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AR 263/97 PETROLEUM AND NATURAL GAS TENURE REGULATION

(Consolidated up to 222/2008)

ALBERTA REGULATION 263/97

Mines and Minerals Act

PETROLEUM AND NATURAL GAS TENURE REGULATION

Table of Contents

Interpretation

1 Definitions

2 Interpretation provisions related to wells

3 Crown spacing units

Applications for and Rights under Agreements

3.1 Rules re applications

4 Rights granted by an agreement

Part 1
Petroleum and Natural Gas Licences

5 Term of licence

6 Initial term of licence

7 Maximum area of location

8 Location in more than one Region

9 Validating wells

10 Grouping of licences

11 Selection and validation of location for intermediate term

12 Licence continuation and offset requirements

13 Waiver of rental for licences under former Regulation

Part 2
Petroleum and Natural Gas Leases

Continuation of Leases

14 Application for continuation of lease

15 Qualifications for continuation

16 Continuation by reason of drilling

17 Continuation as to potentially productive part of the location

18 Notice respecting non‑productivity

Offset Requirements

19 Interpretation of offset requirement provisions

20 Offset notice

21 Review of offset notice

22 Liability to pay offset compensation

23 Calculation and payment of offset compensation

Part 3
General

24 Withdrawal of Crown from unit agreement

25 Proof of ownership of freehold rights

26 Time extensions related to drilling problems

26.1 Determination of Crown ownership in crude oil and natural gas

Transitional

27 Interpretation of transitional provisions

28 Licences under former Regulation

29 Pre‑1998 leases

30 Continuation under section 96 of the Act

31 Continuation under section 97 of the Act

32 Non‑productivity notices

33 Offset drilling obligations

34 Variation of transition rules

Repeal, Expiry and Coming into Force

35 Repeal

36 Expiry

37 Coming into force

Schedules

Interpretation

Definitions

1 In this Regulation,

(a) “Act” means the Mines and Minerals Act;

(b) “Board” means the Energy Resources Conservation Board;

(d) “deepest productive zone”, with reference to a spacing unit containing all or part of a location approved for continuation pursuant to section 15(1), means the deepest of the zones in the spacing unit to which the approval extends under section 15(2);

(e) “former Regulation” means the Petroleum and Natural Gas Agreements Regulation (AR 188/85);

(f) “freehold spacing unit” means,

(i) in relation to Alberta, a spacing unit that is not a Crown spacing unit, or

(ii) in relation to a jurisdiction adjoining Alberta, the area allocated to a well drilled in land in that jurisdiction for the purpose of drilling that well or producing petroleum or natural gas from that well;

(g) “freehold well” means

(i) in relation to Alberta, a well the spacing unit for which is a freehold spacing unit;

(ii) in relation to a jurisdiction adjoining Alberta, a well drilled in land in that jurisdiction;

(h) “gas storage agreement” means a contract or agreement referred to in section 57(5)(b) or (c) of the Act;

(i) “lease” means a lease of rights to petroleum or natural gas or both issued pursuant to the Act or the former Act;

(j) “licence” means a petroleum and natural gas licence issued by the Minister under the former Regulation or this Regulation;

(k) “licensee” means the holder of a licence according to the records of the Department;

(l) “location”, in relation to a licence or lease, means

(i) the subsurface underlying the surface area of the tract described in the licence or lease as its location, or

(ii) where the licence or lease grants rights to petroleum or natural gas or both in some but not all of the subsurface, the subsurface area or areas underlying the surface area of the tract described in the licence or lease as its location and in respect of which the rights are granted;

(m) “measured depth”, in relation to a well, means the measured length of the well‑bore of the well;

(m.1) “minimum depth” means

(i) 150 metres of measured depth in the Plains Region or the Northern Region and 300 metres of measured depth in the Foothills Region, or

(ii) a lesser depth approved by the Minister in any particular case;

(n) “offset zone” means

(i) in relation to a freehold spacing unit, a zone underlying the freehold spacing unit and identified in an offset notice in accordance with section 20(2)(a), or

(ii) in relation to a Crown spacing unit adjoining a freehold spacing unit that is the subject of an offset notice, the zone underlying the Crown spacing unit that is the same as the zone identified in the offset notice in accordance with section 20(2)(a);

(o) “Plains Region”, “Northern Region” and “Foothills Region” mean the respective areas of Alberta described in Schedule 1;

(p) “prescribed”, in relation to a fee or rental, means prescribed by the Mines and Minerals Administration Regulation (AR 262/97);

(q) “producing well” means a well that is considered by the Minister to be a producing well on the basis of the records of the Board and other information available to the Minister;

(r) “productive”, in relation to a well or zone, means capable, in the opinion of the Minister, of producing petroleum or natural gas from the well or zone in paying quantity;

(s) “Region” means the Plains Region, the Northern Region or the Foothills Region;

(t) “rig release date”, with respect to a well, means the rig release date for the well according to the records of the Board;

(u) “spacing unit” means

(i) in relation to a well drilled or being drilled,

(A) the drilling spacing unit for the well prescribed by or pursuant to the Oil and Gas Conservation Regulations (AR 151/71), or

(B) where the Board has issued an order suspending the operation of Part 4 of the Oil and Gas Conservation Regulations (AR 151/71) in respect of the area in which the well is drilled or being drilled, the area that was, immediately before the effective date of the order, the drilling spacing unit prescribed for the well by or pursuant to those Regulations,

(ii) the area that would be the drilling spacing unit prescribed for a well by or pursuant to those Regulations if the well were drilled and in the absence of any order of the Board suspending the operation of Part 4 of those Regulations in respect of that area;

(v) “unit agreement”, except in section 24, includes a unit operation order;

(w) “validating well” means a well that qualifies as a validating well under section 9;

(x) “zone” means a stratum or series of strata considered by the Minister to be a zone for the purposes of this Regulation.

AR 263/97 s1;11/2000;251/2001;254/2007

Interpretation provisions related to wells

2 For the purposes of this Regulation,

(a) a reference to “petroleum and natural gas rights” in the location of a licence or lease means petroleum or natural gas or both in the location, the rights to which are granted by the licence or lease;

(b) a reference to a well that will evaluate or has evaluated petroleum and natural gas rights in the location of a licence or lease means a well whose results are expected to provide or have provided, as the case may be, evidence of the presence or absence of petroleum or natural gas in the location, the rights to which are granted by the licence or lease;

(c) a well is in the location of a licence or lease or is drilled or has been drilled in the location of a licence or lease if the well is drilled under the authority of the licence or lease and all or any part of the well‑bore is situated in the location of the licence or lease;

(d) where the location of a licence or lease consists of some but not all of the subsurface areas underlying the surface area of the tract described in the licence or lease as its location, a well is being drilled in the location of that licence or lease if

(i) the well is being drilled under the authority of the licence or lease with the intention of penetrating the location, and

(ii) the well licence issued pursuant to the Oil and Gas Conservation Act for the well authorized the drilling of the well to a zone in the location;

(e) a well is outside the location of a licence or lease if no part of the well‑bore is situated in the location or any other subsurface area underlying the surface area of the tract described in the licence or lease as its location;

(f) if a well is productive from more than one spacing unit, each of those spacing units shall be deemed to have a separate productive well in it;

(g) if a producing well produces petroleum or natural gas from more than one spacing unit, each spacing unit shall be deemed to have a separate producing well in it;

(h) a Crown spacing unit adjoins a freehold spacing unit if the surface areas of the Crown spacing unit and the freehold spacing unit are laterally or diagonally adjoining.

AR 263/97 s2;11/2000

Crown spacing units

3(1) For the purposes of this Regulation, a spacing unit is a Crown spacing unit in respect of petroleum or natural gas if the title to the petroleum or natural gas, as the case may be, in 50% or more of the area of the spacing unit, as determined under subsection (2), is owned by the Crown in right of Alberta.

(2) Where the Crown owns the title to the petroleum or natural gas in less than 100% of the area of a spacing unit, the determination of whether or not the spacing unit is a Crown spacing unit shall be made in accordance with the following:

(a) if the spacing unit consists of a section, quarter‑section or legal subdivision of land, the whole of the area of the spacing unit shall be deemed to contain 256, 64 or 16 hectares respectively;

(b) if the spacing unit does not consist of the whole of a section, quarter‑section or legal subdivision of land, the area of the spacing unit shall be the area determined by the Minister for the purposes of this section;

(c) for the purposes of this subsection, the “Crown portion” of a spacing unit is the portion of the area of the spacing unit in respect of which the Crown in right of Alberta owns the title to petroleum or natural gas or both, calculated in accordance with this subsection;

(d) if the Crown portion of a spacing unit consists of the whole of the location of a licence or lease, the area of the Crown portion is the number of hectares shown in the description of the location in the licence or lease;

(e) if the Crown portion of a spacing unit consists of a part only of the location of a licence or lease, the area of the Crown portion of the spacing unit is the number of hectares in that part of the location used by the Minister in the calculation of the total area shown in the description of the location in the licence or lease;

(f) if the number of hectares in the Crown portion of the spacing unit, as determined under clauses (d) and (e), equals 50% or more of the whole of the area of the spacing unit, the spacing unit is a Crown spacing unit under subsection (1).

