The Petroleum and Natural Gas Act Drilling Licence Regulation (DL Regulation) was originally designed to encourage drilling of vertical exploratory wells into conventional oil and gas plays.  It was not designed for, nor was it responsive to, recent economic, geoscientific or technological developments, or current  government direction, including the BC Energy Plan.  As a result, the Ministry of Energy, Mines and Petroleum Resources (Ministry) has amended the DL Regulation, as part of the Oil and Gas Stimulus Package, to enhance the ability of the DL Regulation to manage these changes, especially as they relate to the exploration for unconventional, e.g. shale gas, plays.    

The DL Regulation amendments allow an operator to produce from an earning well as soon as possible after drilling without forfeiting unused lease entitlements as would have occurred under the former DL Regulation.  Lease entitlements, i.e., gas spacing areas (GSAs), left over after the necessary lease selection may now be deferred to later applications for lease selections from that same Drilling Licence (DL).  Lease entitlements will be identified by the operator and limited only by the deepest zone evaluated by the earning well.

The DL Regulation amendments also clarify that the DL confers the right to explore by defining an earning well to be the first well to evaluate any spacing area in a DL or that evaluates a new zone in a spacing area.    

Grouping rules have also been enhanced with the DL Regulation amendments.  Small DLs, defined as those DLs issued with four or fewer whole GSAs may be grouped with any number of small DLs lying within four kilometres of the DL on which the earning well is situated.   

Additional changes made to several sections clarify the meaning of existing rules or clearly state current administrative practices.   

A description of each change to the DL Regulation is listed section-by-section below. 

• Section 1 – The definition of an earning well is amended to include a well that, in the opinion of the director, is (i) for the evaluation of a zone that has not yet been evaluated by any other earning well drilled on the location, or (ii) drilled at least 150 metres into a gas spacing area that has not been evaluated by another earning well on the location;
• Section 1 – The definition of a small drilling licence is added to mean (a) a drilling licence that confers a right to explore for petroleum and natural gas in no more than four spacing areas, or (b) a drilling licence that, in the opinion of the director, is equivalent to a drilling licence referred to in paragraph (a);
• Section 3(5.4)(a) is amended so that an extension under subsection (5.3) must not apply to a zone that does not include the coal-bearing stratum or strata subject to the scheme referred to in subsection (5.3)(d);
• Section 3(7) is amended to allow the expiry date of a drilling licence to be extended to the date the drilling of an earning well is completed only if the drilling licence has previously been extended under section 3(5);
• Section 3(8) is amended so that, if an expiry date is extended under section 3(7), no other well may be commenced in the location of the drilling licence after the expiry date that applied immediately before the extension under section 3(7);
• Section 3(10) is added so that the expiry date of a drilling licence that has been grouped, under section 4.1, with another drilling licence extended under section 3(7) is extended to the expiry date of the other drilling licence if the first licence (a) would otherwise expire before the drilling of the well is completed, and (b) has previously been extended under section 3(5);
• Section 4(2)(d) is amended so that lease entitlement of an earning well may be deferred in whole or in part, to a later application;
• Section 4.1(1)(a) is amended to clarify that the director, on written application of the licensees, must approve the grouping of two drilling licences as one drilling licence if one of the licensees has drilled an earning well on one of the drilling licences being grouped;
• Section 4.1(1)(b) is amended to clarify that the director, on written application of the licensees, must approve the grouping of two drilling licences as one drilling licence if the application is submitted to the director on or before the earliest expiry date of the drilling licences being grouped;
• Section 4.1(1.1) is added so that the director, on written application of the licensees, must approve the grouping of two or more small drilling licences as one drilling licence if (a) one of the licensees has drilled an earning well on one of the drilling licences being grouped, (b) the application is submitted to the director on or before the earliest expiry date of the drilling licences being grouped, (c) the distance between the locations of the drilling licences being grouped does not exceed four kilometres at their closest point, and (d) the grouping well has not been used previously to group a drilling licence;
• Section 4.1(3) has been added so that despite section 4(2)(d), deferred lease entitlements of an earning well must not be applied to drilling licences grouped under this section.

The amendments apply to the entire province and to both conventional and unconventional gas resources. 

For further information on the DL Regulation amendments, please refer to the questions and answers below.

1.      Why are the DL Regulations changing?

The Petroleum and Natural Gas Act DL Regulation was originally designed to encourage drilling of vertical exploratory wells into conventional oil and gas plays.  It was not designed for, nor was it responsive to, recent economic, geoscientific or technological developments, or current government direction including the BC Energy Plan.  As a result, the Ministry, after consultation with industry, has amended the DL Regulation to enhance its ability to manage these changes, especially as they relate to the exploration of unconventional, e.g. shale gas, plays.

