1. Regulation for Exploitation and
Commercialisation of Unconventional Gas
Naturgas Conference
14-15 April 2011
David Aron
Managing Director
Petroleum Development Consultants, UK

2. Contents
• Introduction
• Requirement for regulation of unconventional gas
• International experience of regulation of unconventional
gas
• Colombia experience of unconventional gas
• Economic considerations
• Requirement for Colombian regulation of unconventional
gas

3. Introduction
• Petroleum Development Consultants (PDC) is a UK
based oil and gas consultancy
• PDC has been appointed by El Departamento Nacional
de Planeación to carry out a study on unconventional
gas and oil for the Ministry of Mines and Energy. This
followed an initial study prepared by AD Little for the
National Hydrocarbon Agency (ANH)
• The PDC study has three phases:
• Phase 1 Initial review of unconventional oil and gas resources in Colombia
• Phase 2 Review international experience and lessons for Colombia
• Phase 3 Prepare contractual framework and technical regulation
• PDC has just completed Phase 2 and Phase 3 is to be
completed in May 2011

4. Requirement for regulation of
unconventional gas
• Different for tight gas, coal bed methane (CBM) and
shale gas
• For tight gas existing regulations for conventional oil and
gas are usually suitable
• For coal bed methane there is a tension between coal
mining activities and gas production and this requires
additional regulation
• Shale gas production can take place over very large
areas and requires a large number of wells. Regulations
for conventional may well need adjusting to take account
of the differences

5. International comparisons
• Consultant studied regulations for both oil and gas – only
gas to be covered in this presentation
• Countries covered in this presentation:
• USA: shale gas and CBM
• Canada: shale gas and CBM
• Australia: CBM and tight gas

6. USA
• The USA is very much at the forefront of exploitation of
unconventional resources and particularly gas from
shale and CBM
• Natural gas is forecast by the Energy Information
Administration to make up 24% of the USA’s energy
supply, of that, 45% will come from shale gas and 7%
from CBM
• 52% of US dry gas production will come from
unconventional resources and if tight gas is included, the
figure rises to 74% of US gas production.

7. USA unconventional gas

8. USA shale gas plays

9. USA shale gas regulation
• Generally the framework for shale gas is identical to that
for conventional oil and gas with the responsibility being
allocated between federal and state level
• The Texas Railroad Commission, for example, regulates
the development of the Barnett shale

10. USA CBM

11. USA CBM regulation - 1
• Numerous regulations designed to control conventional
natural gas development can and do apply to CBM
exploration and production
• Specific CBM regulations have been drafted by federal,
state and local agencies to meet various concerns
• CBM ownership has been a point of contention since the
early 1900s
• A determination was made by the Department of the
Interior’s solicitor stating that U.S. reservations of coal do
not include the CBM
• However, Federal reservations of gas do include the
CBM found in coal deposits

12. USA CBM regulation - 2
• CBM is therefore disposable as a gas under Section 17
of the Mineral Leasing Act (DOI 1981)
• Where the coal and oil and gas are federally owned,
federal oil and gas lease regulations cover the CBM and
are subject to the regulations governing conventional oil
and gas drilling and production operations
• The Mineral Leasing Act was determined in 1981 by the
DOI solicitor to refer only to gas or natural gas, without
excluding CBM
• Therefore, since 1981 CBM gas has been developed
under the oil and gas leasing provisions of the Mineral
Leasing Act

13. USA CBM regulation - 3
• The DOI Solicitor also concluded that the coal leasing
requirements of the MLA do not grant the coal lessee the
right to extract minerals associated with coal
• A coal lessee has no right to extract CBM, other than the
venting of gas required to maintain a safe working
atmosphere
• The oil and gas lease holder does not have the right to
extract the CBM utilising a method that would harm the
coal deposit or generate hazardous conditions for later
coal mining operations
• In conclusion, the Solicitor affirmed that the rights of an
oil and gas lessee would be restricted to the rights not
previously granted to the coal lessee