Applications for and Rights under Agreements

Rules re applications

3.1(1) Notwithstanding Parts 1 and 2, an application that may be made by a lessee or licensee under a provision of either Part may, if the application is in respect of more than one agreement, only be made by one person who is a person authorized to make the application under section 6 of the Mines and Minerals Administration Regulation (AR 262/97).

(2) An application that may be made under Part 1 or 2 in respect of an agreement may not be made in relation to or on the basis of a well that is not on the location of the agreement, unless

(a) the applicant is authorized to do so by the designated representative, as defined in the Mines and Minerals Administration Regulation, for the agreement on the location of which the well has been or will be drilled, or

(b) the Minister is satisfied that the applicant is authorized to do so by the person who holds the licence for the well issued under the Oil and Gas Conservation Act.

AR 11/2000 s4

Rights granted by an agreement

4(1) Subject to subsection (2) and any terms, conditions or exceptions contained in the agreement, an agreement granting rights to petroleum or natural gas or both conveys

(a) the exclusive right to drill for and recover petroleum and natural gas in the location of the agreement in respect of which rights are granted by the agreement, and

(b) the right to remove from the location any petroleum and natural gas recovered pursuant to clause (a).

(2) An agreement referred to in subsection (1) does not grant the right to

(a) oil sands, or

(b) natural gas, including coalbed methane, in a coal seam that the Minister has authorized the lessee of a coal lease to recover under section 67(2) of the Act.

AR 263/97 s4;251/2001;155/2004

Part 1
Petroleum and Natural Gas Licences

Term of licence

5(1) For the purposes of this Regulation,

(a) the initial term of a licence is the initial term of the licence referred to in section 6(1), and includes any extension of that term under this Regulation or section 8(1)(h) of the Act,

(b) the intermediate term of a licence is the 5‑year period beginning on the commencement date prescribed under subsection (2), and includes any extension of that term under this Regulation or section 8(1)(h) of the Act, and

(c) the combined periods referred to in clauses (a) and (b) are prescribed as the term of a licence for the purposes of sections 82 and 83 of the Act.

(2) The commencement date of the intermediate term of a licence is

(a) subject to clause (b), the date of the expiration of the initial term of the licence as shown in the licence, or

(b) the most recent anniversary of that expiration date, if the initial term, as shown in the licence, is extended for a period of more than one year.

AR 263/97 s5;251/2001

Initial term of licence

6(1) A licence shall be issued for an initial term of

(a) 2 years, if the location is in the Plains Region,

(b) 4 years, if the location is in the Northern Region, or

(2) If

(a) the drilling of a validating well is commenced in the location of a licence before the expiration of the initial term of the licence,

(b) the rig release date for the well occurs after the expiration of the initial term of the licence, and

the initial term of the licence is extended to the expiration of the one‑month period following the rig release date for the well.

(3) If a licensee commences the drilling of any other well in the location of the licence during the period of any extension of the term under subsection (2), except a well that is, by reason of section 26, deemed to be the continuation of the drilling of a well referred to in subsection (2), the well does not qualify as a validating well.

Maximum area of location

7 The maximum area of the location of a licence is

(a) 15 sections in the Plains Region,

(b) 32 sections in the Northern Region, and

Location in more than one Region

8(1) Where the location of a licence lies within more than one of the Regions, then, for the purposes of this Regulation, the location is deemed to be in the Region in which the greatest part of the location is situated.

(2) Subject to subsection (1), if the location of a licence

(a) lies within 2 or 3 Regions and the parts of the location within each of the Regions are equal in area, or

(b) lies within 3 Regions and the parts within 2 of the Regions are equal in area,

then, for the purposes of this Regulation, the location shall be deemed to be wholly within whichever of those Regions would result in the longest term for the licence by reason of section 6(1) if the whole of the location were in that Region.

Validating wells

9(1) Subject to section 6(3) and subsection (5) of this section, the following qualify as validating wells in respect of a licence:

(a) a well that is drilled in the location of the licence during its initial term to at least the minimum depth for the purpose of evaluating petroleum and natural gas rights in the location of the licence;

(b) a well drilled in the location of the licence if

(i) the well is re‑entered during the initial term of the licence,

(ii) the well is either

(A) drilled to at least the minimum depth beyond the total measured depth of the well prior to the re‑entry, or

(B) whipstocked from a point in the well‑bore and drilled beyond that point to at least the minimum depth,

and

(iii) the well is drilled for the purpose of evaluating petroleum and natural gas rights in the location of the licence;

(c) a well drilled outside the location of the licence in a spacing unit part of which is in the location of the licence if

(i) the well is re‑entered during the initial term of the licence,

(ii) the drilling of the well conforms with the requirements in clause (b)(ii) and (iii), and

(iii) no part of the remainder of the area of the spacing unit is within the location of any other licence that is then in its initial term;

(d) a well that is drilled outside the location of the licence in a spacing unit part of which is in the location of the licence if

(i) the well is drilled during the initial term of the licence to at least the minimum depth,

(ii) no part of the remainder of the area of the spacing unit is within the location of any other licence that is then in its initial term, and

(iii) the well, in the opinion of the Minister, evaluates petroleum and natural gas rights in the location of the licence;

(e) a well approved by the Minister as a validating well pursuant to subsection (2), (3) or (4).

(2) The Minister may approve a well as a validating well in respect of a licence if

(a) the licensee applies for the approval before the drilling of the well is commenced,

(b) the well is drilled during the initial term of the licence in a spacing unit no part of which is within the location of the licence,

(d) the well is drilled to at least the minimum depth,

(e) the Minister is satisfied through evidence from the licensee or otherwise that all of the other criteria that the Minister may establish for the drilling of the well as a validating well have been met, and

(f) the Minister is of the opinion that the well will evaluate petroleum and natural gas rights in the location of the licence.

(3) The Minister may approve a well as a validating well in respect of a licence if

(a) the well was drilled in the location of the licence or outside the location of the licence in a spacing unit part of which is in the location of the licence, and is re-entered during the initial term of the licence,

(b) the well does not otherwise qualify as a validating well under subsection (1)(b), and

(c) the Minister is of the opinion that the re-entry operations provide significant new information relating to the evaluation of petroleum and natural gas rights in the location of the licence.

(4) The Minister may approve a well as a validating well in respect of a licence if

(b) the well does not otherwise qualify as a validating well under subsection (1)(b) or (3), and

(5) A well referred to in subsection (1)(b), (1)(c), (3) or (4) may qualify as a validating well under this section only on the basis of one re‑entry operation.

AR 263/97 s9;11/2000;155/2004

Grouping of licences

10(1) In this section and section 11, “grouping well”, in relation to a group of licences approved under this section, means a well that, in the opinion of the Minister, evaluates petroleum and natural gas rights in the locations of all the grouped licences and qualifies under any of the following:

(a) a well that is drilled to at least the minimum depth in the location of one of the grouped licences;

(b) a well drilled in the location of one of the grouped licences if

(i) the well is re‑entered during the initial term of all the grouped licences, and

(ii) the well is either

(A) drilled to at least the minimum depth beyond the total measured depth of the well prior to the re‑entry, or

(B) whipstocked from a point in the well‑bore and drilled beyond that point to at least the minimum depth;

(i) part of which is in the location of one of the grouped licences, and

(ii) no part of which is within the location of any other licence that is then in its initial term;

(d) a well drilled outside the location of the grouped licences in a spacing unit part of which is in the location of one of the grouped licences if

(i) the well is re‑entered during the initial term of all of the grouped licences,

(ii) the drilling of the well conforms to the requirements of clause (b)(ii), and

(iii) no part of the remainder of the area of the spacing unit is within the location of any other licence that is then in its initial term.

(2) The Minister may, on application, approve the grouping of a licence with one or more other licences if

(a) the applicant satisfies the Minister that the well referred to in the application for approval of the group is or will be a grouping well,

(b) the application is received by the Minister not later than one month following the rig release date of the grouping well and while all of the grouped licences are in their initial terms,

(c) all of the licences are in their initial terms when the drilling of the grouping well referred to in the application for approval of the group commences, and

(d) the location of each licence in the group is separated from the location of the licence containing the grouping well by not more than one intervening section at their closest points.

(3) Repealed AR 11/2000 s7.

(4) A group may contain land in more than one Region.

(5) When the Minister approves a group under this section, the group is effective as of the date on which the application for the approval was received by the Minister.

(5.1) A licence may be included in more than one group at the same time.

(6) A licence ceases to be included in a group approved under this section

(a) on the expiry of the initial term of the licence if that term expires before drilling of the well referred to in the application for approval of the group is commenced, or

(b) on the date specified in a notice given by the Minister to the person who applied for approval of the group that indicates that the Minister is of the opinion that the well referred to in the application for approval of the group does not evaluate petroleum and natural gas rights in the location of the licence.

