Regulation of Oil and Gas in Alberta, Canada Presentation to the Latin America and Caribbean Oil and Gas Seminar Jim Dilay, Board Member, Energy Resources Conservation Board Alberta, Canada July 12, 2011

Overview Alberta Energy Industry Scope Structure of Regulation Alberta Oil and Gas Regulation −Purpose −Principles −Delivery Optimizing Recovery New Technology Conclusion

Alberta covers km 2 ( miles 2 ), an area comparable to Texas. Ottawa 2847km (1769 miles) Vancouver 817 km (507 miles) New York City 3270 km (2032 miles) Mexico City 3973 km (2469 miles) Anchorage 2277 km (1415 miles) Houston 3018 km (1876 miles) Alberta’s Location Alberta

World Oil Reserves (billions of barrels - established) Source: Oil & Gas Journal, January 2011 Only 13% of the world’s known oil reserves are accessible to international oil companies… One-half of those reserves are in Alberta’s oil sands.

Scope of Alberta Reserves Conventional crude oil 0.24billion m 3 Bitumen 26.9 billion m 3 in situ 21.5 billion m 3 surface-mineable 5.4 billion m 3 Natural gas1025 billion m 3 with CBM1093 billion m 3 Natural gas liquids 0.26 billion m 3 Coal 33 billion tonnes ST Remaining established reserves end of 2010

Producing Oil & Gas Wells * ERCB Regulated Pipelines km Gas Processing Plants 955 (633 sweet gas, 292 sour gas) Oil Sands 61 in situ**, 8 surface mines 154 primary recovery projects 20 experimental projects Upgraders 5 facilities ( m 3 per day capacity) Coal Mines 12 plants (Annual production: 32.2 Mt) Scope of ERCB Regulated Facilities * Producing wells: 9709 bitumen, conventional oil, gas, CBM and 250 shale. ** As of January 2011

Structure of Industry Majority of (81%) of oil and gas rights owned by the people of Alberta −Administered by Government of Alberta −Balance are held by  freehold mineral rights owners  Federal government (National Parks, Indian Reserves). Alberta leases mineral rights to private businesses −Businesses ask Government of Alberta to post mineral rights parcels −Competitive bidding process for posted leases  Highest bids earn rights

Structure of Industry… Private businesses develop oil and gas resources −Require regulatory approvals Companies pay royalties on production −To Government of Alberta for Crown leases −To rights owner for freehold lands Oil and gas companies also pay taxes −Federal and Alberta income tax −Local government property taxes

Ownership of Rights in Alberta Surface Rights Private Landowners Alberta Public Lands Federal Lands Mineral Rights Companies mostly lease from Government of Alberta Regulator (ERCB) must consider rights of land owners and mineral rights holders

Purpose of Regulation Regulation to mitigate harms −Public safety −Environmental damage −Resource waste −Inequities Information and technical knowledge −Resource appraisal −Supply and demand appraisal −Resource information and history −Advice to Government  Technical advice and support for policy making  Authority to conduct public inquiries

Key Regulatory Principles Fair, just, and transparent Affected parties have a right to due process −right to notice and to know the case to be met −right to participate in decision (hearing) −right to impartial decision maker −Decisions with reasons Identify and address issues before approval −Regulatory certainty  Appeal limited to error in law or jurisdiction Effective and efficient −Appropriate regulation of risks to prevent harms −Efficient for Government, industry and public

Structure of Alberta Regulation

Regulatory Structure: Primary Regulatory Interfaces ALBERTA ENERGY Energy policy Mineral rights Royalty Pre-drilling exploration PUBLIC Notice of applications Information Directly affected Public hearings ENERGY RESOURCES CONSERVATION BOARD Facilities/scheme approvals Information collection and dissemination Compliance/inspections Correlative rights ALBERTA ENVIRONMENT Environmental standards and approvals Environmental impact assessment Pollution control CANADIAN ENVIRONMENTAL ASSESSMENT AGENCY (CEAA) ALBERTA SUSTAINABLE RESOURCE DEVELOPMENT/ SURFACE RIGHTS BOARD Surface access and rights-of- way on privately owned land NATIONAL ENERGY BOARD Gas export Federally-regulated pipelines ALBERTA HUMAN RESOURCES AND EMPLOYMENT Occupational health and safety Oil and Gas Industry

