Block 1: Natural Gas: the energy that makes a difference

Forum 5: Non conventional gas resources

Shale Gas and Hydraulic Fracking

Mr. Karim Mahmud

Partner
Blake, Cassels & Graydon LLP - London, UK

Michael Laffin, Partner, Blake, Cassels & Graydon - Calgary, Canada

Michael Kariya, Blake, Cassels & Graydon - London, UK
 Non conventional gas resources

Shale Gas and Hydraulic Fracking

Shale gas has emerged as a potentially significant source of new and accessible natural gas reserves. Significant gas shale prospects
have been found in a number of jurisdictions including North America, Europe, Asia and Australia. Benefits for these jurisdictions
include reducing their dependency on imported energy supplies which are often more costly in terms of exploration, production,
processing and/or transportation.
Technological advancements have been essential to the development of shale gas in particular the use of hydraulic fracking. This
involves forcing a mixture of water, sand and chemicals into shale rock formations under high pressure. Fracking has made it
possible to unlock natural gas in a cost effective manner that would otherwise be inaccessible using conventional drilling methods.
However, the use of fracking has proved controversial. Concerns with fracking include excessive water usage, ground water supply
contamination, uncertainty regarding the chemicals used in the process, and adverse effects on ground stability. Public concerns
and negative mainstream media and NGO reports have led various jurisdictions including the United Kingdom, France and various
North American states/provinces to place moratoriums on fracking pending further study and inquiry.
In large part, these moratoriums on fracking are the result of regulators needing to examine and understand the new technology
related to the fracking process and regulations drafted to appropriately reflect this understanding. In many cases, existing
regulations related to gas production do not adequately address new fracking production techniques and related public concerns.
This regulatory vacuum results in uncertainty and frustration for shale gas producers, the public and regulators.
Given the current state of affairs, we suggest that industry should take the opportunity to play a lead role in collaborating with
governments/regulators, the public and responsible interest groups in the development of sustainable regulatory regimes for
fracking and shale gas production . These regimes should balance the need for public consultation with responsible shale gas
development and production in a cost effective and environmentally sound manner using up to date technology.
 What is Shale Gas?
Shale formations are
composed of fine-grained
sedimentary rock
compacted in thin
laminated layers
Natural gas (primarily
methane) trapped within
the shales
Uneconomical to develop
until recently
Source: geology.com
 Contributors to the Shale Gas
Revolution
Size of recoverable resource
Improved economics of shale gas production
Lower production costs
Horizontal drilling
Hydrofracking
Note natural gas prices key to viable economics
Strategic considerations
Security of long-term supply
Reduces dependence on foreign supply
 World Shale Gas Resources

Source: US Energy Information Administration

 Technically Recoverable Resources (TRR)
Continent Countries Technically Recoverable
(Tcf)
North America Canada, Mexico, U.S.A. 1,931
Asia China, India, Pakistan 1,404
South America Columbia, Venezuela, Argentina, Bolivia, 1,225
Brazil, Chile, Uruguay, Paraguay
Africa Morocco, Algeria, Tunisia, Libya, Mauritania, 1,042
Western Sahara, South Africa
Europe France, Germany, Netherlands, Sweden, 624
Norway, Denmark, U.K., Poland, Lithuania,
Ukraine, Turkey
Australia 396
All Shale Gas TRR 6,622
All Natural Gas TRR 22,600

Source: US EIA ARI World Shale Gas Resources

 Game Changer?

Source: EIA/ARI 2011, MIT Study on the Future of Natural Gas, 2011
 Hydraulic Fracking, Fracking or
Hydrofracking
Primary technique for shale
gas production:
Horizontal drilling +
Hydrofracking
Process involves forcing mix
of water, sand and
chemicals into shale rock
formations under pressure
Causes fissures to form in
the shales, held open by
proppants such as sand
grains, allowing natural gas
to flow into the well