(7) If

(a) the drilling of a grouping well is commenced in the location of one of the grouped licences while all of the grouped licenses are in their initial terms,

(b) the date of expiry of the initial term of one or more of the licences occurs before the rig release date for the well, and

(c) the drilling operations for the grouping well are conducted diligently and continuously to the satisfaction of the Minister,

the initial term of that licence or the initial terms of those licences, as the case may be, are extended to the end of the one‑month period following the rig release date for the well.

AR 263/97 s10;11/2000;155/2004

Selection and validation of location for intermediate term

11(1) Subject to this Regulation, a licensee may apply to the Minister for validation of the land qualified to remain in the location of the licensee’s licence at the commencement of the intermediate term of the licence.

(2) An application under subsection (1) must

(a) be received by the Minister within the 3‑month period before the expiration of the initial term of the licence,

(b) identify the validating wells and grouping wells drilled,

(c) provide sufficient evidence to demonstrate that each of the wells is a validating well or grouping well, as the case may be,

(d) show the licensee’s selection of the land requested for validation, which shall not exceed the number of sections that may remain in the location of the licence at the commencement of the intermediate term in accordance with Schedule 2,

(d.1) provide sufficient evidence to show the deepest zone in which rights may, in accordance with subsection (8), be validated under this section, and

(e) show how much of the land requested for validation is selected by the licensee from each group in which the licence is included.

(3) If an application has not been made pursuant to subsection (1) within the 3‑month period referred to in subsection (2)(a) and the Minister is of the opinion that a well has been drilled by the licensee that is or might be a validating well or grouping well in respect of the licence,

(a) the Minister shall give a notice to the licensee

(i) stating that no application had been received by the Minister within the 3‑month period, and

(ii) stating that the licensee may make an application under subsection (1) within the one‑month period following the date of the notice on payment of the prescribed late application penalty,

and

(b) the licensee may make the application in accordance with the notice.

(3.1) If the Minister disagrees in whole or in part with the application made in accordance with subsection (1) or (3), the Minister shall give a notice to the licensee respecting the disagreement and specifying the period of time within which the licensee is entitled to respond to the notice.

(4) In granting an application made under this section, the Minister

(a) shall determine in accordance with Schedule 2 the number of sections to remain in the location of the licensee’s licence at the commencement of the intermediate term of the licence,

(a.1) shall determine in accordance with subsection (8) the rights that may be validated under this section, and

(b) may determine the configuration of the location of the licence at the commencement of its intermediate term.

(5) An application under this section may relate to any of the licences in a group approved under section 10 and, in that event, the following rules apply:

(a) if a well identified in the application is a grouping well, the Minister’s determinations under subsection (4), to the extent that they are based on that grouping well, may relate to any one or more of the locations of the grouped licences;

(b) if a well identified in the application is a grouping well and the licence locations are in different Regions, the Minister’s determination under Schedule 2, to the extent that it is based on that grouping well, shall be made on the basis of the Region in which the well is situated.

(5.1) The Minister shall not make a final decision in respect of an application made under this section

(a) until after the expiry of the initial term of the licence, or

(b) if a notice was given under subsection (3.1), until after the expiry of the initial term of the licence or the expiry of the period specified in the notice, whichever event occurs last.

(6) On making a decision in respect of an application under this section, the Minister shall give a notice of the decision to the licensee and, on the commencement date of the intermediate term of the licence, the location of the licence ceases to include any land that is not validated under this section as land that qualified to remain in the location of the licence at the commencement of its intermediate term.

(7) Where an application is made under this section on the basis of a validating well approved under section 9(4) then, notwithstanding subsection (4) of this section, the land that may be validated under this section on the basis of that well shall consist of the part of the location within the spacing unit for the validating well, down to the base of the deepest zone from which the validating well is productive.

(8) Notwithstanding any other provision of this section, where an application is made under this section in respect of a licence issued after December 31, 2001, the rights that may be validated under this section shall include any part of the location that consists of

(a) a zone that is fully penetrated by the validating well or grouping well, as the case may be, and

(b) a zone that is penetrated by more than 15 metres by the validating well or grouping well, as the case may be.

AR 263/97 s11;11/2000;155/2004

Licence continuation and offset requirements

12(1) Sections 14 to 18 apply, with the necessary changes, to licences and for that purpose

(a) a reference in those sections to a lessee or a lease shall be read as a reference to a licensee or a licence respectively, and

(b) a reference in those sections to the term of a lease shall be read as a reference to the intermediate term of a licence.

(2) Sections 19 to 23 apply, with the necessary changes, to licences during their intermediate terms and the period of continuation beyond their terms, and for that purpose a reference in those sections to a lessee or a lease shall be read as a reference to a licensee or a licence respectively.

Waiver of rental for licences under former Regulation

13(1) This section applies only to licences issued pursuant to the former Regulation.

(2) Subject to subsections (3) to (5), if a licensee commences the drilling of a validating well or grouping well in the location of the licence, no rental is payable for each year of the remainder of the initial term of the licence, commencing with the year of the initial term following that in which the drilling commenced, with respect to that portion of the total area of the location of the licence that would, in the opinion of the Minister, form the area for an application under section 11 if the application was made on the rig release date for the well.

(3) If the rig release date for the validating well or grouping well has occurred and the area for which an application may be made under section 11 is less than or greater than the portion of the total area in respect of which no rental is payable by virtue of subsection (2), the rental shall be adjusted by the Minister, effective as of the year of the initial term following that in which the drilling commenced, so that the area in respect of which no rental is payable is the actual area for which an application may be made under section 11 on the rig release date for the well.

(4) If an adjustment is made by the Minister pursuant to subsection (3), the Minister or the licensee, as the case may be, shall pay to the other the amount of the overpayment or underpayment, as the case may be, no later than one month after the adjustment is made.

(5) This section does not apply if the drilling of the validating well or grouping well commences during the last year of the initial term of the licence.

Part 2
Petroleum and Natural Gas Leases

Continuation of Leases

Application for continuation of lease

14(1) A lessee may, in accordance with this Regulation and

(a) within the last year of the term of the lease, or

(b) with the consent of the Minister, at any time before the last year of the term of the lease,

apply to the Minister for the Minister’s approval of the continuation of the lease pursuant to section 15, 16 or 17(2)(a) or any combination of them.

(2) If the Minister disagrees in whole or in part with an application made in accordance with subsection (1), the Minister shall give a notice to the lessee respecting the disagreement and specifying the period of time within which the lessee is entitled to respond to the notice.

(3) The Minister shall not make a final decision in respect of an application for continuation approval made under subsection (1)

(a) until after the expiration of the term of the lease, or

(b) if a notice was given under subsection (2), until after the expiration of the term of the lease or the expiration of the period specified in the notice, whichever event occurs last.

(4) On making a decision in respect of an application for continuation approval, the Minister shall give a notice of the decision to the lessee and, subject to subsections (5), (6) and (7) of this section and section 17, the lease after the expiration of its term ceases to include any part of the location that is not approved for continuation by reason of the decision.

(5) Where no application is made under subsection (1) in respect of a lease before the expiration of its term or where an application is made under subsection (1) but omits a reference to any part of the location,

(a) the Minister shall, as soon as practicable after the expiration date, review the Department’s records respecting the lease to determine whether all or part of the location must be approved for continuation by reason of subsection (7) or could be approved for continuation pursuant to

(i) section 15(1)(a) and (2)(a) on the basis of a producing well,

(ii) any other provisions of section 15 except subsections (1)(e) and (2)(e), or

(iii) section 16(2) on the basis of a qualifying well referred to in section 16(1)(a)(i),

if the lessee were to apply for the approval in compliance with a letter sent to the lessee under clause (b),

(b) if the Minister determines under clause (a) that all or part of the location could be approved for continuation, the Minister shall send the lessee a letter that

(i) describes the Minister’s determination,

(ii) states that the lessee may, within the one‑month period following the date of the notice, apply to the Minister for approval of continuation of the lease in accordance with the Minister’s determination, and

(iii) states that the application must be accompanied by payment of the prescribed rental for the first year following the expiration of the term of the lease in respect of the part of the location specified in the application and of the prescribed late application penalty,

and

(c) if the lessee makes an application in compliance with the letter, the Minister shall approve the continuation of the lease in accordance with the application.

