Alberta''''s Petroleum Industry and the Conservation Board pptx

First published by The University of Alberta Press Athabasca HallEdmonton, Alberta Canada T6G 2 E8 Copyright © The University of Alberta Press 1 993 Alberta's petroleum industry and the

Alberta's Petroleum Industry and the Conservation Board

T H E U N I V E R S I T Y O F A L B E R T A P R E S S«

DAVID H BREEN

Alberta's Petroleum

Industry and the Conservation Board

DAVID H BREEN

First published by The University of Alberta Press Athabasca Hall

Edmonton, Alberta Canada T6G 2 E8

Copyright © The University of Alberta Press 1 993

Alberta's petroleum industry and the Conservation Board

Includes bibliographical references and index.

ISBN 0-88864-245-8

I Petroleum industry and trade—Government policy—Alberta.

2 Gas industry—Government policy—Alberta 3 Alberta Energy Resources Conservation Board I Title.

HD9574.C23A43 1 993 338.2728097 1 23 C92-O9I7I9-4

All rights reserved.

No part of this publication may be produced, stored in a retrieval system, or mitted in any forms or by any means, electronic, mechanical, photocopying, record- ing, or otherwise, without the prior permission of the copyright owner.

trans-To the early resource conservationists, who fought for the conscientious management

of Alberta's natural endowment

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C O N T E N T S

Foreword by G.J DeSorcy xv

Preface xvii

Acknowledgements xxv

Introduction: Conservation, Reservoir

Characteristics and the United States

6 The Natural Gas Export Debate 318

7 Conservation and the Struggle to Expand theMarket for Alberta Crude Oil 420

8 The Petroleum and Natural Gas ConservationBoard: Organization and Regulation of FieldDevelopment, 1948—1959 491

PART III C O N C L U S I O N

9 The Petroleum and Natural Gas ConservationBoard in Retrospect 535

Appendices APPENDIX I Board Chairmen, Deputy Chairmen, and Board

Members, 1938—1962 553 APPENDIX II Turner Valley Oil and Gas Production and

Disposition, 1922—1960 557 APPENDIX III Petroleum and Natural Gas Conservation Board

(PNGCB) Summary of Expenditure and Revenue, 1938—1958 561

APPENDIX IV Petroleum and Natural Gas Conservation

Board: Order No 63 565 APPENDIX v Province of Alberta, Development and

Exploratory Wells Drilled or Completed, 1900-1959 569

APPENDIX VI Summary Tables 573

APPENDIX VII Alberta Milestone Oil and Gas Discoveries,

1897-1959 577 APPENDIX VIII Alberta Revenue from Energy Resources and

Total Provincial Expenditure, 193 8—1961 581 APPENDIX IX Board Staff Distribution and Professional

Recruitment 585 APPENDIX x The Conservation Board and Field Management,

1948—1958 589 Chronology of the Petroleum and Natural Gas Industry in Alberta 650

Conversion Tables 663 Glossary 665

Notes 678 Selected Bibliography 752 Index 762.

I L L U S T R A T I O N S

MAPS

INT.I Western Canada Sedimentary Basin xxxii

I.1 Shell and Imperial Concession Requests, 1917 191.2 Turner Valley Natural Gas Pipelines,

1921—1928 48

4.1 Provincial Reserves, 1941 195

4.2 Turner Valley, Brown Plan, 1942 203

4.3 Turner Valley, Weymouth Plan, 1943 210

4.4 Turner Valley, 1938—1948 236

4.5 Producing Oil and Gas Fields of Alberta, 1946 237

5.1 Townships Containing Crown Acreage Acquired by

6.2 Alberta Gas Trunk Line Proposals,

1954-1955 404

6.3 Alberta Gas Trunk Line Company Limited PipelineSystem, 1958 418

7.1 Athabasca Oil Sands to 1960 441

8.1 Alberta Oil and Gas Fields, 1958 493

8.2 Petroleum and Natural Gas Conservation Board FieldOffices and Districts, 1956 511

FIGURES

INT.I Schematic Cross-section through the Alberta Portion

of the Western Canada Sedimentary Basin xxxivINT.2 Examples of Several Entrapment Conditions for Oiland Gas xxxvi

I NT 3 Water-drive Reservoir xxxvii

INT.4 Solution-gas-drive Reservoir xxxviii

I NT 5 Gas-cap-drive Reservoir xxxix

1.1 Typical Producing Well and Production Facility,Turner Valley, 1920-1940 46

2.1 Turner Valley Production History, 1927—1936 1024.1 Petroleum and Natural Gas Conservation BoardOrganization Chart, 1939 158