Source: BBC News

The Controversy of Hydraulic Fracking
Environmental, health and safety concerns
Migration of methane into drinking water
Migration of chemicals into drinking water
Lack of disclosure regarding chemicals used
Large quantities of water used
Inadequate treatment of flowback water
If deep well injection is used, loss of potable water
Greater GHG emissions than conventional gas
Earth tremors
The Controversy of Hydraulic Fracking
Industry concerns
Misinformation and scare tactics
Lack of regulatory framework in many jurisdictions
Patchwork of rules across jurisdictions
Competitors who fail to adhere to best practices
Summary
Most jurisdictions playing catch-up
Conventional gas framework being applied to shale gas
Studies on impacts of fracking
Moratoriums / Bans
 Status of Fracking by Jurisdiction
Country Status Country Status
U.K. Permitted
Canada
British Columbia Permitted France Ban
Alberta Permitted
Saskatchewan Permitted Poland Permitted
Ontario Permitted
Quebec Moratorium
New Brunswick Permitted In some countries, fracking may be
Nova Scotia Permitted banned on a province/state basis,
U.S.A.
Pennsylvania Permitted and even on a town by town basis. For
New York Moratorium example:
Texas Permitted
Ohio Permitted Morgantown, WV, USA Ban
New Jersey Moratorium Pittsburg, Penn, USA Ban
 Canada
Industry Best Practices
Canadian Association of Petroleum Producers (CAPP) Guiding Principles for
Hydraulic Fracking Released September 9, 2011
We will safeguard the quality and the quantity of regional surface and
groundwater resources, through sound wellbore construction practices,
sourcing fresh water alternatives where appropriate, and recycling water for
reuse as much as practical.
We will measure and disclose water use with the goal of continuing to reduce
our effect on the environment.
We will support the development of fracturing fluid additives with the least
environmental risks.
We will support the disclosure of fracturing fluid additives.
We will continue to advance, collaborate on and communicate technologies
and best practices that reduce the potential environmental risks of hydraulic
fracturing.
 Canada
Regulatory Framework
Canadian Constitution divides responsibilities between Provinces and Federal
Government.
Natural Resources development primarily provincial responsibility
Environment primarily provincial responsibility
Shale gas and fracking operations primarily governed by provincial regulation
Conventional gas laws/regulations applicable
Environmental laws/regulations including water laws applicable
Recent Developments: Government has launched 2 reviews:
Council of Canadian Academies: not-for-profit agency that provides science-based
studies
Environment Canada: conducting internal review
 Canada
British Columbia
Major Plays: Montney, Horn River
Regulatory Scheme: Same regulatory scheme for conventional and unconventional
Key Legislation: Oil and Gas Activities Act (OGAA); Petroleum and Natural Gas Royalty and
Freehold Production Tax Regulation; Environmental Management Act, Oil and Gas Waste
Regulations
Key Regulatory Agencies: Oil and Gas Commission (OGC); Ministry of Energy, Mines and
Petroleum Resources; Ministry of Finance
Recent Developments: On September 9, 2011, Premier Christy Clark announced that starting
January 2012, British Columbia will implement a new online registry providing information on (1)
where fracking activities are taking place; and (2) disclosure of fracking liquids.
Alberta
Major Plays: Colorado, Montney, Doig
Regulatory Scheme: Same regulatory scheme for conventional and unconventional
Key Legislation: Oil and Gas Conservation Act; Energy Resources Conservation Act
Key Regulatory Agencies: Energy Resources Conservation Board (ERCB); Alberta Energy;
Alberta Environment; Alberta Department of Sustainable Resource Development
Recent Developments: Implementation of a shale-specific royalty incentive program. New shale
gas specific regulations likely in the near future.
 Canada
Quebec
Major Plays: Utica
Regulatory Scheme: Moratorium on development
Key Legislation: Mining Act; Regulation respecting petroleum, natural gas, brine and
underground reservoirs; Environment Quality Act; Regulation respecting the application of
the Environment Quality Act
Key Regulatory Agencies: Ministiere des Ressources naturelle et de la Faune; Ministiere du
Developpement durable, de lEnvironnement et des Parcs
Recent Developments: Release of BAPE Report (Bureau daudiences publiques sur
lenvironnement) and 2011/12 Budget supportive of shale gas development.

Nova Scotia and New Brunswick

Officially and unofficially reviewing their regulations.
 1821 - First commercial
U.S.A. gas well was a shale
gas well

