1. From Experimental to Commercial Production - The Next Step Ron Stefik, AScT Sr Reservoir Engineering Technologist Oil and Gas Commission Presentation to Unconventional Gas Technical Forum Victoria, BC April 4, 2008

2. Variance required from normal well spacing, target areas and testing regulations! >1 well / section for effective recovery high well density + uniform reservoir quality = reduced need for individual well data for development decisions and reserves evaluation Unconventional Gas - Premise Unconventional Gas - Premise

3. YES! Existing statutes allow sub-surface issues to be addressed.  Petroleum and Natural Gas Act  Drilling and Production Regulation  Petroleum and Natural Gas General Regulation Available via OGC website, under “Regulations” www.ogc.gov.bc.ca Are existing Regulations adequate for unconventional gas development ? unconventional gas development ? Note: some changes are planned as a result of the new Oil and Gas Activities Act (OGAA).

4. Uniform “play type” = reduction or exemption;  logging and sampling.  reservoir pressure testing.  well deliverability (AOF) testing.  well spacing and target restrictions [Good Engineering Practice (GEP) approval]. Flexibility Available Flexibility Available

5. Logging and Sample Waivers Logging and Sample Waivers  High well density provides opportunity for selective data acquisition.  OGC prefers to review area drilling program for pre-approval of logging or sample waivers.  Drilling issue prevent logging? Email or phone to request exemption.

6. Initial test requirement  surface data instead of bottom-hole, where appropriate  microfrac (DFIT), RFT, PID may be acceptable  exemptions may be appropriate Annual pool testing  normally required for a % of wells each year  reduced expectation or exemption in unconventional Well Testing – Reservoir Pressure Well Testing – Reservoir Pressure

7. minimize flaring!  inline deliverability testing OK, Regulation allows up to 6 months from date of initial production to test  OGC permits pipeline construction prior to well completion in “resource play” areas  testing exemption available Well Testing – AOF Deliverability Well Testing – AOF Deliverability

8. Surface Position of a Well Surface Position of a Well Pad drilling is encouraged to minimize surface impacts. Inter-wellhead distance normally 25 m, however, have allowed 10 m, so long as; u all potential issues are addressed, and u a service plan documented.

9. Off-Target Production Penalty Off-Target Production Penalty  Penalty factor (fraction < 1.00) applied to well daily gas allowable  OGC is proactive in applying penalty, request from competitor NOT required  Penalty applies even if no well on affected off-setting land  If off-target to Crown, penalty does apply!  Penalized well may still be economic

10. Gas Well Off-Target Production Penalty Gas Well Off-Target Production Penalty Notes: 1. NS & EW distances measured to nearest corner of the spacing area 2. 1 ha = 100 m x 100 m = 10 4 m 2 Example: OTF = 8 (200.0 m) (300.0 m) = 0.1778 270.0 10 4 m 2 Gas spacing area = 1 section (DLS) 4 units (NTS) 250 m 300 m 200 m OTF = 8 ( NS m) ( EW m) Spacing Area m 2 Therefore production limited to 17.78% of DGA Target area is 250 m inside spacing area. target area ~ 928 m ~ 698 – 820 m

11. Off-Target Production Penalty (Example #1) Off-Target Production Penalty (Example #1) Well located off-target in the corner is considered to also affect spacing area in the diagonal direction

12. Off-Target Production Penalty (Example #2) Off-Target Production Penalty (Example #2) For directional/horizontal well, coordinates of “worst point of infringement” to calculate penalty Example #1Example #2

13. Daily Gas Allowable (DGA) Daily Gas Allowable (DGA)  Reserves based calculation formula  “Daily production limit”=125% of DGA  Form available www.ogc.gov.bc.cawww.ogc.gov.bc.ca  With off-target factor, can estimate penalized allowable prior to drilling APPROVAL (for commission use only) Off-target penalty factor Daily gas allowable10 3 m 3 (minimum UDGA is 60.0 10 3 m 3 in accordance with Section 1 of the Drilling and Production Regulation ) Date Effective FieldPool Approval Date OGC_038_DGA Rev. 99/05 Authorized Commission Employee 59070-03/WA Application form