4.2 Petroleum and Natural Gas Conservation BoardOrganization Chart, 1946 232

4.3 Gas Production and Percentage Conserved, TurnerValley Field, 1922-1947 235

5.1 Atlantic Oil Company Petroleum and Natural GasLease, Summer 1948 273

5.2 Atlantic No 3 Relief Wells, Summer 1948 2745.3 Economic Allowance Chart, Schedule No I, 1950Proration Plan 314

5.4 Proration of Crude Oil to Market Demand 3156.1 Estimated and Actual Alberta Natural Gas Consump-tion, 1951-1980 359

7.1 Canada Productive Capacity Versus Production andRefinery Operations, 1950—1961 421

7.2 Alberta Productive Capacity Versus Production,1950—1961 423

7.3 Comparison Between 1950 and 1957 Proration Plans(Smoothed-out Data) 435

7.4 Oil Sands Cross-section 442

7.5 Richfield Oil Corporation Pony Creek No 3 Well,Stratigraphy of 9-kiloton Nuclear Blast

8.6 Blowout Prevention Equipment 52,1

8.7 Production and Disposition of Alberta Natural Gas,1949-1958 530

APP.X.I Trends in Estimates of Alberta Crude Oil Initial

Established and Remaining Established Reserves,1948-1962 604

APP.X.Z Production Battery Showing Required Equipment

Spacing, 1958 633

APP.x.3 Trends in Estimates of Alberta Natural Gas Ultimate

Potential and Initial Established Reserves,

1948—1962, 646

TABLES

1.1 Alberta Lands, 30 September 1930 64

1.2 Petroleum and Natural Gas Rights Alienated from theCrown 65

1.3 Annual Production of Natural Gas and of Naphtha inthe Turner Valley Field, 192.5—1930 65

2 1 TVGCB Gas Flow Allowance for Naphtha-producingWells of Imperial Subsidiary Companies, ImperialContract Companies and Independent Com-

panies 84

2,.2 Partial Schedule to TVGCB Order No 1 85

4-1 Oil Production in Alberta by Field for the Fiscal Year1938-1939 155

4.2 Wells in Alberta Capable of Producing Natural Gasfor the Fiscal Year 1938—1939 155

4.3 Gas Consumption for the Fiscal Year

1938-1939 156

4.4 Petroleum and Natural Gas Conservation BoardStaff, 31 December 1938-31 December 1939 1574.5 Turner Valley Gas-cap Raw Gas Reserves

5.4 The Petroleum and Natural Gas Conservation BoardAtlantic No 3 Well Trust Statement of Revenue andExpenditure to 27 February 1953 288

5.5 Major Alberta Crude Oil Discoveries and Field uction, 1947—1951 290

Prod-5.6 Producing Oil Wells in the Turner Valley, Woodbend, Redwater and Other Fields,

Leduc-1947-1951 292

5.7 Crude Oil Prices, 1947—1951 292

5.8 First Market Demand Order Issued by the Petroleumand Natural Gas Conservation Board for December

6.4 Estimates of Alberta's Natural Gas Requirements,

1 January 1951-31 December 1980 358

6.5 Evolution of Conservation Board Estimates of

Alberta's Thirty-year Natural Gas

8.1 Alberta Oil and Gas Fields, 1958 494

8.2 Board Staff and Budget, 1948—1958 505

8.3 Comparison of Alberta Oil and Gas Conservation

Board and Texas Railroad Commission Annual

Bud-gets, Number of Wells Drilled and Producing Wells,

1948-1958 513

8.4 Southern and Northern District Field Offices,

1958 518

APP.I.I Board Chairmen, 1938—1962 554

APP1i.2 Deputy Chairmen, 1938—1962 554

APP.i.3 Board Members, 1938-1962 555

APP.II.I Turner Valley Oil and Gas Production and

Disposi-tion, 1922—1960 558

APP.III.I Petroleum and Natural Gas Conservation Board

(PNGCB) Summary of Expenditures and Revenue,

1938—1958 562

APP.V.I Province of Alberta, Development and Exploratory

Wells Drilled or Completed, 1900-1959 570

APP.VI.I Annual Production 574

APP.vi.2 Annual Disposition, 1938-1958 575

APP.vi.3 Oil and Gas Well Completions in Year Shown 576

APP.vi.4 Cumulative Summary of Total Wells Drilled,

APP.IX.2 Engineers and Geologists Hired by the Conservation

F O R E W O R D

THE PETROLEUM AND NATURAL GAS CONSERVATION BOARD Was

created in 1938 Its responsibilities have since been expanded to alltypes of energy resources, and it is now known as the Energy Re-sources Conservation Board (ERCB) The occasion of the organiza-tion's fiftieth anniversary caused many of us to think about thesignificant role that the Board has played in the development of theprovince's energy industry We also recognized that, even thoughdetailed files on Board business were in existence, little had beendone to ensure that the information on the Board's role was com-plete, properly preserved, and pieced together in a manner under-standable to those who were not present as the events had un-folded This led to the history project, an undertaking that involvedmany current and former Board staff members The project in-cluded not only written material but also recorded interviews withmany of the capable and colourful people who had figured promi-nently in the development of the organization that we know today.This book is the showpiece of the history project It details theBoard's early years, describes events, explains why they happened,and introduces us to many of the personalities who made them hap-pen Dr Breen has employed his exacting standards for detailed re-search and analysis in preparing this work, and he has written it in

