In the last three years, a helium (He) balloon has developed in the wake of the sell-off of the U.S. reserves. This trend could begin to deflate as the market re-equilibrates on the heels of new He discoveries around the world, the signing of significant new offtake agreements, and as new liquefaction facilities outfitted for He come online. Time is of the essence for Alberta to attract additional investment and to carve out its competitive share of the He market.
The framework for subsurface He rights in the Province – which largely adopts that of traditional petroleum and natural gas tenure rights – fails to capture the nuances of He exploration and production. The result is a regulatory regime that is ill-suited to attract that investment. Below, we highlight some specific examples of this issue and suggestions for modernizing the tenure system for He in Alberta.
The Natural Alignment of Interests Between the Lessor and Helium Lessee
He companies invest significant resources and time into the exploration and development of He at a commercial scale. Most of these companies are not the large hydrocarbon exploration and production conglomerates with potential prospects and existing assets across the globe. Accordingly, independent He explorers are not burdened with the strategic management of competing resource portfolios within a slow, multi-layered bureaucratic corporate regime. Instead, they can pursue commercialization decisions nimbly and without significant red tape.
The lessor’s primary compensation for granting the leased rights is the potential for relatively risk-free monetary gain in the form of a royalty. Yet, that royalty is only payable when the leased substances are being produced from the leased lands.
In many contexts, the He lessee is not a major hydrocarbon player dabbling in He production alongside its other vast interests. Consequently, the lessee’s interests are more squarely aligned with those of the lessor – both parties will only realize monetary gain with capital effective, quick development of the He resource.
As argued below, the use of the inhospitable regulatory ‘spacing unit’ to define the relatively small amount of ‘Leased Lands’ that a lessee is permitted to retain at the end of the primary term of a lease forces an artificial misalignment of the interests of lessors and He lessees.
Issues with the Current Regulatory Scheme
(a) Spacing Units
Government regulators introduced the concept of spacing units to address conservation issues. The aim of spacing units is to avoid the ‘Spindletop’ problem, overcapitalization and erosion of reservoir pressure; and temper the effects of the common law rule of capture. The primary purpose of a spacing unit is to establish the maximum number of wells that can be drilled in a given area and to require common ownership throughout a single-spacing unit.
Historically, spacing units have also been used as an arbitrary default to define the area in which a Crown lessee will be able to continue its Crown lease beyond the primary lease term. This is an ancillary purpose of spacing units. However, where a lessee can show that a hydrocarbon reservoir extends beyond a spacing unit, the Crown is generally willing to continue the lease of all the leased lands located vertically above the established reservoir.
A simple way of conceptualizing the separation of the spacing unit’s primary purpose and ancillary purpose is by considering the dissimilarity of the latter to a Farmout. The farmor grants the farmee a percentage of its ownership of a license over the ‘farmout lands’ and the farmee participates in its earning wells in accordance with regulatory requirements of spacing units and setbacks. However, Farmout Agreements do not typically restrict the farmee’s ‘earning’ to the single spacing unit of the test well(s). The Farmout Agreement more often provides that the farmee can earn an undivided interest in an entire reservoir.
The ancillary purpose of the spacing unit incentivizes the lessee to over-drill a He play to ensure the maximum acreage of leased lands is retained at the end of the primary term of its lease. This is antithetical to current environmental and conservation policies, increases the opportunity for conflict with surface owners, and deters He explorers who lack the capitalization and operational capabilities to entertain multi-well drilling campaigns.
Moreover, industry has known since before the spacing unit’s inception that the drainage area of any given pool varies as a function of geology. Thus, the standard 1/4 section spacing unit for vertical oil wells in Alberta and one full section for gas wells has always been inherently arbitrary.
In a rather extreme, but relevant example, the spacing units designated for gas wells in the infamous Ladyfern Field of northeast British Columbia significantly underestimated the overpressure and extensive permeability networks of the fractured and hydrothermally dolomitized Slave Point carbonate reservoir. Realizing that the vast drainage area of a single well far eclipsed the one-section spacing unit, producers commenced an ill-fated drilling bonanza that irreparably damaged the reservoir. The recoverable reserves once touted to be in excess of a trillion cubic feet evaporated in a matter of months. The example is particularly poignant as the Slave Point and other Devonian carbonates with heterogeneous reservoir properties are prospective He targets in Alberta today.
(b) The True Costs of Land Relinquishment
Net present value leaks away over time. The cost of delays in exploration and development of the He resource impact value creation and capture.
If a lessee is forced to relinquish leased lands which extend under a proven He reservoir, lessors may see this as an additional boon – they can release the lands to a new lessee, possibly with a higher royalty rate, or a direct development by the lessor itself. However, during the time that the lessor is engaged in new lease negotiations or a Crown disposition, followed by the time a new lessee may need to get up to speed on the He play or put the necessary infrastructure in place to remove the He from the lands and sell it at the best rates – the lessor is not receiving its ‘increased’ royalty and the original lessee (with its reduced lease tenure) is continuing to drain the reservoir.
Unless multiple wells are drilled across a leased area, the use of spacing units to define the area over which a He lessee may continue its lease following the end of the primary term effectively forces the relinquishment of potentially prospective land. This erodes the net present value for lessors and deters He explorers.