14. USA regulation lessons
• There are many aspects of the unconventional gas
industry in the US that have significant relevance to
Colombia
• However there are significant differences between the
two countries. The two most important are that the US
has a market based gas price and that the gas
transmission infrastructure in the US is much more
developed than that of Colombia
• Some policies that have been implemented in the US
that are relevant to Colombia. The main one is the
regulatory allocation made for CBM between the owner
of the coal and the owner of the CBM. Conversely the
US experience suggests that regulation of shale gas can
follow conventional oil and gas practice

15. Canada
• In Canada, 90% of the gas that is produced is classified
as conventional. Tight gas and unconventional gas
resources in Canada are growing, particularly in two key
geological areas: Montney and Horn River located in
northeast British Columbia
• As development of these resources increase and other
conventional resources decline, there is a shift of natural
gas production from Alberta to British Columbia
• The future development of gas production is very
influenced by the expected gas price which is controlled
by the Henry Hub price

16. Canada – British Columbia shale gas

17. Canada – British Columbia shale gas
regulatory framework - 1
• The British Columbia Oil and Gas Commission provides
the implementation of Petroleum and Natural Gas Act
1996 and the Drilling and Production Regulations of
British Columbia, 1998. There are no specific
requirements in this legislation for shale gas
• The BC Oil and Gas Commission regulates oil and gas
activities in British Columbia, including exploration,
development, pipeline transportation, facilities and
reclamation
• Companies are required to obtain an Environmental
Assessment Certificate from the British Columbia
Environmental Assessment Office

18. Canada – British Columbia shale gas
regulatory framework - 2
• The Commission is responsible for ensuring sound
resource development in British Columbia and has
recently formed a Resources Development Unit to carry
out this work in potential basins
• The Commission reports to the Ministry of Energy. The
Ministry of Energy is supportive of shale gas
development. It is interested in developing a better
understanding of this shale gas potential
• To determine this potential, it contracted a study on the
Gas Shale Potential of Devonian Strata, North-eastern
British Columbia

19. Canada – Alberta CBM

20. Canada – Alberta CBM
regulatory framework - 1
• The Energy Resources Conservation Board (ERCB) is
responsible for most oil and gas functions, but it also
covers coal as well. It is responsible for administrating
the following relevant statutes:
• Coal Conservation Act
• Energy Resources Conservation Act
• Gas Resources Preservation Act
• Oil and Gas Conservation Act
• Pipeline Act
• Water is regulated in Alberta primarily by Alberta
Environment (AENV) through the Water Act, and, like in
British Columbia, all rights to water use and water
diversion are conferred by the Crown

21. Canada – Alberta CBM
regulatory framework - 2
• The Act requires a government license for all activities,
including de-watering and water disposal. However the
Water (Ministerial) Regulation explicitly exempts
diversions of saline water (defined as exceeding 4,000
mg/l TDS) from the requirement of a government license
• Therefore, an operator who intends to de-water a coal
seam in order to extract CBM must first determine the
salinity of the water. If it exceeds 4,000 mg/l TDS, the
operator can proceed with de-watering without a license
• If a license is required, evidence must be provided by the
operator to AENV to show that the proposed diversion
will not cause adverse effects on the water supply of
nearby users over the short-term or long-term, and will
not cause adverse effects on the source aquifer or other
aquifers

22. Canada – Alberta CBM
regulatory framework - 3
• While AENV has jurisdiction over water diversions
generally, ERCB administers the Oil and Gas
Conservation Act, which requires ERCB approval for the
gathering, storage, and disposal of water produced in
conjunction with oil and gas
• The Board does not distinguish between saline and non-
saline produced water, so even if the produced water
has already been licensed by AENV, it must also be
disposed of in accordance with a scheme approved by
ERCB
• Treating produced water and putting it to a useful
purpose – rather than disposing of it is permitted by the
ERCB, but no preference is given to this option and the
onus is on the operator to choose the appropriate
method for disposal

23. Canada regulation lessons
• The main policy which Canada has implemented which
is applicable to Colombia is the royalty reduction and
credit schemes. These royalty reduction and credit
schemes have two vital parts to play
• First, they allow the cost of infrastructure required for the
projects to be offset against initial royalty payments
• Secondly they allow companies to amortize project debt
faster making projects more bankable
• However royalty reductions will not make projects
profitable in Colombia due to the low gas price
• Canada has not developed its own technology but has
imported it from USA.