a style that informs while it retains our interest For this, the Board

is thankful Special thanks are also due to those individuals,primarily former Board staff members, who devoted much time andattention to the collection and synthesis of the mass of information.This book deals with the first two decades of the Board's history.The efforts of Dr Breen and his research assistants leave a recordthat will facilitate additional detailed analysis and serious writtenworks on the Board's later history It is my hope that this will occur

em-by the Board in the early development of oil and gas policy and ofthe problems it faced will undoubtedly increase their understanding

of the organization and their pride in its accomplishments I expectthat they will note the shift in emphasis for the organization fromthat of a regulator and policymaker in the early years to the pri-mary role of regulator that we see today This change is largely be-cause of the shift in society whereby an impartial arbiter, at armslength from government, is required to make regulatory decisionsregarding energy developments

Notwithstanding the somewhat modified role of the tion, employees will see in Dr Breen's assessment of its early his-tory the emergence of the same basic principles that guide the Boardtoday They are the twin objectives of serving the public interest ofthe province and of doing so in an efficient manner based on thepremise of working co-operatively with other involved parties Theproblems and stakeholders have changed over the years, both incomplexity and in number, but these early principles remain totallyrelevant The efforts of working towards these objectives, throughtechnical excellence and innovative approaches to regulation, haveresulted in a highly respected regulatory agency

This book chronicles the important role played by one tion in the development of energy policy in the province of Alberta.Many of us take pride in that organization We can experience thatsame sense of pride in this book, which not only describes our be-ginning but also improves our understanding of why we exist

organiza-G.J DeSorcy

October 1992.

P R E F A C E

ALTHOUGH IT is a provincial agency, Alberta's Energy ResourcesConservation Board (ERCB) is one of the most important regulatorybodies in Canada Decisions of this agency have had profound con-sequences, often beyond Alberta The significance of the ERCB,known from 1938 to 1957 as the Petroleum and Natural Gas Con-servation Board (PNGCB) and from April 1957 to 1971 as the Oiland Gas Conservation Board (OGCB), stems directly from the keyrole that it has played in the Canadian energy sector Curiously, theBoard remains little known, and even in its home province the truenature of the Board's responsibilities is not well understood outsideindustry circles

The ERCB'S importance and its prescribed role are largely defined

by the unique characteristics of the resources that it has regulatedsince 1938 Petroleum, including its associated by-products, wasquickly recognized as essential to the well-being of modern commu-nities, and access to assured sources of supply has remained acornerstone of the foreign policies of industrial nations since WorldWar I Even the United States, the first industrial nation blessedwith an abundant local supply, soon realized that it was in the na-tional interest to ensure that production was managed so as toensure long-term maximum recovery.1 The idea that oil and naturalgas resources warranted special attention came not only from therecognition that petroleum supply had become a matter of strategicimportance but also from the growing awareness that the peculiarproperties of this resource rendered traditional frameworks of ex-ploitation and development inappropriate Oil and natural gas aremigratory resources, which means that the reserves underlying onetract of land can often be produced from a well located on another.Therefore, when a number of operators are producing indepen-dently from the same oil pool without any restrictions or regula-tions, the rational response of each producer will be to drill andproduce as rapidly as possible to avoid being drained by his neigh-bours Such frantic production to gain short-run advantage usuallyhas a negative long-run effect Most oil reservoirs are production-

— xvii —

Although the significance of the ERCB'S regulatory role in the oiland gas sector of the Canadian economy is apparent, its influence inthe narrower sphere of individual corporations should not be over-looked Depending on the ranking criteria, six to eight of Canada's

20 largest corporations are oil and gas companies.2 Both the ing environment and the financial well-being of these large andpowerful corporations are affected directly by decisions emanatingfrom the ERCB headquarters in Calgary

operat-Although the regulatory decisions of the ERCB and its sors, the Oil and Gas Conservation Board and, before that, the Pe-troleum and Natural Gas Conservation Board, have had a far-

predeces-P R E F A C E

reaching local and national importance, this has been almost

ig-nored in the literature on the petroleum industry and energy policy

Among the few to present a general history of Alberta's petroleum

industry, Eric Hanson is one of an even smaller number who have

made more than passing reference to the Conservation Board.3 His

study offers a useful summary of how the Board operated during

the 1950s, but there is no attempt to understand the Board within

the context of the political and economic forces that brought about

its creation and shaped its evolution Although there is no

discus-sion of either alternative approaches or analysis of the

con-sequences of Board actions, it must be acknowledged that Hanson

was writing in the midst of the boom that he was describing and

lacked perspective His preoccupation was with the dramatic

statis-tics of growth and development

Perhaps the best of the more recent studies is Prairie Capitalism:

Power and Influence in the New West by John Richards and Larry

Pratt.4 They take advantage of their greater time perspective to

ven-ture well beyond the more descriptive commentaries of earlier

writers and offer an interpretive assessment of Alberta's postwar oil

boom Although the focus of their study is not specifically upon

Al-berta's petroleum industry, they do acknowledge the significance of

the ERCB and draw certain conclusions regarding its regulatory role

As they see it, the Board was the centrepiece of a regulatory

frame-work that was adopted uncritically from the practice in the U.S

oil-producing states that they believe fostered the interests of the large

oil companies Based more on apparent similarity of legislative

form than careful research, it is a conclusion that nonetheless has

found favour with subsequent commentators.5

In most popular accounts and nearly all company histories, the

Conservation Board's profile is almost nonexistent In their haste to

get on with the "real" story, most authors have quickly passed over

the seemingly tedious landscape of the regulators and fixed their

gaze upon an apparently more colourful topography peopled by

roughnecks and entrepreneurs.6 Such accounts of the petroleum

in-dustry might have colour and drama, but they present a partial

pic-ture only Along with the oil barons and politicians, the various

chairmen of the Conservation Board must be considered among the

principal players in the history of the Alberta oil industry With

little or no attention focused upon the regulatory environment or

upon the regulators, the written history of the petroleum industry

and our understanding of it remain incomplete

Given the singular importance of the Board's role, what explains

its nearly nonexistent profile, even within the more serious and

P R E F A C E

analytical literature on the petroleum industry or regulatorybodies? In part, this might have to do with the remarkable politicalstability that has characterized postwar Alberta Since World War

II, there has been but one change of government, and this tially was a change from one conservative administration to an-other Moreover, opposition parties in the Alberta Legislature haveseldom mustered more than a handful of members This has meantthat debate about development and regulatory policy has beenmuted, perhaps with the exception of the gas export question of theearly 1950s, and that continuity rather than change has typifiedboth policy and personnel in government and in the senior levels ofthe provincial civil service With a history unmarked by dramaticchange, with no great controversies debated in the public arena,with no great scandals or outrageous personalities, there has beenlittle about the ERCB to attract the casual observer or the writer insearch of a "good" story

essen-But what of the more serious professional observers? Energy icy has been an area of often embittered national debate for nearlytwo decades Although a few scholars have been moved to addresstopics in this area, without exception the focus has centred uponpolicies, politics and institutions at the national level.7 In thesestudies, Alberta's ERCB has usually received but passing mention,even though it is the initial point of regulation in the oil and naturalgas sector and has played a principal role in shaping the regulatoryenvironment surrounding this vital resource area.8 This oversight isunfortunate but understandable Although it is one of the most im-portant regulatory agencies in Canada, its decisions have emanatedfrom a city far removed from the familiar path of national policy-oriented social scientists preoccupied with institutions in Ottawa.That a full and serious study of Alberta's Conservation Board islong overdue is readily apparent, but not just to derive a morebalanced understanding of national energy policies and thedynamics of the Alberta and federal relations from which these pol-icies emerged Such a study, as has been suggested earlier, is alsoone of the critical elements of any comprehensive history of the Al-berta petroleum industry The organization, pattern and pace of theindustry's development in Alberta over the past half century havebeen influenced by the policies of this Board Moreover, the impact

pol-of Board decisions has extended well beyond the immediate fines of the petroleum industry It is clear that this agency is one ofthe most important institutions to have shaped Alberta's postwardevelopment A careful look at the political environment and pro-cess that created and subsequently refined the legislation that gov-