(6) Where no application is made under subsection (1) in respect of a lease before the expiration of its term or where an application is made under subsection (1) but omits a reference to any part of the location,

(a) the lessee may apply to the Minister in accordance with clauses (b) and (c) for continuation of the lease after the expiration of its term as to all or part of its location pursuant to

(i) section 15(1)(a) and (2)(a),

(ii) section 15(1)(c) and (2)(c), or

(iii) section 16(2) on the basis of a qualifying well referred to in section 16(1)(a)(i) or (iii),

except any part of the location that is referred to in the letter sent by the Minister to the lessee pursuant to subsection (5)(b),

(b) the application must be made before the end of the 60‑day period following

(i) the date of the letter sent by the Minister to the lessee pursuant to subsection (5)(b),

(ii) the date of a report sent by the Minister to the lessee respecting the expiration of the term of the lease or the part of the location of the lease, as the case may be, or

(iii) the date of a notification by the Minister to the lessee indicating the Minister’s intention to advise the Board of the need to abandon a well in the location,

whichever date occurs last,

(i) the rental for the first year following the expiration of the term of the lease in respect of the part of the location specified in the application,

(ii) the prescribed late application penalty, and

(iii) evidence that in the opinion of the Minister supports the continuation of the lease as to all or part of its location pursuant to the provision referred to in clause (a) upon which the application is based,

and

(d) if the lessee makes an application under this subsection in compliance with clauses (a), (b) and (c), the Minister shall approve the continuation of the lease as to the location or part of the location, as the case may be,

(i) contained in the spacing unit for the well down to the base of the productive zone that is stratigraphically the deepest in that spacing unit, where the application is made pursuant to clause (a)(i),

(ii) contained in the spacing unit adjoining the spacing unit for the freehold well down to the base of the offset zone from which the freehold well is producing petroleum or natural gas, if the lessee has also complied with section 15(1)(c), where the application is made pursuant to clause (a)(ii), or

(iii) contained in the section of land in which the qualifying well is drilled, where the application is made pursuant to clause (a)(iii).

(7) If the Minister determines under subsection (5)(a) that all or part of the location is qualified for continuation

(a) under section 15(1)(b) and (2)(b),

(b) under section 15(1)(d) and (2)(d), or

the Minister shall approve that part of the location or that subsurface area for continuation and notify the lessee accordingly.

(8) The Minister may not approve the continuation or further continuation of a lease under this Part except on the basis of

(a) an application authorized by this Part and made in accordance with this Regulation,

(b) an acceptance of an offer made in accordance with section 17, or

AR 263/97 s14;11/2000;155/2004

Qualifications for continuation

15(1) Subject to section 14 and subsections (2) and (3) of this section, the Minister, in accordance with this Regulation, shall approve the continuation of a lease after the expiration of its term to the extent that the location is within any or all of the following:

(a) the spacing unit for a well that is productive from a zone in the location;

(b) a spacing unit all or part of which is within the unit area of a unit agreement to which the lease is subject;

(i) in accordance with this Regulation and before the expiry of the term of the lease, the lessee has notified the Minister in writing that the lessee elects to pay offset compensation in respect of the location or the part of the location within the spacing unit, and

(ii) offset compensation is being paid in respect of the location or the part of the location within the spacing unit;

(d) a spacing unit all or part of which is within the area of a gas storage agreement to which the lease is subject;

(e) a spacing unit all or part of which is productive from a zone in the location.

(2) The Minister’s approval under subsection (1), in relation to a spacing unit containing the location or any part of the location, shall be granted down to the base of whichever of the zones described in the following clauses is stratigraphically the deepest in that spacing unit:

(a) the deepest zone from which the well is productive, if continuation is approved under subsection (1)(a) in relation to that spacing unit;

(b) the deepest zone that is subject to a unit agreement, where continuation is approved under subsection (1)(b) in relation to that spacing unit;

(c) the offset zone from which the freehold well is producing petroleum or natural gas, if continuation is approved under subsection (1)(c) in relation to that spacing unit;

(d) the deepest zone that is subject to a gas storage agreement, if continuation is approved under subsection (1)(d) in relation to that spacing unit;

(e) the deepest productive zone, if continuation is approved under subsection (1)(e) in relation to that spacing unit.

(3) If the Minister approves the continuation of a lease after the expiration of its term under section 16 as to all or part of the location, this section does not apply to the lease or to the part of the location, as the case may be, while the lease is continued under section 16.

AR 263/97 s15;11/2000;155/2004

Continuation by reason of drilling

16(1) For the purposes of this section,

(a) a well is a “qualifying well” in relation to a lease if the well qualifies under any of the following subclauses at the expiration of the term of the lease or the expiration of a continuation period of the lease, as the context requires:

(i) a well that is being drilled in the location of the lease or in a section of land containing all or part of the location of the lease;

(ii) a well that is being drilled outside the location of the lease and, in the opinion of the Minister, will evaluate petroleum and natural gas rights in the location of the lease;

(iii) a well that has been drilled in the location of the lease or in a section of land containing all or part of the location of the lease, but in respect of which the 3‑month period following the rig release date for the well has not yet expired;

(iv) a well that has been drilled outside the location of the lease and, in the opinion of the Minister, has evaluated petroleum and natural gas rights in the location of the lease, but in respect of which the 3‑month period following the rig release date for the well has not yet expired;

(a.1) the “qualifying area”, in relation to a qualifying well, is

(i) the location of the lease in respect of which the well is a qualifying well by virtue of clause (a)(i) or (iii), and

(ii) the portion of the location of each lease

(A) in respect of which the well is a qualifying well by virtue of clause (a)(ii) or (iv), and

(B) that is contained within a section that either adjoins the section containing the well or that is less than one intervening section from the section containing the well, at their closest points,

but does not include the part of a location in respect of which an application is made for approval of continuation under section 15 or 17(2)(a);

(b) a well shall be construed as being drilled at the expiration of the term of a lease or at the expiration of a continuation period of a lease, as the context requires, if the rig release date for the well has not yet occurred at that expiration date;

(c) an “initial continuation period” in relation to a lease is the period of continuation referred to in subsection (4) and includes any extension of that period granted under subsection (8);

(d) a “further continuation period” in relation to a lease is a period of further continuation referred to in subsection (5) and includes any extension of that period granted under subsection (8);

(e) a “continuation period” in relation to a lease means the initial continuation period of the lease or a further continuation period of the lease.

(2) Subject to section 14, if at the expiration of the term of a lease there are one or more qualifying wells in relation to the lease, the Minister shall approve the continuation of the lease after the expiration of its term with respect to the whole or part of its location in accordance with subsection (3).

(3) The following rules apply with respect to applications for continuation approval under subsection (2):

(a) subject to clause (d), the application must be made pursuant to clause (b) or (c) of this subsection and not a combination of both and no application based on a single qualifying well may be made more than once;

(b) the application may, if it is based on a qualifying well, seek approval of continuation for any portions of the locations of one or more leases where the portions are within the qualifying area of the well and the portions do not exceed in aggregate 5 sections in area;

(c) the lessee may apply for approval of continuation as to the whole or any part of the location, if the application is accompanied by technical data that, in the opinion of the Minister, demonstrates that the qualifying well will evaluate or has evaluated petroleum and natural gas rights in the location or the part of the location of the lease sought to be continued under this clause;

(d) if the Minister disagrees with an application under clause (c) and sends a notice to the lessee respecting the disagreement pursuant to section 14(2), the lessee may, in response to that notice, apply instead for approval of continuation under clause (b), if the lessee is eligible to apply under clause (b) and the well is a qualifying well in relation to the location of one or more leases in the qualifying area by virtue of subsection (1)(a)(i) or (iii).

(4) Where a lease is approved for continuation pursuant to subsection (2) as to the whole or part of its location, the lease expires with respect to the location or the part of the location so continued

(a) at the end of the 6‑month period following

(i) the rig release date for the qualifying well, or

(ii) where there are 2 or more qualifying wells, the last of the rig release dates for those wells,

(b) at the end of any extension of that period granted pursuant to subsection (8),

subject to being further continued pursuant to subsection (5).

(5) Where a lease is approved for continuation pursuant to subsection (2) for its initial continuation period, the Minister shall approve one or more further continuation periods for the lease if in the case of each further continuation period the following requirements are met:

(a) an application for approval of the further continuation period must be made to the Minister before the expiration of the initial continuation period or the expiration of the then current further continuation period, as the case may be;

(b) there must be at least one qualifying well in relation to the lease at the expiration of the initial continuation period or the then current further continuation period, as the case may be.

(6) Where the location or part of the location is approved for continuation pursuant to subsection (2), the area so approved remains the same during any further continuation period except to the extent that it is reduced by reason of the approval of continuation of part of the location pursuant to section 15 or by reason of a surrender.

(7) Where a lease is approved for further continuation pursuant to subsection (5), the period of further continuation expires

(a) at the end of the 3‑month period following

(i) the rig release date for the well, or

(ii) where there are 2 or more qualifying wells, the last of the rig release dates for those wells,

(b) at the end of any extension of that period granted pursuant to subsection (8).

(8) If a lease is approved for continuation for an initial continuation period or a further continuation period, the Minister may from time to time grant an extension of that continuation period subject in the case of each extension to the following:

(a) the lessee must apply to the Minister for the extension before the continuation period expires;

(b) the application will be granted only if the Minister considers the extension warranted in the circumstances.

(9) If a lease is further continued pursuant to subsection (5) for one or more further continuation periods, the lease expires at the end of the further continuation period or the last of the further continuation periods, as the case may be, unless it is approved for continuation under section 15 as a result of an application under subsection (10).