24. Australia - CBM
• The most relevant unconventional resources in Australia
are CBM and tight Gas. CBM development is found in
the states of Queensland and New South Wales
• The proven and probable CBM reserves were 24.77 TCF
in December 2009. Queensland has the most part of
these reserves with 88.1%. The rest are in New South
Wales. In terms of basins, the reserves are concentrated
in Surat Basin and Bowen Basin with 65% and 23%
respectively.
• This figure show an increase in 61.5% compared to
2008.

25. Australia - CBM

26. Australia – Queensland CBM regulation - 1
• CBM exploration and production is carried out under the
Petroleum Act 1923 and the Petroleum and Gas
(Production and Safety) Act 2004 and the Mineral
Resources Act 1989
• Leases are an Authority to Prospect (ATP) or a
Petroleum Lease (PL) are provided through a call for
tender process. The PL allows exploration, production
and storage activities, pipeline construction or petroleum
processing activities
• CBM is treated differently from Coal Mine Methane
(CMM). In New South Wales and Queensland CMM is
administered by mineral resources legislation and CBM
is administered by petroleum resources legislation

27. Australia – Queensland CBM regulation - 2
• CBM operators are required to obtain an Environmental
Authority from the Department of Environment and
Resource Management before starting operations
• The operators must present an environmental
management plan for new CBM activities which identify
and manage any potential impact on the surrounding
environment
• The CBM water management plan must include the
expected flow rate, quantity and quality expected to be
generated, proposed management (use, treatment,
storage or disposal)
• Required are criteria against which the CBM operator will
monitor and assess the management of CBM water

28. Australia – tight gas
Basin Fields Gas in Place
Resource
Perth Warro 10 Tcf
Gingin
Cooper Moomba
8 Tcf
Big Lakes
Onshore Wombat 700 Bcf
Gippsland

29. Australia – tight gas

30. Australia regulation lessons
• The Queensland Government is supporting the growth of
the petroleum industry by making available geo-scientific
information and company exploration data
• Queensland has developed a strategy to promote an
export LNG industry. In Colombia this option could be
viable in order to guarantee the demand to producers.
• Mines in the Sydney Basin are using methane drained
from mine workings to generate electricity which is sold
into the state electricity grid
• Based on the experience of Queensland and New South
Wales, Colombia should design and implement
community consultation and environmental controls
during the approval process

31. Colombia experience of unconventional gas
• Limited experience to date but CBM licences are in place
with Drummond and a shale gas contract with Nexen
• There is a significant conflict between coal mining and
CBM
• There is limited gas pipeline capacity and planned
expansion is for conventional gas
• The cost of transportation is high and it is noticeable that
the Nexen shale gas contract is located near to Bogota
potentially eliminating the requirement to use the
national gas transportation system

32. Conflict between CBM and coal
• Virtually all countries, including Colombia support the
overall principle that if there is a conflict with another
resources owner then both sides must cooperate to
achieve an optimal overall result
• PDC proposes a strict timetable for negotiations be
imposed, (with full mutual disclosure of development
plans and operations
• PDC proposes a joint state appointed dispute resolution
tribunal consisting of representatives from the coal
regulatory authority (Ingeominas) and the oil & gas
regulatory authority (ANH), possibly chaired by a
representative of the Ministry of Energy
32

33. Limited gas pipeline capacity
• Capacity in 2010 is 1100
mmscfd BALLENA
• To increase to 1330
mmscfd by end 2011 and CARTAGENA
1375 mmscfd by end
2014 SARDINATA
CÚCUTA
• However this is only for GIBRALTAR
conventional gas and VASCONIA
B/MANGA
there is no current
provision for transporting CUSIANA
unconventional gas
Sistema Nacional de Transporte