con-P R E F A C E

erned the Board's activities, along with an examination of the

forces that influenced the Board in its key decisions, would seem

therefore to offer promising rewards

The history of the ERCB is also worthy of study in a more

theoreti-cal sense Much effort, particularly in the United States, has been

expended studying the behaviour of national regulatory bodies

The consensus that emerges from the more recent literature is that

regulatory agencies have not been particularly effective in

protect-ing the public interest in the long run Not long after its creation, it

seems that a typical agency is inevitably co-opted by the industry it

was designed to regulate.9 Professional regulators soon come to see

and interpret the world through eyes similar to those of the

regu-lated industry Differences come to be more of detail than

sub-stance Does the history of the ERCB lend confirmation to this

recog-nized pattern? It must be asked how successfully the Board has

fared on behalf of Albertans in the face of the variety of private

in-terests that frequently clamour for special consideration In the

name of resource conservation, has this regulatory agency

func-tioned ultimately, as one writer recently asserted, as a client of the

major oil companies to establish "a producers' cartel that

eliminated price competition to the detriment of Canadian

con-sumers."10 The purpose of this study therefore is to examine the

ERCB with particular attention to the legislation that defined the

Board's role, the important issues that the Board has had to

ad-dress, the process by which it has come to important policy

deci-sions, and the leadership role of Board chairmen Policy decisions

rest upon the judgements of key individuals, and to clarify the

fac-tors that shaped and motivated these judgements the Board and its

activities must be considered within the political and economic

set-ting in which it was created and functioned Advantageous

perspec-tive on the Board and its activities is also to be gained through

refer-ence to an outside measure, and for this reason some comparison

with similar U.S agencies will also find a place in this study

Finally, it must be stressed that this is a historical study and not an

economic analysis The long-term economic implications of certain

policies or decisions must remain an indeterminate question,

per-haps to be pursued more appropriately in a specific or specialized

examination

This study of the Conservation Board begins with a review of

es-sential geological, engineering and legal concepts, followed by an

examination of the U.S experience from which early petroleum and

natural gas conservation emerged The subsequent discussion is

divided into two naturally defined periods Part I reviews the

dis-P R E F A C E

covery phase of petroleum development in western Canada, withparticular attention to Turner Valley and the problems there thatgave rise to the conservation movement in Alberta Close examina-tion is given to the debate on petroleum and natural gas conserva-tion and to the 1938 legislation that established the Petroleum andNatural Gas Conservation Board

Part II begins with a close look at the regulatory foundation tablished during the Board's formative years before the Leduc oildiscovery in 1947 This discussion is followed by an examination ofthe Conservation Board's role during the critical first decade of Al-berta's post-Leduc oil boom, when the Board moved throughyouthful trial and adjustment to become a mature technically com-petent conservation authority Special consideration is given to thenatural gas export decisions of the 1950s, the surplus oil prod-uction capacity question, the development and enforcement ofBoard regulations, and the changing technology of oil and gas con-servation A central theme here is how the Board, confronted by in-dividuals and an industry often preoccupied by short-run perspec-tives emanating from constant focus on the yearly balance sheet,managed to promote long-range conservation policies In 1959,Conservation Board Chairman Ian McKinnon left Alberta for Ot-tawa to chair Canada's new National Energy Board, and petroleumand natural gas regulation at both the provincial and federal levelsentered a new phase

es-All relevant documentary sources for this period at the Board'sCalgary headquarters were made available for this study These in-clude Board minutes from 1938, letters to oil and gas field oper-ators from 1932., minutes of meetings with industry groups, inter-nal correspondence and numerous reports on topics of timely con-cern The transcripts of evidence presented at Board hearings,which, along with the Board's "decision Reports," are part of thepublic record, have been used extensively While the Board's court-of-record status has ensured the preservation of most records of his-torical importance, the great wealth of information at the Boardnonetheless is compromised by the regrettable loss of its chairmen'scorrespondence for the 1940s and most of the 1950s and 1960s Tosome extent, this deficiency can be made up through consultation

of the premiers' papers, especially those of E.C Manning, available

at the Provincial Archives of Alberta in Edmonton This collectioncontains most, and perhaps all, of the written communication be-tween the various Conservation Board chairmen and PremiersAberhart and Manning Other correspondence between thepremiers and fellow politicians, at both the provincial and federal

P R E F A C E

levels, private citizens and oil company executives, on matters

relat-ing to the Conservation Board and its activities, offers helpful

back-ground in many areas Deputy ministers' correspondence and other

relevant documentation from the Alberta Department of Lands and

Mines, later the Department of Mines and Minerals, as well as from

the Department of Intergovernmental Affairs at the Provincial

Ar-chives, also allow important insights into the formulation of

poli-cies governing the administration of Alberta's petroleum resources

The extensive tape-recorded commentary prepared by Ernest

Man-ning at the University of Alberta Archives was similarly helpful At

the Public Archives of Canada in Ottawa, the C.D Howe Papers

and various files from the collection of the Department of the

Inte-rior and its successors, as well as the Department of Munitions and

Supply and the National Energy Board, contributed important

ele-ments of the national context The transcripts of certain

commis-sions, particularly Alberta's McGillivray and Dinning commiscommis-sions,

as well as Canada's Borden Commission, provided another rich

source upon which this study relied Tape-recorded interviews

un-dertaken by the Glenbow Archives in Calgary as part of the

"Petroleum Industry Oral History Project," plus the numerous

in-terviews with former Board members and employees, and industry

officials, carried out expressly for the preparation of this history,

have added a further important dimension to the foundation of

sources upon which this study rests The "Scrapbook Hansard"

record of debate in the Alberta Legislature; the popular press,

par-ticularly the Edmonton dailies, the Bulletin and Journal, and

Cal-gary's Herald and Albertan; and the main trade journals, the

West-ern Oil Examiner, the Daily Oil Bulletin and Oil in Canada, have

been used to shed light on the political, economic and technical

environment in which Alberta's oil and natural gas legislation

evolved and which the province's Conservation Board reflected

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A C K N O W L E D G E M E N T S