(10) Before a lease expires at the end of a continuation period by reason of subsection (4) or (9), the lessee may apply for approval of the further continuation of the lease pursuant to section 15 as to all or any part of the location, as the case may be, and for that purpose section 14 applies, with the necessary changes, as though the expiration of the continuation period were the expiration of the term of the lease.

AR 263/97 s16;11/2000;155/2004

Continuation as to potentially productive part of the location

17(1) In this section,

(a) “offer notice” means a notice referred to in subsection (4);

(b) “potentially productive part of the location”, in relation to a lease, means

(i) a part of the location of the lease in which one or more potentially productive zones occur, or

(ii) a subsurface area lying stratigraphically below the base of the deepest productive zone in all or part of the location of the lease and in which one or more potentially productive zones occur;

(c) “potentially productive zone” means a zone that is, in the opinion of the Minister, potentially capable of producing petroleum or natural gas or both in paying quantity.

(2) The Minister may approve the continuation of a lease in respect of a potentially productive part of the location pursuant to this section on the basis of

(a) an application made in accordance with subsection (3), or

(b) an acceptance made in response to an offer notice given to the lessee.

(3) An application referred to in subsection (2)(a)

(a) must be made by the lessee before the expiration of the term of the lease in accordance with section 14(1) to (4), and

(b) shall show the potentially productive part of the location in respect of which the approval of continuation is sought.

(4) Where

(a) an application is made under section 14 before the expiration of the term of the lease for approval of the continuation of the lease pursuant to section 15 or 16 or both, and

(b) the Minister disagrees with the application in whole or in part but considers any part of the location or any subsurface area in all or part of the location not approved for continuation under section 15 or 16 to be a potentially productive part of the location,

the Minister, by a notice given to the lessee in accordance with subsection (5), may offer to approve the continuation of the lease as to the potentially productive part of the location.

(5) An offer notice

(a) shall contain the Minister’s offer and describe the potentially productive part of the location and the potentially productive zone or zones in it,

(b) shall state that the lessee may accept the Minister’s offer for the continuation of the lease in respect of all or part of the potentially productive part of the location described in the offer notice,

(i) the rental for any part of the location in respect of which the rental has not yet been paid for the first year following the expiration of the term of the lease, and

(ii) the prescribed acceptance fee,

(d) may prescribe any other requirements respecting the offer or any conditions on which the Minister may approve continuation under this section, and

(e) if a notice is given to the lessee pursuant to section 14(2), shall be included in or accompany that notice.

(6) If an application referred to in subsection (2)(a) is granted by the Minister or the lessee accepts the Minister’s offer in accordance with the offer notice, the Minister may approve the continuation of the lease as to

(a) the potentially productive part of the location, or

(b) a portion of the potentially productive part of the location described in the offer notice, as determined by the Minister, if the lessee’s acceptance relates to less than the whole of the potentially productive part of the location,

for a period of one year from the expiration of the term of the lease and on the terms and conditions the Minister prescribes.

(7) Where an acceptance is made in response to an offer notice, an approval of continuation granted pursuant to subsection (6) is effective as of the expiration of the term of the lease.

(8) If a continuation approval is granted pursuant to subsection (6), the lease expires with respect to the potentially productive part of the location so continued at the end of the one‑year period unless it is approved for further continuation under section 15 or 16 as a result of an application referred to in subsection (9).

(9) Before a lease expires with respect to the potentially productive part of the location at the end of the one‑year period pursuant to subsection (8), the lessee may apply for approval for the further continuation of the lease pursuant to section 15 or 16 as to all or any portion of the potentially productive part of the location and for that purpose section 14 applies, with the necessary changes, as though the expiration of the one‑year period were the expiration of the term of the lease.

Notice respecting non-productivity

18(1) The Minister may give a lessee written notice in accordance with this section if

(a) the lease is continued pursuant to section 15(1)(a) or (e) as to all or any part of its location in a spacing unit and the Minister considers that the deepest productive zone in the spacing unit is then no longer productive,

(b) the lease is continued pursuant to section 15(1)(b) as to all or part of its location in a spacing unit and the deepest productive zone in the spacing unit is then no longer subject to a unit agreement,

(c) the lease is continued pursuant to section 15(1)(c) as to all or part of its location in a Crown spacing unit and the freehold well concerned has, for a continuous 6‑month period, ceased to produce petroleum or natural gas from the zone that is the same as the deepest productive zone in the Crown spacing unit, and the Minister considers the zone in the freehold spacing unit to be no longer productive, or

(d) the lease is continued pursuant to section 15(1)(d) as to all or part of the location in a spacing unit and the deepest productive zone in the spacing unit is then no longer subject to a gas storage agreement.

(2) In this section, “subsurface portion”, in relation to a location or part of a location of a lease contained in a spacing unit referred to in a notice given under this section, means the portion of the subsurface in that spacing unit that lies stratigraphically between

(a) the base of the zone specified in the notice and within that spacing unit, and

(b) the base of the deepest productive zone in that spacing unit.

(3) Subject to subsection (4), a notice under this section shall relate to

(a) the location or the part of the location contained in the spacing unit referred to in subsection (1)(a), where the notice is given pursuant to subsection (1)(a),

(b) the location or the part of the location contained in the spacing unit referred to in subsection (1)(b), where the notice is given pursuant to subsection (1)(b),

(c) the location or the part of the location contained in the Crown spacing unit referred to in subsection (1)(c), where the notice is given pursuant to subsection (1)(c), or

(d) the location or the part of the location contained in the spacing unit referred to in subsection (1)(d), where the notice is given pursuant to subsection (1)(d).

(4) A notice under this section may be confined to a subsurface portion of the location or part of the location to which the notice relates by reason of subsection (3).

(5) A notice under this section shall state that, after the expiration of one year following the date on which the notice is given, the lease will expire as to the whole or part of the location to which the notice relates or the subsurface portion to which the notice relates, as the case may be, except to the extent that it is continued by reason of subsection (9).

(6) The Minister may from time to time extend the one‑year period under a notice given pursuant to subsection (1) if

(a) the lessee applies for the extension before the expiration of the one‑year period or of the previous extension, as the case may be, and

(b) the Minister considers the extension to be warranted in the circumstances,

and, on the granting of the extension, a reference in subsection (8) or (9) to a one‑year period shall, in relation to the lease, be deemed to be a reference to the extended period.

(7) The Minister may at any time withdraw a notice given under this section

(a) in its entirety,

(b) with respect to one or more of the spacing units to which the notice relates, or

(c) with respect to all or part of the subsurface portion in one or more of the spacing units to which the notice relates.

(8) If a notice is given to a lessee pursuant to this section then, subject to subsection (9), the lease expires at the end of the one‑year period referred to in the notice as to the whole or part of the location or the subsurface portion, as the case may be, to which the notice relates.

(9) Before a lease expires in respect of all or part of its location or a subsurface portion, as the case may be, at the end of the one‑year period pursuant to subsection (8), the lessee may apply for approval of the continuation of the lease pursuant to section 15 or 16 as to the location or the part of the location or the subsurface portion, as the case may be, or any lesser area or subsurface portion, and for that purpose section 14 applies, with the necessary changes, as though the expiration of the one‑year period were the expiration of the term of the lease.

Offset Requirements

Interpretation of offset requirement provisions

19(1) In this section and sections 20 to 23,

(a) “offset obligation” means the requirements described in section 20(2)(b) and contained in an offset notice;

(b) “offset notice” means a notice given pursuant to section 20(1);

(c) “offset well” means a well required to be put on production of petroleum or natural gas by a lessee pursuant to an offset notice;

(d) “solution gas” means the gaseous component of petroleum that is separated from crude oil after the recovery of the petroleum from a well;

(e) “6‑month notice period”, in relation to an offset notice, means the 6‑month period following the date of the notice and any extension of that period granted under section 21 of this Regulation or section 8(1)(g) of the Act.

(2) In this section and sections 20 to 23, the definitions of “natural gas” and “petroleum” in section 80(2) of the Act do not apply.

(3) Where a freehold spacing unit adjoining a Crown spacing unit has

(a) a producing well producing from more than one zone, or

(b) 2 or more producing wells each producing from one or more zones,

an offset notice pertaining to that freehold spacing unit may relate to and identify each of those zones and, in that case, references in this section and sections 20 to 23 to an offset zone shall be read as references to each of those zones.

AR 263/97 s19;11/2000;251/2001;155/2004

Offset notice

20(1) The Minister may give a notice to a lessee in accordance with this section where

(a) there is a producing well producing from a zone in a freehold spacing unit adjoining a Crown spacing unit containing all or part of the location of the lessee’s lease,

(b) there is no well producing petroleum or natural gas from the offset zone in the Crown spacing unit, and

(2) An offset notice shall

(a) identify the zone in the freehold spacing unit to which the offset notice relates,

(b) require the lessee within the 6-month notice period

(i) to put a well on production of petroleum or natural gas from the offset zone in the Crown spacing unit and notify the Minister that the lessee has done so, or

(ii) to prove to the Minister’s satisfaction that the offset zone in the Crown spacing unit is not productive,

and

(c) describe the lessee’s alternative courses of action under subsection 3(a) and (b) and the circumstances described in subsection 3(c) in which the lessee’s offset obligation need not be fulfilled.