2.      When will the changes to the DL Regulations come into effect?

The amendments came into force on August 20, 2009.

3.      Will the amendments affect existing DLs?

The amendments affecting the definition of an earning well will apply to all wells that spud after the effective date of the amended regulation.  For wells that spudded prior to the effective date of the amended DL Regulation, licensees must choose whether they would like to apply the rules of the previous or the amended DL Regulation.

Amendments that do not affect the definition of an earning well will apply to all DLs active on the effective date of the amended DL Regulation. 

4.      Will the amendments cause the Crown to post smaller licences as opposed to the larger tracts required for resource plays?

The Crown will not change its approach to industry posting requests.

5.      How does the enhanced grouping work?

DLs that were issued as four gas spacing areas (GSAs), or smaller in size, can be grouped with an unlimited number of other “small” DLs within four kilometres of its boundary.  For DLs that are larger than four GSAs there is a limit allowing only two DLs to be grouped within four kilometres of each other.

6.      What impact will this change have to surface footprint?

It is expected that the immediate footprint may be reduced as industry has more flexibility on how they can step out development. 

7.      Will extra wells drilled on a DL be limited or capped, impacting my ability to validate DLs?

The exploratory requirement has been implemented as a change to the definition of an earning well, rather than as a cap or limit to the number of earning wells.  If a well meets the definition of an earning well it will have full earning privileges.

8.      With the enhanced grouping privileges for smaller DLs, can I group a six GSA DL with two four GSA DLs?

You are able to group only “small” DLs together.  Small DLs are considered DLs that are four GSAs or smaller.

9.      How long can I keep my deferred validation credits?

Validation credits will be deferred until the term of the DL that they are earned on has ended, including extensions.  Validation credits that are deferred are eligible to be used to validate only the DL that they were earned on.

10.   How will deferred validation credits be managed?

The Crown will keep a record of deferred earnings for each well, but licensees are strongly advised to track their earnings.  Licensees will be responsible for designating which deferred earnings are to be included in any subsequent lease selection.

11.   How will these changes to DL Regulation impact the term on my current DL? I have an eight GSA DL, and have already converted to lease on six GSAs to the base of the “X” formation, such that I only have two GSAs remaining in the DL to the “X” formation.  Can I use the enhanced grouping privileges for smaller DLs for a grouping that includes those two GSAs?

No.  The DL must be four GSAs or smaller at the time it was issued in order to qualify.

12.   I have a six GSA DL.  Can I surrender two GSAs to bring my DL within scope of the revised process?

No.  Only DLs that were issued as four GSAs or smaller can utilize the special grouping privileges.

13.   I previously banked five GSAs to the base of the Halfway as deferred earnings.  We have recently drilled a Montney well and are now making a lease selection on our DL because we are at the end of term.  Can I consolidate my lease selection by including rights in the five GSAs of deferred earnings rights in the same lease selection associated with my Montney well (and forego my earlier deferred earning) or am I required to include the five GSAs of deferred earnings in a separate lease selection anyway so that I end up with two different layered leases for the same area?

You are entitled to forego your earlier deferred earnings.  The earnings are simply lost as they were not used to validate or convert a DL to a Lease.

14.   I have six GSAs of deferred earnings associated with a Halfway well and I have now drilled a deeper Montney test at a location below the deferred earnings rights.  How does having shallower deferred earnings at a location impact my ability to use a deeper well for earning within the DL and for groupings?

The well that you have drilled in the Montney test has full earning rights as it would meet the definition of an “earning well” in the amended regulations.  If the well is validating a new zone within the same GSA it will likely meet the definition of an earning well and therefore have full earning privileges.

15.   I have earned six GSAs by drilling a Montney test on my DL, but am nearing the expiry of extension under section 3(5).  Uphole are some coalbed gas zones that I have not actively explored to date.  I have an experimental scheme for coalbed gas development under s.100 of the Petroleum and Natural Gas Act for these uphole zones and want to retain them in DL form.   Is it possible to convert the Montney zone to lease and defer the portion of my earnings in the uphole zones for a later conversion?

An applicant may choose to convert only a portion of zones evaluated by an earning well.  However, it is that same collection of zones that will be considered the lease entitlement and be eligible for deferral.  Zones outside that lease entitlement will remain in the DL and may be converted to a lease only through a subsequent earning well or grouping.

For further information contact:

Oil and Gas Titles Branch

Titles Division

PO Box 9326, Stn Prov Gov’t

Victoria, BC  V8W 9N3

Facsimile:  PNGTitles@gov.bc.ca

Lisa Nye

Executive Lead, Titles Division