1947 Fracking first

used commercially by
Halliburton

1996 1.6% gas

production from shale

2006 5.9% gas

production from shale

2008 11% production

from shale

2035? EIA predicts

shale gas could
account for 47% of
natural gas production.
 U.S.A.
Regulatory Framework
Federal, State and Local laws applicable
All laws applicable to conventional gas also applicable to shale gas development
Federal
Primarily responsible for environmental laws (U.S. EPA) and oil and gas
development on federal lands (Bureau of Land Management).
The Safe Water Drinking Act
The Clean Water Act
The Clean Air Act
States
Well permits, design, location, spacing, operation, abandonment
Implementation and enforcement of federal environmental laws
State environmental laws (cannot conflict with federal laws but can dictate
higher standards)
Water use and disposal within state
 U.S.A.
Multiple Federal Government Studies: Areas of Potential Regulation
US EPA Hydraulic Fracturing Study initial results expected end of 2012; final 2014
Focus will be on understanding potential impacts of hydraulic fracturing on drinking water
and groundwater
Secretary of Energy Advisory Board (SEAB) Ninety-Day Report released August 11,
2011
The Subcommittee identifies four major areas of concern: (1) Possible pollution of drinking
water from methane and chemicals used in fracturing fluids; (2) Air pollution; (3)
Community disruption during shale gas production; and (4) Cumulative adverse impacts
that intensive shale production can have on communities and ecosystems.
The Subcommittee shares the prevailing view that the risk of fracturing fluid leakage into
the drinking water sources through fractures made in deep shale reservoirs is remote.
Department of the Interior (DOI) Forum on Hydraulic Fracturing
Areas discussed for potential regulation:
Chemicals used in fracking mixtures
Well integrity
Waste disposal
 U.S.A.
New York State
State appears to be laying framework for a balanced approach to development
Supplemental Generic Environmental Impact Statement (SGEIS) Revised Draft released
September 7, 2011
SGEIS report repeatedly states: no significant adverse impacts so long as proper procedures
and safety measures are put in place and recommends that certain fracking wells be subject to
site-specific regulations, including:
Wells where target fracture is at shallow depth
Wells with close proximity to fresh water supply, aquifers, streams
High Volume Hydraulic Fracturing Proposed Regulations published September 29, 2011.
Other State Initiatives
Pennsylvania ban on oil and natural gas development on state forest lands
Delaware River Basin Commission (initiative among Delaware, New Jersey, New York and
Pennsylvania) no development along river basin
Wyoming on August 16, 2010 first state to require disclosure of chemicals used in fracking
fluids.
 Other Developments
United Kingdom
Energy and Climate Change Committee Fifth Report Shale Gas, released May 10,
2011.
Finds no evidence that hydraulic fracturing poses a direct risk to underground aquifers
provided well is constructed properly.
Finds that shale gas could reduce UKs dependence on imported gas.
Finds GHG from shale gas is lower than coal but higher than low-carbon technologies
Cuadrilla Resources voluntarily stopped drilling following small earth tremors near
Blackpool, England, in May 2011 following extensive negative media reports and
public opposition.
France
Very negative public view of fracking fuelled by numerous media reports and a strong
campaign by high profile NGOs including the WWF led to a ban in France on
hydraulic fracking.
First country to implement a total ban on hydraulic fracking (as of July 1, 2011)
French National Assembly (May 11, 2011); 287 in favour of ban; 186 against ban
French Senate Vote (July 1, 2011): 176 in favour of ban; 151 against ban
Ban is on hydraulic fracking; shale gas may be developed using other methods
US EIA estimates France has substantial shale resources TRR of 180 Tcf (only slightly
lower than Poland which has an estimated TRR of 187 Tcf)
 Path Forward
Jurisdictional patchwork of laws likely to remain a
reality very fast moving area
Laws should be based on a balanced approach to
development including:
Recognition of economic importance of shale gas
resource
Mitigation of environmental, health and safety risks in
relation to relative risk and gravity of event
Encouraging responsible development and production
and the need for meaningful public consultation
 Regulatory Framework Content
Shale gas laws should address:
Buffer zones for development (watersheds, aquifers)
Uniform well completion standards
Water usage (source and quantity)
Disposal and/or treatment of flowback water
Disclosure of chemicals used in fracking slurry
 Karim Mahmud
Partner
Blake, Cassels & Graydon LLP, UK

Karim Mahmud has extensive experience in the structuring, negotiation, development, construction and implementation of energy, resource and
infrastructure projects. He has worked in over 35 countries in North America, Europe, Asia, the Middle East and Africa. Karim has primarily acted
for project developers/sponsors but also advised governments, international multilateral agencies (including the International Financial
Corporation and World Bank) and financial institutions. Karim has law degrees from Oxford University and the Dalhousie Law School.
Karim's experience in major energy projects includes:
Advised a major international aluminium producer on the development of a West African joint venture project with a Chinese co-venturer.
Project incorporated the acquisition of bauxite licences, the development of bauxite mines, the construction of a bauxite slurry pipeline (or
railway), the development and construction of an alumina refinery and the development of an aluminium smelter. This vertically integrated
project (completed project value estimated at C$3.7-billion) also involved the expansion and development of a port facility.
Advised on the development of a US$3.5-billion liquefied natural-gas-receiving terminal on North America's Atlantic Coast and led team dealing
with construction matters regarding the regasification terminal, including the EPC, Tank Works and Jetty development contracts. Also advised on
LNG supply negotiations with various international LNG suppliers and downstream-gas marketing negotiations.
Acted for a Middle East-based state-owned petroleum company on drafting, bidding and implementation of all construction contracts related to
an upstream oil and gas project in Indonesia. Project designed to link company-owned production wells to an oil tanker loading jetty and entailed
construction of an oil gathering pipeline system, storage facilities and marine jetty for crude oil tanker loading.
Acted for an oil and gas super major on a C$6-billion complex cross-border oil sands and refinery assets swap and joint venture transaction
involving the client acquiring 50 per cent of an oil sands heavy-oil mining project in Northern Canada and the divestiture by the client of 50 per
cent of a U.S. refinery.
Advised on the development of Vietnams first Shale Gas project.
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