THIS BOOK is ADDRESSED to all those who have an interest in orcuriosity about the petroleum industry and the manner in which itdeveloped in Alberta It represents a huge undertaking that wouldhave been impossible without the generous assistance of many in-stitutions, organizations and individuals Standing first amongthese varied groups is the Energy Resources Conservation Board.Without the initiative, research funding and unrestricted access torecords that the Board provided, this study would have been im-possible The faith of former Board chairman Vern Millard andcurrent chairman G.J DeSorcy in this project, and their desire for

an open and comprehensive approach to the study of petroleumregulation in Alberta, was crucial The completion of this study ex-tended well beyond the date originally estimated, and I am particu-larly grateful for the patience and unstinting support of deputyBoard chairmen Norman Strom and Frank Mink Board librarianLiz Johnson and her staff consistently offered helpful and congenialassistance I am also pleased to acknowledge the important contri-butions of Barry Scott, Grant King and others in the Board's draft-ing department, particularly Joan Richardson, who prepared most

of the maps and figures for this book Among the many former andcurrent Board staff whose interests and special efforts have en-riched this study are Ian Cook, Rod Edgecombe, Joan Evans, EileenFlegg, Don Hannah, Simone Marler, Al Mayer, Anita Miltimore,Merv Mumby, Alyn Olive, Olga Potter, Bob Pow and KellySchieman, and the late Red Goodall and Ken Fuller

Others outside the ERCB who have made important contributionsare William Epstein, a native Calgarian and distinguished UnitedNations disarmament adviser, who provided invaluable informa-tion on the drafting of Alberta's first Conservation Act; HubertSomerville, former deputy minister of the Department of Mines andMinerals, who helped to clarify various aspects of the legislationand regulations of the period; and Mark Frawley and RonaldMcKinnon, who furnished helpful background on their fathers-two of the more important individuals who figure in this study I

A C K N O W L E D G E M E N T S

also wish to acknowledge the help and encouragement that I ceived from geologist-historian Aubrey Kerr My research wouldhave been seriously deficient had not two former Alberta premiers,the Honourable E.C Manning and the Honourable PeterLougheed, permitted me to consult their papers I am sincerelygrateful for their consideration

re-Archivists of the National Archives in Ottawa, the Provincial chives in Edmonton and the University of Alberta Archives havebeen essential contributors to my research for the project In partic-ular, I would like to thank Doug Cass at the Glenbow Archives in

Ar-Calgary I also wish to acknowledge the generosity of the Nickle

Oil Bulletin, the Canadian Petroleum Association and Nova

Cor-poration, who allowed me access to important records in their session

pos-This study has gained substantially from the observations andsuggestions made by the readers of earlier drafts In this regard, Iwish to thank Gordon Connell and a former Board member, thelate Doug Craig George Govier and Frank Manyluk read the entiremanuscript, and I am grateful for the benefit of their insightfulcomments Valuable observations were also received from the un-named referees chosen by the University of Alberta Press The finalproduct also owes a great deal to Mary Mahoney-Robson's edito-rial guidance, the proficient copy-editing of David Evans, KerryWatt's design and the comprehensive index prepared by EveGardner In addition, I must extend my sincere thanks to PatSchulze, whose commitment and good humour remained unfailingthrough the typing of numerous manuscript revisions

The publisher wishes to acknowledge the Book Publishers port Programme of Alberta Culture and Multiculturalism for agrant to prepare the manuscript for publication

Sup-Last, I wish to acknowledge my singular obligation to retiredConservation Board engineers Murray Blackadar and GeorgeWarne Their assistance began with the start of the project in Sep-tember 1985 and their contribution stands apart from all others

My debt to them for their painstaking research, criticism, constantencouragement and friendship can never be repaid

That for which I am beholden to my wife, Patricia, and family,Derek, Stuart and Patrick, is of a different order They offered re-markably patient and essential support to an often absent and dis-tracted husband and father To them I shall ever be in debt

What merits this book might possess rest heavily upon the tributions of those named; what deficiencies of fact or interpreta-tion exist rest solely with the author

Conserva-M E A N I N G S O F C O N S E R V A T I O N

Government departments or specialized agencies, typically called

"conservation boards" or "commissions," regulate the petroleumindustry at the provincial or state level, and their entire range of ac-tivities is commonly described by the phrase "conservation regula-tion." The statutes that define the powers and responsibilities ofsuch bodies are generally known as "conservation acts or laws."Such general usage renders the term "conservation" almost inca-pable of specific definition Having absorbed many related ideas toassume a general meaning, "conservation" has also retained a moreprecise usage The confusion that surrounds the purpose and activi-ties of petroleum conservation agencies stems in good part from thedifferent meanings ascribed to the word "conservation" by the pub-lic, the petroleum industry and economists

The popular notion of conservation is rooted in the traditionalcredo that emerged at the turn of the century Thoughtful Ameri-cans realized that three centuries of frontier experience had finallyrun their course As scholars contemplated what impact the closing

of the frontier might have upon U.S society, it became apparentthat the notion of the United States as a country of limitless landsand resources was no longer appropriate The idea that present useshould be curtailed so that the needs of future generations might bemet gained wide support Conservation came to be seen as a re-straining force that had to be fixed upon a free enterprise economy