34. Economic considerations
• Main issue is the low price of gas in Colombia with gas
being sold at $4/MMBTU at the Bogota city gate
• CBM gas is assumed to be consumed by power
generation in the mines; however gas from shale will
need to be transported
• The cost of transportation from resources to consumer is
around $2.5/MMBTU
• Limited gas pipeline capacity which is different to the
situation in US and Canada where unconventional gas
mainly replaced conventional gas

35. Colombia shale gas economics
Shale_Gas
High Reserves
70%
60%
50%
Current Royalty
Rate of Return %
40%
Royalty Reduction 10%
30%
Royalty Reduction 30%
20%
Royalty Reduction 50%
10%
Zero Royalty
0%
$0/mcf
-10% $5/mcf $10/mcf $15/mcf
-20%

36. Colombia CBM economics

37. Requirement for Colombian regulation
of shale gas - 1
• International practice is that it can be included in the
conventional oil and gas regulatory structure
• Shale gas development compared to conventional gas,
requires a larger resource base and a much longer
production profile
• The large number of wells requires a long period of
positive cash flow to pay back, often in excess of 30
years
• Conventional gas regulation is based on shorter
production profiles and relatively small-sized licence
areas and early relinquishment obligations
• There is also regulatory pressure to declare field
commerciality as early as possible

38. Requirement for Colombian regulation
of shale gas - 2
• The characteristics of shale gas mean that adjustment of
the conventional contract is required so not to raise
unnecessary entry barriers to development
• New specifically shale-orientated regulatory bodies are
being considered by some US States and Australia
(Queensland)
• It is probably premature to consider establishing a shale
regulatory authority since the existing regulatory bodies
in Colombia already have the relevant experience to deal
with the potential new challenges posed by shale

39. Requirement for Colombian regulation
of shale gas - 3
• It is suggested that there may need to be regulatory
incentives for pipeline owners to make capacity available
to unconventional gas in priority to conventional gas at
least in the short term
• Colombian regulatory authorities should perhaps
consider some fiscal incentivise to attract service
companies and equipment, at least in the initial start-up
of the shale gas industry
• This could involve a temporary tax reduction/custom duty
exemption for personnel and equipment working on
qualifying projects

40. Requirement for Colombian regulation
of CBM - 1
• CBM projects raise many of the same issues as shale
gas and most of what was covered for shale gas also
applies to CBM developments.
• CBM projects raise two additional challenges:
• large volumes of water production
• potential co-existence problems with coal developments,
• There is a general international practice which clearly
states the overall principle that if there is a conflict with
another resources owner then both sides must
cooperate to achieve an optimal overall result

41. Requirement for Colombian regulation
of CBM - 2
• Many countries provide a period of time when the miner
and the gas company negotiate a solution between
themselves
• Failure to achieve agreement results in state intervention
in the national interest, having regard to the existing
interests of the parties concerned
• Some countries such as Australia (Queensland) allow
the parties to agree between themselves merely
notifying the state of their agreement which is then
legally binding
• Others (e.g. India) reserve the right to approve the
negotiated settlement

42. Requirement for Colombian regulation
of CBM - 3
• The Consultant has recommended that negotiation
between the parties should be required
• Agreement confirms to all parties that the amended
permit/licence has been officially authorised and
removes any uncertainty. It also ensures that existing
regulatory and legal duties are properly observed
• A strict timetable for negotiations be imposed with full
mutual disclosure of development plans and operations
• There should established in advance an appointed
dispute resolution tribunal consisting of representatives
from the coal regulatory authority (Ingeominas) and the
oil & gas regulatory authority (ANH), possibly chaired by
a representative of the Ministry of Energy

43. Requirement for Colombian regulation
of CBM - 4
• Any failure to meet the timetable or any breach of any
agreed solution would be deemed to be a breach of the
permit/licence
• It is expected that having a state-imposed solution as a
sanction for non-agreement, there would be a strong
incentive to agree a compromise