Alberta’s Tenure Regime is Simply Not Designed for Helium Production
The Alberta Crown tenure regime does not contemplate the production of He as anything but a by-product of natural gas hydrocarbons. In May 2020, Alberta Energy released Information Letter 2020-22 which detailed the amendments to the Natural Gas Royalty Regulations (effective April 2020) and set out a new royalty rate for He. However, the Alberta tenure system was otherwise unchanged. In fact, a change to the royalty rate scheme without a change to the tenure system does seem backwards to some extent.
Calgary Faculty of Law Professor Nigel Bankes has argued that Alberta’s tenure system isn’t “fit for purpose in those cases in which the proponent’s target is an accumulation of nitrogen containing helium, rather than a hydrocarbon accumulation that may contain some helium.” We wholeheartedly agree and would go a step further in suggesting that Alberta’s tenure scheme should be revised to accommodate both accumulations of nitrogen containing He AND methane and other natural gas accumulations that may be targeted primarily for their associated He.
A review of gas analyses from Alberta wells with elevated He concentrations suggests that very few He accumulations are associated predominantly with nitrogen – the vast majority of analyses with 1.5% He or greater contain less than 50% nitrogen, with the remaining gas component typically being methane and other short-chained hydrocarbons. These realities support the argument that He should be split from petroleum and natural gas in Alberta’s tenure system. A brief look at Saskatchewan’s scheme shows how this might be achieved.
Saskatchewan has regulated ‘helium and associated gases’ separately from petroleum and natural gas hydrocarbons since the 1960s when significant reserves of He were identified in that province. More recently, in 2016 when the U.S. government disclosed that it had been selling its reserves and was exiting the commercial He business, the resulting ‘shakeup in the global helium market’ sparked an exploration rush in southern Saskatchewan. The Province issued 59 He leases in 2016 alone and again modernized its oil and gas tenure regime (repealing the Helium and Associated Gases Regulations, 1964) to maximize exploration and development of He.
The new Oil and Gas Tenure Registry Regulations (2016) provided Saskatchewan explorers with the ability to acquire a He permit, to explore for He reserves, and then apply to convert their permit to a He lease.
These permits have a maximum term of five years, plus the opportunity for up to three, one-year extensions. If the holder of a permit makes a discovery of commercial quantities of He on permit lands, the holder may select several blocks of land to lease in accordance with the holder’s estimation of the boundary of the applicable He reservoir(s).
The area that may be the subject of a lease for He rights must be a minimum of one legal subdivision and a maximum of 12.25 survey sections or 3,173 hectares, more or less. He lease holders are then granted a further 21 years to drill, test and establish the size and nature of a He discovery before the Crown applies a further rights reversion.
A Reasonable Alternative: the ‘Helium Production Unit’
The conservation goal of the spacing unit is also fit for the He context because He production is generally analogous to that of hydrocarbons. The continued use of drainage-dependent spacing units in the clauses of He leases that address drilling, pooling, and offset requirements is therefore largely desirable.
With respect to the relinquishment of leased lands following the primary lease term, however, the use of a ‘Spacing Unit’ should be replaced with a ‘Helium Production Unit’ of reasonable size and configuration to accommodate the unique nature of He accumulations and its carrier gases.
Upon completion of the initial test well(s) and mapping of the extent of the He reservoir, the lessee can then relinquish those portions of the leased lands which do not fall within the reservoir area. In this way, the more flexible Helium Production Unit is better suited to account for the inherent variability in drainage area and better aligns the natural interests of the lessor and He lessee in ensuring the efficient and maximum recovery of the He resource.
This reservoir-based relinquishment process is more in line with the process of relinquishment on Crown lands in Saskatchewan; a province that has been refining the best methods of maximizing He resource recovery – for the Crown Lessor – since the early 1960s. This approach would also be akin to the relinquishment systems found in most Production Sharing Contracts globally.
The Wasted Potential for Helium Under Alberta’s Current Regime
Lessors have an aligned interest with He producers in capital effective, quick development of the He resource because their primary means of compensation is through a royalty on the produced He. This cannot happen if the rights to natural gas – which for now ostensibly includes He in Alberta – are leased to a traditional oil and gas company who might a) produce the natural gas without any He offtake, rendering any He associated with that natural gas a wasted asset; or b) sit idly on the leased lands (for example, with shut-in wells and/or while making delay-rental payments), thereby denying the opportunity for He production by other developers on those lands and the opportunity for Crown royalties. Alternatively, Alberta could adopt a similar split tenure system as Saskatchewan to maximize He development potential.
In establishing what it describes as a competitive royalty rate structure for He production, Alberta has acknowledged the value in He and the need to make Alberta’s He investment climate attractive. It was thus counter intuitive for the Province to have simultaneously neglected to reform the tenure system to ensure He exploration and production are accessible in a commercially competitive way. While new discoveries of He are made, offtake agreements are inked, and massive He liquefaction projects are underway in places like Tanzania and Virginia, Saskatchewan, and Russia, Alberta risks losing out on market share for its valuable He assets. The future of He production is likely to be the main purview of powerful National Oil Companies abroad in any event. There remains precious little time for the Province to attract new capital investment and carve out its share of the He market before that market re-equilibrates.
Nick Ettinger and Heather Lilles
1.By this we mean, non-state owned entities or conglomerates. Many SOEs and large O&G producers are, of course, also developing He assets as part of their resource portfolio outside Alberta.
2.The discovery of the monster Spindletop Field in southeast Texas in 1901 delivered the U.S. into the oil age, but it also dealt industry its first significant lesson: the ensuing frenzy saw wells drilled as close as physically possible to each other, resulting in a tragedy of the commons as the reservoir lost pressure with the breakneck pace of production.