I N T R O D U C T I O N

to protect the public interest against rapacious private greed Fromthe latter part of the nineteenth century in the United States, andmainly after the turn of the century in Canada, so-called "conserva-tion" measures were applied to natural resource areas, includingforest preservation, fisheries and wildlife, parklands, streams andrivers, as well as mineral exploitation Although such measureswere controversial and inevitably touched upon conflicting privateand public interests, they have generally been sustained by the com-mon belief that long-range social and economic benefits would beforegone without public regulation

For early conservationists, preservation for future use was the sence of their concern, but the related idea of efficient production toeliminate waste emerged more slowly It was not until the impor-tance of exhaustible and nonrenewable mineral resources to mod-ern communities became more apparent that the idea of promotingeconomically efficient methods of production to assure the maxi-mum ultimate recovery of the resource was seen as the appropriatecomplement of conservation For traditional conservationists theemphasis nonetheless remained on preservation—efficiency couldnot be equated with conservation The reason, as Erich Zim-merman has explained, is that efficiency promised to lower costswhich, if reflected in lower prices, might stimulate demand and thuscause "an accelerated exhaustion of earth materials, which to [thetraditionalists] appeared as the very antithesis of conservation."1

es-This primary focus on preservation has remained central to thepopular notion of conservation

Economists have their own notion of conservation They arguethat conservation involves maximizing the present value of a re-source: in other words, getting the most petroleum in the presentfor the least investment Their concept of conservation is centredupon the necessity of efficiency Inefficiency or "misallocation" inthe use of resources is one of the discipline's classic concerns, and aconsiderable literature on the theory of conservation has developed.The central concept centres upon the maximization of social bene-fits over time through correct distribution of resource use Basedupon the fundamental doctrine of maximum efficiency being the es-sential measure of social benefit, an economic definition of conser-vation might be summarized "as action designed to achieve andmaintain the optimum time distribution of use of natural re-sources."2 The critical concept in the definition is "optimum timedistribution." It does not denote, however, the concern for futuresupply that agitated traditional conservationists As between pres-ent and future use, the concept is neutral As Lovejoy and Homan,

I N T R O D U C T I O N

two economists noted for their work on petroleum conservation,

have explained, optimum time distribution offers "a way of

defin-ing an economic test of efficiency to be applied to various sets of

circumstances."3 In other words, the economic problem facing the

resource owner is to determine which production alternative will

yield, in present value terms, the maximum return over the life of

the resource Similarly, society wants ideally to obtain the

maxi-mum net benefits from a resource over time To this end,

econo-mists have generally been critical of the petroleum industry and

reg-ulatory bodies and have structured elaborate models as a guide to

move government, industry and individuals in the direction of what

they argue would represent more rational policy formulation At

the same time, economists have argued for the acceptance of a more

rigorous and precise definition of conservation that would conform

to economic logic and for the removal of what they consider are

in-appropriate regulations and restraints that compromise the

eco-nomic criterion of efficiency.4 Adoption of the economists'

defini-tion of conservadefini-tion has definite implicadefini-tions, the most important

being the development of reservoirs as a unit

The petroleum industry and its regulators use the term

"conser-vation" in a much more general and usually less consistent way

In-dustry publications and the comments of conservation officials

de-note a blend of traditional conservation philosophy, insights from

practical engineering experience, and economic theory.5 In 1950,

early in his career as a member of Alberta's Conservation Board,

Dr George Govier explained to a Vancouver audience in an

ad-dress on the subject of oil and gas conservation that the realization

by western Canadians that their resources were not inexhaustible

accounted for the broad acceptance of conservation principles He

went on to explain that

conservation involves the efficient use of natural resources, the

development of these resources in such a way as to protect the

interests of future generations, and the elimination of all

eco-nomically avoidable waste It may be defined as "The

preserva-tion of natural resources for economical use." The concept of the

elimination of waste is paramount.6

The traditional idea of preservation for future use is seen to be

part of Govier's concept of conservation, and his concern about the

prevention of waste touches upon one of the two fundamental

ob-jectives that the petroleum industry has come to associate with

"conservation" programs To prevent oil and gas waste, regulators

I N T R O D U C T I O N

focused on ensuring maximum recovery from underground voirs Significantly, critical economists have often observed thatthis concern about waste is focused by statute and regulation al-most entirely upon the production and storage of petroleum andonly to a limited extent on refining and end use The second majorpurpose associated with conservation programs is the protection of

reser-"correlative rights." This takes the form of measures designed toensure that production is allocated so that each owner of oil andgas rights in a field has an opportunity to obtain his equitable share.Closely allied with these primary objectives, the prevention ofwaste and the protection of property rights, is an important—though implied—goal that has influenced the thinking of regula-tors, or at least those who drafted the conservation acts Underlyingthe regulatory apparatus is the compelling desire to maintain ahealthy domestic producing industry to sustain the local or regionaleconomy The industry's role as a critical generator of employmentand government revenues has never been far from the minds of pro-vincial or state legislators Considerations of national security havealso influenced the manner in which the industry has been regulated

in the United States and, to a lesser degree, in Canada

It is apparent that the term conservation has a diverse lineage.This, with the broad-ranging and not always consistent mandate ofso-called conservation agencies, renders precise definition unlikely

