could use this aspect of leasing law to hold a complete lease by drilling a single well into the shale oil zone. To overcome this potential problem, the state, in its last North Slope lease sale, divided leases on recognized shale oil fairways into quarter tracts, Barron explained.
AOGCC view AOGCC Chair Cathy Foerster agrees with Barron that state statutes do not require modification to accommodate shale oil development.
“For shale ‘the pool’ is going to be whatever one well can drain and so you don’t need to unitize, you don’t need to pool,” Foerster said.
To minimize the number of wells drilled in a shale oil development, and hence to optimize the development economics, a shale oil developer will not space wells closely enough for fluid communication between one well and another. In effect the oil extraction zone around each well then becomes the “pool” for that well, with the ownership of the well operation determining the ownership of the produced oil.
The onus is going to be on an operator like Great Bear to demonstrate to us what one well is capable of draining and, therefore, what their allowed well spacing would be, Foerster said.
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