14. Off-Target Well Production Penalty Waiver Off-Target Well Production Penalty Waiver A. Discovery Well absolute B. Common Ownership - same lease waiver C. Common Ownership - different lease conditional D. Different Ownership - different lease waiver Note: for C & D, operator may apply for waiver on proposed well before drilling

15. Off-Target Well Production Penalty Waiver Off-Target Well Production Penalty Waiver A.Discovery Well - “sufficient information has been obtained to determine that the well has encountered a previously undiscovered pool”  not first well to produce; older well with DST may qualify  operator must apply to OGC Victoria office for recognition; no specific application form  supply supporting data to build a “case”, i.e. seismic, pressure, x-sections, etc.  for unconventional gas plays, OGC recognizes regional pools, so discovery application likely not successful!

16. Off-Target Well Production Penalty Waiver Off-Target Well Production Penalty Waiver B. Common Ownership - Same Lease  Off-target waiver is automatic under section 9.4 (oil) and 10.4 (gas) of the Drilling and Production Regulation  No application required Two spacing areas under one PNG Lease

17. Off-Target Well Production Penalty Waiver Off-Target Well Production Penalty Waiver C. Common Ownership - Different Lease  Application required (no specific OGC form)  Include cover letter stating request and attached titles map with well location plotted  If title of affected lease (PNG #1 in example) expires or changes ownership, penalty may be imposed  Affected title must be a P&NG Lease, not a Drilling Licence PNG#1PNG#2 PNG#1 & #2 both registered identical ownership

18. Off-Target Well Production Penalty Waiver Off-Target Well Production Penalty Waiver D. Different Ownership - Different Lease  Application required (no specific OGC form)  Include titles map with well location and letters of consent from registered owner(s) of affected off-setting lease (PNG #1 in example)  Approval is “conditional” upon ownership of PNG #1; if changes, OT penalty may be applied  PNG #1 must be P&NG Lease, not a Drilling Licence PNG#1PNG#2 PNG#1 & #2 registered different ownership

19. Good Engineering Practice (GEP) Good Engineering Practice (GEP)  Allow a pool (or portion) to be exploited without well spacing & target restrictions, i.e. “super” target area.  Effective for “downspacing” or areas of horizontal drilling.  No inter-well minimum distance specified, OGC expects economics and geology to dictate.  Usually no production restrictions, however individual allowable(s) may be applied to lease-line wells.  Flexibility in locating wells to access resource and minimize surface impact.

20. Good Engineering Practice (GEP) Good Engineering Practice (GEP) Example gas pool under GEP approval (contiguous full spacing areas) off-target locations HZ wells crossing multiple spacing areas increased density OGC requires evidence that “downspacing” will result in increased recovery, not just recovery acceleration. (production decline vs. volumetric) However, not an issue in recognized unconventional resources.

21. Good Engineering Practice (GEP) Good Engineering Practice (GEP) non-contiguous area receives separate approval contiguous lands single approval However both areas may be included in a single application if for the same pool.

22. Good Engineering Practice (GEP) Good Engineering Practice (GEP) Individual allowable(s) may be applied to lease-line locations, Production from each of these gas spacing areas may be limited to a daily gas restriction (example 60 10 3 m 3 /d) based on objection(s) received.

23. Good Engineering Practice (GEP) Good Engineering Practice (GEP)  A pproval does not have any affect on lease tenure (conversion or continuation).  Pooling still required to produce incomplete gas spacing areas.  GEP areas range in size from one gas spacing to hundreds.  May be approved for land held under a Drilling Licence, provision that PNG Lease selection made prior to production.  Buffer area usually 250 m, opportunity to decrease if both off-setting parties agree. Note: see ogc.gov.bc.ca “Good Engineering Practice – Background Article”

24. GEP Application Guideline GEP Application Guideline ogc.gov.bc.ca

25. GEP Application GEP Application  Notice of application posted on OGC website; 3 week period for objections to be filed.  Not a requirement to notify off-setting lease owners of application but suggested good practice if objection expected – early resolution will speed final approval.  Decision if objection is valid at discretion of OGC, no hearing process but applicant allowed to respond.  Approval subject to specified conditions.  Approval transfers to new operator.

