The Alberta Energy Regulator (the “AER”) released an evaluation of its Play-Based Regulation Pilot (the “Evaluation”) concerning unconventional resource development in Duvernay shale play near Fox Creek, Alberta (see our prior commentary on the key impacts to industry of Play-Based Regulation). Under the Play-Based Regulation Pilot (the “Pilot”), the AER trialed a single, integrated scheme which invites energy companies to submit one application for all activities associated with a development project within the defined play. The Evaluation of the Pilot presents a mixed review.

This blog post comments on the need for adaption of the AER’s traditional regulatory framework and outlines the key outcomes of the Evaluation.

Play-Based Regulation – Why the change?

The AER’s willingness to consider a new regulatory approach to unconventional oil and gas activities is a welcome development. The fragmentation in the AER’s current system of regulation creates ongoing burdens for energy companies. These burdens include regulatory duplication, project delays associated with a multiple approval system and overlapping jurisdiction.1 The single, multiple-activity application would be more desirable if the consequence is certainty of longer-term approval.

Additionally, the extraction of unconventional resource poses unique challenges, some of which highlight shortcomings in the AER’s traditional regulatory framework. In particular, Play-Based Regulation (“PBR”) may be better poised to address the potential regional effects of unconventional oil and gas activities. These regional effects stem from the increased geographical scale of these activities and their use of different technologies, primarily hydraulic fracturing.

Key Outcomes of the Evaluation

1. Reduction of cumulative effects on the land and water.

One of the Pilot’s stated objectives was to minimize the cumulative effects of unconventional oil and gas activities on land, water, air and biodiversity. The Evaluation concluded that progress was made towards reducing, but not minimizing, the cumulative effects of surface disturbances and water management in the Pilot area. The Evaluation credits the Pilot for reducing surface disturbances by increasing the use of fewer, larger multi-well pads. Further, Pilot participants applied for water licenses for their long-term needs of the entire project, instead of temporary diversion licenses. Giving broader consideration to the long-term diversion demands placed on regional water sources can reduce cumulative effects.

Next, as part of the Pilot, the AER envisioned industry voluntarily collaborating on surface development plans (eg water reservoirs, roads and pipelines). This proved abortive. Although practical barriers to collaboration, such as the relative physical dispersion of activities throughout the Duvernay are present, the AER will ultimately need to either mandate or incentivize operator collaboration if it wishes to see a change in the industry’s highly competitive culture.

2. Lack of clarity for Pilot participants.

The Evaluation concluded that the requirements to submit a single application were not sufficiently detailed and clear. This made it challenging for Pilot participants to develop their applications. Of note, the AER’s December 4, 2014 Manual 009, Play-Based Regulation Pilot Application Guide recognized that the Pilot’s objectives would be less prescriptive than current AER requirements for single-activity authorizations. However, going forward, it will be critical for the AER to develop clear and comprehensively defined minimum application requirements for single, multiple-activity applications.

Despite this lack of clarity, the six Pilot participants’ applications were approved, subject to only a few limitations and outstanding authorizations (the seventh participant, the Athabasca Oil Corporation, withdrew its application during the Pilot). Yet, concerns surrounding the increased risk of reviews, appeals and legal challenge stemming from this lack of clarity may linger.

3. Inadequate regulatory tools to that support and enable Play-Based Regulation.

The AER intended to develop appropriate regulatory responses to the generic risk profile given the characteristics of the Duvernay play. On March 17, 2015, under another concurrent project, the AER issued Subsurface Order No 3; this Order provided uniform subsurface requirements for the Pilot area. However, surface-related play-based requirements were not developed within the time frame of the Pilot, owing to the lack of regulatory tools that support and enable PBR. While it is still possible for such surface-related requirements to be introduced, at present, the Pilot appears to have fallen short of this objective.

4. Diminished stakeholder understanding and engagement.

The Evaluation concluded that stakeholders, including First Nations and Métis, see a benefit to having a broader, long-term view of energy development plans. However, the stakeholders did not feel that Pilot participants provided them with enough information to fully understand the project plans or their potential impacts. Additionally, information about the Pilot provided to stakeholders by the AER was insufficient. In turn, this lead to a limited understanding of the Pilot and its outcomes. Much work needs to be done to ensure PBR adequately and meaningfully engages with all stakeholders.

Play-Based Regulation: “I’ll be back”

The Pilot represents the first step towards a new regulatory framework in Alberta’s energy sector. Indeed, the AER has given every indication that it intends to operationalize the PBR more broadly across the province. If so, this process will need to be refined. Frank contemplation of the results of this Evaluation will be critical for the AER’s success. Ultimately, if the shortcomings of the Pilot can be overcome, benefits will flow to all stakeholders.