(3) A lessee to whom an offset notice is given

(a) may defer the lessee’s offset obligation by notifying the Minister in writing, within the 6‑month notice period, that the lessee elects to pay offset compensation in accordance with sections 22 and 23;

(b) may, within the 6-month notice period, submit to the Minister a surrender of the lease, the part of the location of the lease within the Crown spacing unit or the part of the location down to the base of the offset zone in the Crown spacing unit, excepting

(i) each zone in which a producing well is producing, and

(ii) each zone that is subject to a unit agreement or a gas storage agreement;

(i) the freehold well is abandoned,

(ii) the freehold well is abandoned in the offset zone,

(iii) the Board makes an order that reduces the size of the spacing unit for the freehold well with the result that the reduced spacing unit containing the freehold well no longer adjoins the Crown spacing unit, or

(iv) the offset zone underlying the location or part of the location within the Crown spacing unit becomes subject to a unit agreement or gas storage agreement.

(4) Where at the end of the 6-month notice period in respect of an offset notice

(a) the lessee has not complied with the notice,

(b) the lessee’s offset obligation is not deferred pursuant to subsection 3(a),

(d) the lessee is not excused from fulfilling the lessee’s offset obligation by reason of subsection 3(c),

the Minister may, subject to subsection (5), cancel the lease with respect to the part of the location of the lease within the Crown spacing unit in one or more of the zones down to the base of the offset zone.

(5) The Minister may not cancel a lease under subsection (4) or accept a surrender under subsection 3(b) in respect of a zone in the Crown spacing unit

(a) in respect of which, during the 6-month notice period, a well has commenced production of petroleum or natural gas, or

(b) that, during the 6-month notice period, becomes subject to a unit agreement or a gas storage agreement.

(6) Where, after an offset notice is given, the Board makes an order that has the effect of changing the area of the Crown spacing unit referred to in the offset notice into smaller spacing units, the offset notice is deemed to be amended to refer to the smaller Crown spacing unit or units adjoining the freehold spacing unit.

(7) The Minister may at any time withdraw an offset notice

(a) in its entirety,

(b) with respect to part of the spacing unit to which the notice relates, or

AR 263/97 s20;11/2000;155/2004

Review of offset notice

21(1) A lessee to whom an offset notice is given may apply to the Minister for a review of the decision to give the notice, or of any requirement contained in the notice, if, when the application for review is made, the lessee

(a) notifies or has notified the Minister under section 20(3)(a) of the lessee’s election to pay offset compensation, or

(b) submits or has submitted a surrender under section 20(3)(b).

(2) An application under this section in respect of an offset notice must be made before the end of the 6‑month notice period and must show either

(a) that the offset notice was not authorized by section 20(1), or

(b) the relief sought by the applicant under subsection (3)(b) or (c) and the grounds on which the relief is sought.

(3) On concluding a review under this section, the Minister may

(a) where the applicant claims that the giving of the offset notice was not authorized by section 20(1),

(i) confirm the decision to give the offset notice, or

(ii) withdraw the offset notice,

(b) withdraw the offset notice if the Minister is satisfied, on the basis of the evidence provided by the applicant, that the withdrawal of the offset notice is warranted in the circumstances,

(d), (e) repealed AR 11/2000 s14;

(f) consent to a surrender pursuant to section 20(3)(b) that excepts a productive zone in addition to the zones referred to in section 20(3)(b)(i) and (ii) and (5).

(4) A decision by the Minister under subsection (3) to withdraw an offset notice does not preclude the Minister from giving another offset notice relating to the same Crown spacing unit.

AR 263/97 s21;11/2000;155/2004

Liability to pay offset compensation

22(1) A lessee is liable to the Crown for the payment of offset compensation if

(a) the lessee is given an offset notice and notifies the Minister in accordance with section 20(3)(a) of the lessee’s election to pay offset compensation, or

(b) the Minister gives a notice to the lessee pursuant to subsection (2) requiring the lessee to pay offset compensation.

(2) Where

(a) a lessee has fulfilled the lessee’s offset obligation by putting a well on production of petroleum or natural gas from the offset zone in the Crown spacing unit and has notified the Minister that it has done so, or

(b) the lessee’s liability to pay offset compensation has terminated in accordance with subsection (5)(a) by virtue of a well producing from the offset zone in the Crown spacing unit,

the Minister may give a notice to a lessee requiring the lessee to pay offset compensation where

(c) the well has not produced petroleum or natural gas from the offset zone for a period of at least 3 consecutive months, or

(d) the Minister is of the opinion that the production of petroleum or natural gas from that well from the offset zone over a specified period is unduly or unjustifiably less than the production of petroleum or natural gas from the offset zone in the freehold spacing unit during the same period.

(3) A lessee to whom a notice is given pursuant to subsection (2) may apply to the Minister within the period specified in the notice for a review of the Minister’s decision to give the notice and, on concluding the review, the Minister may

(a) confirm the decision,

(b) withdraw the notice if the Minister, on the basis of the evidence provided by the applicant, considers the withdrawal of the notice warranted in the circumstances, or

(4) The liability of a lessee to pay offset compensation commences with

(a) the month following the month in which the 6‑month notice period expires, where the liability arises under subsection (1)(a), or

(b) the month in which the period specified in the notice under subsection (2) expires, where the liability arises under subsection (1)(b).

(5) The liability of a lessee to pay offset compensation ends if any of the following events occur and the Minister receives and approves an application from the lessee for such termination that satisfies the Minister as to the occurrence of the event:

(a) a producing well commences producing petroleum or natural gas from the offset zone in the Crown spacing unit, and the lessee notifies the Minister that the well is doing so;

(b) the Minister receives from the lessee a surrender that is accepted by the Minister and that surrenders

(i) the lease or the part of the location of the lease containing the Crown spacing unit, or

(ii) the part of the location of the lease within the Crown spacing unit down to the base of the offset zone, excepting each zone lying stratigraphically above the offset zone that is either productive or is subject to a unit agreement or gas storage agreement;

(c) the Board issues an order that reduces the area of the spacing unit for the freehold well with the result that the spacing unit for the freehold well no longer adjoins the Crown spacing unit;

(d) the offset zone in the Crown spacing unit becomes subject to a unit agreement or a gas storage agreement.

(5.1) The liability of a lessee to pay offset compensation ends on the first day of the month in which the Minister receives an application under subsection (5) if the Minister subsequently approves the application.

(5.2) The liability of a lessee to pay offset compensation ends as of the day on which either of the following occurs:

(a) the Minister is satisfied that the freehold well has, for a period of at least 6 consecutive months, ceased to produce petroleum or natural gas, as the case may be, from the offset zone in the freehold spacing unit and that the offset zone is no longer productive, or

(b) the freehold well, according to the Board’s records, is abandoned in its entirety or in the offset zone.

(6) Notwithstanding anything in this section, the lessee may apply to the Minister, at any time after the liability for offset compensation commences, to have the lessee’s liability terminated and, on considering the application and the lessee’s evidence, the Minister may by notice direct that the liability be terminated as of the date specified in the notice or may refuse to grant the application.

(7) If a Crown spacing unit adjoins more than one freehold spacing unit each of which contains a well producing petroleum or natural gas from the same zone, the liability of a lessee to pay offset compensation applies in respect of each of those freehold wells and for that purpose a reference in this section or section 23 to a freehold well shall, in relation to that Crown spacing unit, be read as referring to each of those freehold wells.

(8) A person who is liable to pay offset compensation is indebted to the Crown in right of Alberta.

AR 263/97 s22;11/2000;155/2004

Calculation and payment of offset compensation

23(1) Offset compensation payable by a lessee

(a) for any month during which the lessee’s liability for offset compensation arises under section 22(4) shall be an amount equal to the value of the Crown’s royalty share of petroleum and natural gas that would have been payable to the Crown if the freehold well had instead produced the petroleum or natural gas during that month from the offset zone in the Crown spacing unit,

(b) shall be reduced by the amount of any deductions allowed under subsection (3), and

(2) For the purposes of subsection (1)(a),

(a) the value of the Crown’s royalty share of petroleum

(i) for any month prior to February, 2000 shall, in respect of crude oil, be calculated by using the new oil par price prescribed for that month under the Petroleum Royalty Regulation (AR 248/90), and

(ii) for any month from and after February, 2000 and before January 1, 2009 shall, in respect of crude oil, be calculated using the par price prescribed for that month under the Petroleum Royalty Regulation (AR 248/90) that would apply to the petroleum produced from the freehold well if the well had instead produced the petroleum from the offset zone in the Crown spacing unit, and

(iii) for any month from and after January 1, 2009 shall, in respect of crude oil, be calculated using the par price prescribed for that month under the Petroleum Royalty Regulation, 2009 that would apply to the petroleum produced from the freehold well if the well had instead produced the petroleum from the offset zone in the Crown spacing unit,

and

(b) the value of the Crown’s royalty share of natural gas and solution gas for any month shall be calculated by using 80% of the Gas Reference Price prescribed by the Minister for that month pursuant to the Natural Gas Royalty Regulation, 1994 (AR 351/93), the Natural Gas Royalty Regulation, 2002 (AR 220/2002) or the Natural Gas Royalty Regulation, 2009, with no deductions for any costs or allowances incurred in gathering, processing or reprocessing.