26. Good Engineering Practice (GEP) Good Engineering Practice (GEP)  Usually applied for area of common interest, but not a requirement.  Consent letter(s) required from all registered lease owners, including brokers. example letter on website

27. Good Engineering Practice (GEP) Good Engineering Practice (GEP) example Approval area description pool specific waiver of well spacing & targets but 250 m buffer no production restriction

28. Horn River Basin - Jean Marie GEP areas comparison Horn River Basin - Jean Marie GEP areas comparison

29. Montney Play - existing GEP approval areas Montney Play - existing GEP approval areas

30.  depleted or wet reservoir preferred  if hydrocarbon reservoir, injection below water contact  below shallow / near surface aquifers  injection pressure must be below 90% of formation fracture gradient  must control P & NG rights to ¼ section (1 unit) Water Disposal Well - considerations Water Disposal Well - considerations

31. Water Disposal Water Disposal  Application notice posted to OGC website, for possible objections.  Limited “test” injection volume may be approved before / during formal application process.  May dispose of both produced water or recovered fluids from a well completion or workover (includes fracture treatment fluids ie “slick water fracs”).  Challenge to industry – recycle frac water, use saline zones (Debolt) as “water storage”.

32.  proximity to source facility (shorter the pipeline the better)  confinement of the injected gas  competent cap rock, effect on rock matrix  lateral plume migration  protection of hydrocarbon, mineral and groundwater resources  potential to effect nearby wells and future production / drilling in area  equity interests  wellbore integrity – cement, casing, packer, tubing, safety valve  public and environmental safety – air monitoring  must control P & NG rights to full gas spacing area Acid Gas Disposal Well - considerations Acid Gas Disposal Well - considerations

33. Acid Gas Disposal Acid Gas Disposal WA#Disposal ZoneApproval Date 464WGSI BUBBLES b-19-A/94-G-08BaldonnelJune 27, 1997 7908BURLINGTON BURNT a-94-A/93-O-08BaldonnelOctober 21, 2004 7961ANADARKO CARIBOU c-04-G/94-G-07HalfwaySeptember 20, 2000 10585ANADARKO CARIBOU a-A30-G/94-G-07DeboltMarch 30, 1998 9637PC ET AL JEDNEY a-79-J/94-G-01BaldonnelOctober 31, 1996 427PC ET AL JEDNEY b-88-J/94-G-01BaldonnelOctober 31, 1996 7979PC ET AL PARKLAND 15-17-81-15 W6MBasal KiskatinawFebruary 22, 2001 10503BRC HTR ET AL RING d-49-B/94-H-16DeboltApril 6, 2000 5787CNRL SIKANNI a-32-I/94-G-03DeboltJanuary 31, 2005 9887CNRL W STODDART 01-33-87-21 W6MHalfwayJune 14, 2001 11398CNRL W STODDART 07-34-87-21 W6MHalfwaySeptember 18, 1998 1517TALISMAN SUKUNKA a-43-B/93-P-05Pardonet-BaldonnelMarch 21, 2002 12 wells approved for acid gas disposal

34. Commingled Production Commingled Production  OGC avoids mapping sub-units, removing commingling as an issue.  single Montney, not Upper and Lower  individual well, pool or area based approvals.

35. Project Data Project Data  Reservoir projects (including GEP) data file at; www.ogc.gov.bc.ca “Drilling Data for all wells in B.C.” – Excel file  For past Project applications or approvals, contact; Steven Glover (250) 952-0293 Steven.Glover@gov.bc.ca  OGC has digital shape files for GIS systems, also digitizing pool net pay maps and pool designation areas Lori Miller (250) 261-5713 Lori.Miller@gov.bc.ca