Separation of Policy and Regulatory Functions Department of Energy −Energy policies −Mineral tenure −Setting royalties −Administering royalties ERCB −Authorization of projects −Compliance  Monitoring and Reporting  Inspection  Enforcement −Closure  Suspension  Abandonment −Information  Data collection  Information dissemination

Alberta Energy sets and administers royalties −Important for royalties to be “competitive” and not discourage investment Royalty features can positively influence industry −Royalty credits for drilling −Royalty incentive for EOR can enhance recoveries and life-time value of resource developments −Incentives (credits against royalties) for value add activities (e.g., gas plant NGL/ethane extraction for petrochemical feedstocks) Economic Policy and Regulation

The ERCB’s mission is to ensure development is safe, fair, responsible and in the public interest -Created in 1938  70+ years of regulatory heritage -Independent decision maker  Adjudication  Operational regulation -9 Board Members  Chairman and Board members appointed by Government -900 staff  Technical experts -9 field centres throughout Alberta The ERCB

ERCB legislation requires it to: −Consider the public interest, having regard to the social and economic effects of the project and the effects of the project on the environment. −To effect the conservation of, and to prevent the waste of, the energy resources −To control pollution and ensure environment conservation Resource conservation is a foundational element of the ERCB Public Interest Regulation

Preventing waste of resources −Flaring and venting limits  Directive 060 Conserving reservoir energy −Restrictions on high gas-oil ratio production Protecting reservoirs −Commingling controls  Prevent cross-flow between formations  Prevent contamination (e.g., sour gas into sweet zones) −Injection (waste water, acid gas) control  Prevent contamination of recoverable resources  Prevent harm to off-set wells Resource Conservation

Reservoir equity and orderly development −Common carrier, processor −Well density (“spacing”) limits −Pooling and unitization −Facilities proliferation Optimizing recovery −Maximum production rate limitation relaxation for enhanced recovery  Applies to larger pools −Encourage but not regulate enhanced recovery  Smaller pools −Encourage cycling of retrograde hydrocarbon rich gas reservoirs Resource Conservation…

Optimizing oil sands recovery −Operating criteria for oil sands mines  ID sets out a minimum recovery ratio  ERCB experts evaluate recovery compliance −Gas over bitumen  Shut-in of gas production that may harm future bitumen recovery −In situ application review  Ensure valuable resource not bypassed −Minimum in situ recoveries  Special approval to stop steaming if not met −Performance reporting  ERCB experts assess recovery, steam strategies Resource Conservation…

Important that regulation not impede appropriate use of new technology ERCB is enhancing its role in technology development −Bulletin −Single-contact (Chief Operations Engineer) −Work with parties to assess and validate new technologies −Review requirements to encourage responsible innovation Unconventional resources regulatory framework −Adapt regulations to better suit unconventional gas, tight oil and oil sands −Play-based approach −Focus on regulation of risks (versus prescriptive rules) New Technology

New Regulatory Challenges Important that regulation recognize and address emerging issues −Appropriate and timely regulation of risks to prevent harms −Efficient for Government, industry and public Oil sands −Cap rock integrity  Use of thermal recovery for shallow oil sands reservoirs −Water use and recycle −Tailings elimination for mines Aging infrastructure −Well and facility integrity −Abandonment of inactive sites

Alberta has long history of comprehensive regulation of a large resource base Separation of fiscal policy and delivery of regulation Expert application of science and technology to promote resource conservation and recovery optimization Regulatory improvement to adapt to new technology, changing resource development focus and emerging risks Effective Regulation