(3) Where a lessee is liable for the payment of offset compensation in respect of any month by reason of a notice given under section 22(2), the amount of the offset compensation for that month shall be reduced by the following amounts:

(a) the amount representing the value to the Crown, as determined by the Minister, of crude oil recovered from the offset well in that month;

(b) the amount obtained by multiplying the quantity, in gigajoules, of the Crown’s royalty share of natural gas and solution gas recovered from the offset well in that month by 80% of the Gas Reference Price for the month.

(4) A lessee who is liable to pay offset compensation shall make each payment to the Minister no later than 30 days after being sent an invoice for the amount by the Minister.

(5) If

(a) a lessee is liable to pay offset compensation in respect of petroleum for any month prior to February, 2000 the value of which was calculated in respect of crude oil using the new oil par price referred to in subsection (2)(a)(i), and

(b) within 3 months after the date of the invoice sent under subsection (4) setting out the offset compensation the lessee provides proof satisfactory to the Minister that the average price received in the month for crude oil produced from the freehold well in connection with which the liability arose is less than that new oil par price,

the value of the offset compensation shall be calculated using that average price instead of that new oil par price.

AR 263/97 s23;11/2000;220/2002;155/2004;221/2008;222/2008

Part 3
General

Withdrawal of Crown from unit agreement

24(1) In this section,

(a) “unit agreement” means a unit agreement as defined in the Act;

(b) “unit operations”, in relation to a unit agreement, means any operations or activities conducted for the purpose of producing petroleum or natural gas pursuant to the unit agreement or any other operations or activities conducted for the purpose of developing or exploiting petroleum or natural gas pursuant to the unit agreement;

(c) “unit operator” means the person who is the unit operator under a unit agreement according to the records of the Department.

(2) If no unit operations have been conducted under a unit agreement for a period of at least 12 consecutive months, the Minister may give a notice to

(a) the unit operator, and

(b) the persons who, according to the records of the Department, are the working interest owners under the unit agreement,

stating that the Crown intends to withdraw as a party to the unit agreement after the end of the 3‑month period following the date of the notice.

(3) The unit operator or a person authorized for the purpose by the unit operator may apply to the Minister to withdraw the notice given under subsection (2).

(4) An application under subsection (3)

(a) must be made before the end of the 3‑month period following the date of the notice, and

(b) must be accompanied by evidence showing

(i) that unit operations had not ceased before the date of the notice,

(ii) that unit operations have recommenced since that date and are continuing in good faith, or

(iii) that on the date of the notice, unit operations were suspended in circumstances where the obligation of the unit operator to perform those operations was suspended pursuant to the force majeure provisions of the unit agreement.

(5) The Minister may, on application, extend the 3‑month period referred to in subsection (4)(a) if the Minister considers the extension warranted in the circumstances, whether the application is made before or after the expiry of the 3‑month period.

(6) Unless the Minister sooner withdraws a notice given under subsection (2), the Minister may make a declaration stating that the Crown has withdrawn as a party to the unit agreement as of the date specified in the declaration if

(a) an application was not made under subsection (3) in accordance with subsection (4), or

(b) an application was made under subsection (3) but the Minister considered that the evidence accompanying the application was insufficient to support the request for the withdrawal of the notice or that the application was not made in good faith.

(7) The Crown ceases to be a party to a unit agreement as of the date specified in the declaration of withdrawal made by the Minister under subsection (6).

(8) A declaration of withdrawal made by the Minister under subsection (6) must be published in The Alberta Gazette.

Proof of ownership of freehold rights

25 If the location of a licence or lease forms a part only of a spacing unit and the title to the petroleum or natural gas or both in the remainder of the spacing unit is not owned by the Crown in right of Alberta,

(a) the Minister may give a notice to the licensee or lessee, as the case may be, requiring the licensee or lessee to provide to the Minister, within the period specified in the notice, proof that the licensee or lessee has the right to drill for and recover petroleum or natural gas or both with respect to that remainder of the spacing unit, and

(b) the Minister may cancel the licence or lease if the notice under clause (a) is not complied with.

Time extensions related to drilling problems

26(1) If, due to mechanical or other difficulties encountered in the drilling of a well referred to in any provision of this Regulation, the well cannot be completed but within one month from the cessation of those drilling operations the drilling of another well is commenced

(a) in the same spacing unit, or

(b) with the consent of the Minister, in another spacing unit,

the drilling of that other well shall be deemed to be a continuation of the drilling of the uncompleted well.

(2) The Minister may, on application, extend the one‑month period under subsection (1), if the Minister considers the extension warranted in the circumstances.

Determination of Crown ownership in
crude oil and natural gas

26.1(1) In this section,

(a) “crude oil” means crude oil as defined in the Petroleum Royalty Regulation, 2009;

(b) “field condensate” means field condensate as defined in the Natural Gas Royalty Regulation, 2009;

(d) “production entity” means

(i) a drilling spacing unit prescribed or established pursuant to regulations under the Oil and Gas Conservation Act, to the extent the drilling spacing unit is not included in a block or area described in subclause (ii), (iii) or (iv),

(ii) a block established pursuant to regulations under the Oil and Gas Conservation Act,

(iii) the area of a project as defined in the Oil and Gas Conservation Act, or

(iv) the unit area under a unit agreement or unit operation order;

(e) “solution gas” means solution gas as defined in the Natural Gas Royalty Regulation, 2009;

(f) “well event” means well event as defined in the Petroleum Royalty Regulation, 2009.

(2) If the whole or part of a location forms a part only of a production entity other than the unit area under a unit agreement or unit operation order,

(a) the percentage of Crown ownership in crude oil, natural gas or solution gas recovered from a well event or events in the production entity, or gas product or field condensate obtained from that gas is

(i) the proportion that the area of the location within the production entity bears to the whole area of the production entity, or

(ii) if the production entity is a drilling spacing unit and an order under section 80 or 81 of the Oil and Gas Conservation Act is in effect with respect to the spacing unit, the proportion that the production allocated to the location or to the part of the location contained in the spacing unit bears to the whole of the production from the spacing unit,

and

(b) the well event or events in the production entity are deemed to be in the location or part of the location.

(3) If the production entity is a drilling spacing unit that is partly inside and partly outside the unit area under a unit agreement or unit operation order,

(a) the crude oil, natural gas or solution gas recovered from a well event in the drilling spacing unit or gas product or field condensate obtained from that gas must be allocated to the parts of the drilling spacing unit inside or outside the unit area, and

(b) the percentage of Crown ownership in the parts allocated under clause (a)

(i) inside the unit area is as stipulated in the unit agreement or unit operation order, and

(ii) outside the unit area is the proportion that those parts bear to the drilling spacing unit outside of the unit area.

(4) For the purposes of subsection (2)(a)(i), the production entity for a well event in a well designated by the Energy Resources Conservation Board as a gas well producing crude oil is the quarter section of land on which the well is located, unless the Minister otherwise designates a larger or smaller area of land.

AR 222/2008 s17

Transitional

Interpretation of transitional provisions

27 In sections 28 to 33,

(a) “former continuation rules” means

(i) sections 90 and 94 to 97 of the Act, as they stood on December 31, 1997, and

(ii) sections 23 and 24 of the former Regulation;

(b) “new continuation rules” means sections 14 to 17 of this Regulation;

Licences under former Regulation

28(1) Except as otherwise provided in subsections (2) and (3), this Regulation applies to every licence issued under the former Regulation and having a term expiring on or after January 1, 1998.

(2) If

(a) the term of a licence issued under the former Regulation expires on or after January 1, 1998,

(b) the location of the licence was in, or deemed to be in, the Plains Area under the former Regulation, and

the Minister, in granting an application under section 11(1) of this Regulation, shall use the Table in Schedule B of the former Regulation to determine the number of sections of land to remain in the location of the licence at the commencement of its intermediate term.

(3) If

(a) 2 licences issued under the former Regulation were grouped under section 10 of the former Regulation before January 1, 1998,

(b) 2 licences issued under the former Regulation are grouped under section 10 of this Regulation, or

(c) a licence issued under the former Regulation and a licence issued under this Regulation are grouped under section 10 of this Regulation,

and, in the absence of the enactment of this Regulation, the licensee or licensees would have been entitled to apply for leases having aggregate locations containing more than 15 sections of land, the Minister, in granting an application under section 11(1) of this Regulation in relation to those licences, shall use the Table in Schedule B of the former Regulation to determine the aggregate number of sections of land to remain in the locations of the licences at the commencement of their intermediate terms.

