Letter of the law: Tight resources

Jason Rosychuk looks at how the industry is incentivising and regulating unconventional extraction

China's tight gas reserves are situated offshore.
China's tight gas reserves are situated offshore.

Jason Rosychuk, senior associate at Pinsent Masons, looks at how the industry is incentivising and regulating unconventional extraction

Unconventional oil and gas exploration and production has revolutionised the industry’s landscape in the past decade.

The pace of change is accelerating. Particularly in the past few years, US shale gas production has upturned preconceived constants in the global energy map. The world’s largest importer could conceivably become energy self-sufficient and perhaps even an exporter.

The oil and gas industry has repeatedly witnessed unconventional resources become conventional. Offshore exploration is now commonplace with oil sands firmly established as a commercial resource. In addition, tight oil and gas – particularly shale gas – made the leap from a fringe interest to an energy revolution in the United States in a brief few years.

Shale gas has become synonymous with a greater revolution in oil and gas technologies. Oil sands, tight oil and gas, shale gas, and coal bed methane are all resources that have become commercially viable in the past decade through a combination of rising prices and technological innovation.

As a result, new territories around the world have opened up to oil and gas exploration. These include China, Poland and Jordan, while historic producing countries like Pakistan, Oman and Yemen are eyeing new opportunities. Even major conventional producers like Saudi Arabia and Algeria are developing their reserves.

However, the success in exporting the industry beyond the North American continent have been mixed, and the new norm of oil sub-$80 a barrel has put the spotlight on the economics of tight oil and gas plays.

Unlike in North America, where shareholder value comes first, governments in MENA and West Asia are looking to broader needs such as domestic gas supply for domestic and industrial development.

However, to incentivise International Oil Companies (IOCs) to make the investment needed means to provide enhanced rewards for developing tight oil and gas plays. To do that, the legal regime needs to be able to define the resource.

Additionally, unconventional oil and gas presents its own unique set of regulatory challenges, such as increased water use, greater land access, and disposal concerns. Therefore, with new markets and unconventional producers arriving on the scene, it is worth asking: ‘What is the definition of tight oil and gas and does it vary in different jurisdictions?’

As a starting point, terms such as tight oil and gas and shale oil or shale gas and unconventional oil and gas are often used somewhat interchangeably and with a lack of specificity from a legal standpoint.

Shale oil and gas is found in low porosity shale formations. But oil and gas can be found in other types of rock that share the same traits, hence the moniker of “tight” oil and gas that is found in other types of rock formations that share the same feature of low permeability.

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Any hydrocarbon reserves that cannot be extracted using standard vertical wells is typically called “unconventional” as methods such as hydraulic fracturing is required. Of course, there are other types of unconventional oil and gas resources, such as oil sands, that form a different category of unconventional resources.

The method of extraction is often more important than the origin of the petroleum. For tight resources and shales, the issues often arise from the increased land use and resource demands, as well as increased discharge raising regulatory issues. The difficulty and cost of extraction can also affect pricing and project structuring for the exploration company.

Several jurisdictions have wrestled with the definition of tight oil and gas and their experience can inform development in other countries.

In the Province of Alberta in Canada (one of the key jurisdictions for unconventional oil and gas), the Alberta Energy Regulator (AER) defines tight oil and tight gas as oil or natural gas found in low-permeability rock, including sandstone, siltstone, shale, and carbonates.

The AER also has a special definition of shale gas as natural gas locked in fine-grained, organic-rich rock, as well as coal bed methane, simply defined as natural gas contained in coal.

Crossing over to the United Kingdom, the right to explore and develop oil and gas is granted through a Petroleum Exploration and Development Licence under the Petroleum Act 1998. The Licence defines petroleum broadly and does not make any specific reference to shale gas or unconventional extraction methods.

The differentiation in the UK comes through the further regulatory approvals that are required to undertake unconventional extraction.

Nevertheless, a lot of work around the issues of tight oil and gas has taken place in the UK as part of the government’s review of unconventional resources in the UK and the regulatory framework.

The Royal Institute of International Affairs set out useful definitions for different types of gas resources borrowed from the International Energy Agency (IEA) World Energy Outlook of 2009.

The definitions are as follows:
Tight Gas: This refers to gas deposits found in low permeability rock formations that require fracturing to release them for production. The IEA suggests a definition that is based upon a gas reservoir that cannot be developed commercially by vertical drilling because of the lack of natural flow. Also, even with horizontal drilling, hydraulic fracturing is required to produce commercial quantities.

Shale Gas: These are deposits trapped within shale rocks. Unusually, these rocks are both the source of the gas and the means of storing it. They also tend to overlie conventional oil and gas reservoirs. Thus, if there has been extensive exploration for conventional oil and gas the existing well-cores can generate large amounts of data to locate the potential shale plays.

The Department of Energy and Climate Change responsible for oil and gas licensing in the UK focuses on permeability stating “a tight gas reservoir is commonly defined as a rock with matrix porosity of 10% or less and permeability of 0.1 millidarcy or less, exclusive of fracture permeability.”

In an effort to exploit Pakistan’s huge reservoirs of tight oil and gas and expand domestic gas production, the government has introduced the Tight Gas (Exploration & Production) Policy 2011.

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The main feature of the policy is enhanced commercial terms for natural gas, so the definition is important. For the purposes of the policy, “tight gas” is defined as natural gas that the company demonstrates to the satisfaction of the Federal Government and the Provincial Government concerned that it cannot flow naturally at commercial rates with conventional methods despite having hydrocarbon reserves.

It also requires advanced technologies for its exploitation and production or any new technology acceptable to the Regulator. Similarly to the UK, it has to have an estimated value of effective permeability less than “1.0 millidarcy”.

The Pakistan test as set out in the Policy covers both the limited permeability of the rock and the need for unconventional exploration techniques in the definition of Tight Gas. It further adds a subjective element of satisfying the Federal Government and Provincial Government that the gas cannot flow naturally at commercial rates using conventional methods. It is a three part test - all three must be satisfied.

Other jurisdictions like the one in Jordan, simply define a specific strata as tight oil and gas rather than relying on a complex test involving permeability and extraction technique.

Therefore, this shows us there is no consistent or right approach as to how tight oil or gas should be defined. The most appropriate definition might be that which most appropriately meets the requirements of the policy that the host government is seeking to implement.

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