(4) Where the term of a licence issued under the former Regulation expired on or before December 31, 1997 but all of the procedures respecting lease selection and issuance had not been completed before that date, sections 11 and 12 and Schedules A and B of the former Regulation continue to apply to the licence as though those sections and Schedules had not been repealed.

Pre‑1998 leases

29(1) Subject to subsection (2), this Regulation applies to every lease issued before January 1, 1998.

(2) Except as otherwise provided in sections 30 and 31, the former continuation rules apply to a lease whose term expired before January 1, 1998 until the decision is finally made in respect of an application under section 94 of the Act for approval of continuation of the lease after the expiration of its term.

Continuation under section 96 of the Act

30(1) Where as of January 1, 1998, a lease is being continued as to the whole or any part of its location for a period pursuant to section 96(1) or (4) of the Act or any extension of that period, the period is automatically extended for a further 3‑month period and, at the end of that 3‑month period, section 16 of this Regulation applies, and the former continuation rules cease to apply, to the lease with respect to the whole or part of the location so continued as though the expiration of the 3‑month extension period were the expiration of its initial continuation period.

(2) In subsection (1), “initial continuation period” has the meaning given to it by section 16(1)(c) of this Regulation.

Continuation under section 97 of the Act

31(1) Where as of January 1, 1998 a lease is being continued as to the whole or part of its location pursuant to section 97 of the Act then, on the expiration of the one‑year period referred to in section 97(4) of the Act or of any extension of that period, section 17(9) of this Regulation applies, and the former continuation rules cease to apply, to the lease with respect to the whole or part of the location so continued as though the expiration of the period or the extension were the expiration of the term of the lease.

(2) Notwithstanding subsection (1), the security furnished by a lessee pursuant to section 97(3)(d)(ii) of the Act shall be dealt with under the former continuation rules.

Non-productivity notices

32(1) If the one‑year period under a notice given under section 98 of the Act expires during 1998, the new continuation rules apply to the location or part of the location or the subsurface portion of the location or part of the location, as the case may be, to which the notice related, as though the expiration of the one‑year period were the expiration of the term of the lease.

(2) Where a notice given under section 18 of this Regulation relates to a lease whose term expired before January 1, 1998, section 18 shall, as far as practicable, be applied to the lease as though the lease had been continued under the new continuation rules.

Offset drilling obligations

33(1) Where

(a) prior to January 1, 1998 the Minister has given a lessee a notice respecting the default by the lessee in complying with section 21(2) of the former Regulation and stating that the Minister will cancel the lease or cancel the lease with respect to the part of the location within the Crown spacing unit concerned, as the case may be, if the default is not remedied before the expiration of the 30‑day period following the date of the notice, and

(b) the 30‑day period referred to in the notice expires on or after January 1, 1998,

section 21(1), (2), (4) and (5) of the former Regulation continue to apply to the lessee and the lease in relation to the Crown spacing unit concerned, as though that section had not been repealed, until the expiration of the 30‑day period or any extension of that period.

(2) If a notice had been given to a lessee under section 21(3) of the former Regulation before January 1, 1998 and the 90‑day period in that notice or any extension of that period expires after that date, section 21(1), (3), (4) and (5) of the former Regulation continue to apply to the lessee as though that section had not been repealed, until the expiration of the 90‑day period or any extension of that period.

(3) Where a lessee

(a) was liable for the payment of compensatory royalty under the former Regulation and the liability had not ended by January 1, 1998, or

(b) became liable for the payment of compensatory royalty under the former Regulation by reason of an election received by the Minister on or after January 1, 1998 and before the expiration of

(i) the 30‑day period referred to in subsection (1) or any extension of that period, or

(ii) the 90‑day period referred to in subsection (2) or any extension of that period,

the lessee’s liability to pay compensatory royalty becomes a liability to pay offset compensation under this Regulation.

Variation of transition rules

34 Where the Minister is satisfied that any of the provisions of section 10 or sections 28 to 33 have caused or are causing undue hardship or prejudice in a particular case or class of cases, the Minister may by a general or special direction vary or replace any of the provisions of section 10 or sections 28 to 33 to the extent necessary to remove or alleviate the hardship or prejudice.

AR 263/97 s34;11/2000

Repeal

35 The Petroleum and Natural Gas Agreements Regulation (AR 188/85) is repealed.

Expiry

36 For the purpose of ensuring that this Regulation is reviewed for ongoing relevancy and necessity, with the option that it may be repassed in its present or an amended form following a review, this Regulation expires on June 30, 2014.

AR 263/97 s36;329/2002;130/2004;155/2004

Coming into Force

Coming into force

37 This Regulation comes into force on January 1, 1998.

Schedule 1

Regions

PLAINS REGION

The Plains Region consists of the land in Alberta contained within the outer perimeter of the land listed below:

On the east by townships 1 to 66 inclusive, range 1, west of the 4th meridian;

and

On the north by township 66, ranges 1 to 27 inclusive, all west of the 4th meridian, and township 66, ranges 1 to 4 inclusive, and township 34, range 5, all west of the 5th meridian;

and

On the west from townships 35 to 66 inclusive, range 4, west of the 5th meridian;

and

On the west from townships 1 to 34 inclusive, the lands immediately adjacent to the Foothills Region;

and

On the south by township 1, ranges 1 to 23 inclusive, all west of the 4th meridian.

NORTHERN REGION

The Northern Region consists of the land in Alberta not included in the Plains Region or the Foothills Region.

FOOTHILLS REGION

The Foothills Region consists of the land in Alberta listed below and that land within Alberta located south and west of the listed land:

Township 1, range 24; township 2, range 25; township 3, range 26; township 4, range 27; township 5, range 28; and townships 6 to 11 inclusive, range 29, all west of the 4th meridian;

and

Townships 12 and 13, range 1; townships 14 to 20 inclusive, range 2; townships 21 and 22, range 3; townships 23 to 28 inclusive, range 4; townships 29 and 30, range 5; townships 31 to 34 inclusive, range 6; townships 35 and 36, range 7; township 37, range 8; township 38, range 9; townships 39 and 40, range 10; township 41, ranges 11 to 13 inclusive; township 42, range 14; township 43, ranges 15 and 16; township 44, range 17; townships 45 and 46, range 18; townships 47 and 48, range 19; township 48, range 20; township 49, ranges 21 and 22; township 50, range 23; townships 51 and 52, range 24; townships 53 and 54, range 25; township 54, range 26; townships 55 and 56, range 27, all west of the 5th meridian;

and

Township 56, range 1; townships 57 and 58, range 2; township 58, range 3; townships 59 and 60, range 4; township 60, ranges 5 and 6; township 61, ranges 7 and 8; township 62, ranges 9 and 10; township 63, range 11; townships 64 and 65, range 12; and township 66, ranges 13 and 14, all west of the 6th meridian.

Schedule 2

Number of Sections that may Qualify
to Remain in a Licence Location at the
Commencement of the Intermediate Term

1 Subject to section 2 of this Schedule, where a validating well or grouping well is drilled at least to a measured depth shown in Column 1 in the following Table (the measured depth being referred to in this Schedule as the “Column 1 depth”) but not beyond the next succeeding measured depth shown in Column 1, the number of sections of land that may be validated as qualified to remain in the location of a licence at the commencement of its intermediate term is the number of sections shown in the Column for the appropriate Region opposite the Column 1 depth.

Table

Column 1 Measured Depth (in metres)	Column 2 Plains Region (sections)	Column 3 Northern Region (sections)	Column 4 Foothill Region (sections)
Minimum Depth as defined in section 1(m.1)

	3	5	8
325	3	6	8
475	3	6	9
600	3	6	9
750	4	7	10
900	4	7	10
1050	5	8	11
1200	5	8	11
1350	6	9	12
1500	6	9	12
1650	7	10	13
1800	7	10	13
1950	8	11	14
2100	8	11	14
2200	9	12	15
2300	9	13	15
2400	10	13	16
2500	10	14	16
2700	11	14	18
2750	12	14	18
2775	12	15	19
2925	13	16	20
3000	13	16	20
3075	14	17	21
3225	15*	18	22
3300	15*	18	22
3375	15*	19	23
3525	15*	20	24
3600	15*	20	24
3675	15*	21	25
3825	15*	22	26
3900	15*	22	26
3975	15*	23	27
4125	15*	24	28
4200	15*	24	28
4275	15*	25	29
4425	15*	26	30
4500	15*	27	31
4550	15*	28	32
4650	15*	29	33
4800	15*	30	34
4850	15*	31	35
5000	15*	32*	36*
* Maximum

2 Where a whipstocked well referred to in section 9(1)(b)(ii)(B) of this Regulation is a validating well,

(a) the Column 1 depth for the well is the total measured depth of the well, in the case of the first of the whipstocked wells drilled, and

(b) the Column 1 depth for the well is that portion of the measured depth of the well calculated from the point in the well‑bore from which the well was whipstocked to the total measured depth of the well, in the case of a well subsequently whipstocked from the same re‑entered well.

AR 263/97 Sched.2;11/2000;155/2004

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