It is doubly important therefore to understand the strands ofthought, diverse and inconsistent as they might be, that are to befound within the concepts that have guided industry and petroleumconservation bodies

If conservation practice does not exhibit the tidy parameters ortheoretical purity that some would prefer, it is hardly surprising.Knowing the necessary difference between what is theoretically de-sirable and what is politically acceptable is one of the first laws ofpractical and successful administration Petroleum conservationregulations did not emerge full-blown from a solidly constructedtheoretical foundation Rather, they developed incrementally in re-sponse to specific problems, in light of field experience, in the wake

of changing technology, or, in other words, in the face of shiftinghistorical forces A proper understanding of the role and activities

of Alberta's Conservation Board demands therefore a careful sis of these historical forces The historical forces set in motion bythe discovery and increasing importance of petroleum were shaped

analy-in the first analy-instance, however, by the manaly-ineral's peculiar physicalproperties It is necessary therefore to consider first the factors thatdetermine the occurrence of petroleum and attend its behaviour, so

I N T R O D U C T I O N

that implications that follow from these characteristics will be

clearly understood

E L E M E N T S O F G E O L O G Y A N D R E S E R V O I R M E C H A N I C S

Petroleum and Natural Gas

Petroleum is a mixture of naturally occurring hydrocarbons that

can exist in a solid, liquid or gaseous state, depending upon the

temperature and pressure to which it is subjected Almost all

petro-leum is produced in liquid or gaseous form, and these constituents

are referred to as either crude oil or natural gas, depending upon

the hydrocarbon mixture.7 Whether the substance is crude oil or

natural gas is largely determined by the number of carbon atoms in

its molecular structure For both oil and gas, the greater the number

of carbon atoms the higher the specific gravity Crude oil might also

contain impurities such as sulphur and minor amounts of certain

metals that affect the later processing at the refinery stage

Natural gas is found with oil, and frequently on its own Within

the reservoir, gas might exist in solution with crude oil, but upon

being produced to normal atmospheric conditions, it separates in

the gaseous form Gas produced from either an oil or gas reservoir

may be "wet," that is containing heavier hydrocarbons that can

separate out in liquid form under surface conditions These liquids

are variously known as condensate, distillates or natural gas

liq-uids, and they differ from crude oil in their molecular composition

In certain reservoirs, gas can be found that does not contain liquids

This gas is simply referred to as being dry Natural gas can also

con-tain impurities, especially hydrogen sulphide or carbon dioxide

Although natural gas is important as a fuel in its own right, it can

also be of substantial importance in the production of oil This

rela-tionship between oil and gas is central to an understanding of the

concerns that motivated the search for effective petroleum

conser-vation measures

Geology of Western Canada

The Western Canada Sedimentary Basin is the chief geological

fea-ture relating to the occurrence of oil and gas Stretching from the

Northwest Territories to South Dakota, it is the largest basin within

the vast multibasin freeway that extends from the Arctic islands

through the Mackenzie Delta and great central plains in varying

widths to the Gulf of Mexico The Canadian portion of the Western

Canada Sedimentary Basin, shown in Map INT.I, occupies an area

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MAP INT 1 Western Canada Sedimentary Basin

SOURCE: ERCB, adapted by J.R Pow.

of some 540,000 square miles It is bounded on the north by a logical feature known as the Tathlina Arch, located in the south-western corner of the Northwest Territories; on the east by the sedi-mentary section's erosional edge at the Canadian Shield; on thesouth by the international boundary; and on the west by the RockyMountains The Basin consists of undeformed strata, except in thenarrow foothills belt where they were severely distorted when theRocky Mountains were formed, between about 75 million and 27million years ago.8

geo-The Alberta portion of the Basin covers some 92% of the ince's Z55,ooo-square mile area Undeformed sedimentary strataoccupy an area of approximately 223,000 square miles beneath theplains, lowlands and uplands of the province and, as shown in Fig-ure INT.I, thicken gradually from zero at their northeastern edge toover 19,000 feet at the eastern boundary of the foothills The se-verely deformed strata of the foothills belt extend over some 11,500square miles and are believed to average between 15-20,000 feet indepth The cross-section presented in Figure INT.I shows the rela-

prov-I N T R O D U C T prov-I O N

tionship and relative thickness of the principal geological

forma-tions Most of the oil and gas reserves in the gently dipping,

rela-tively predictable sedimentary strata that characterize the plains

portion of the Basin have been found in Cretaceous and Devonian

formations In the more geologically complex western edge of the

Basin, in the Rocky Mountain foothills, oil and gas reserves occur

mainly in the folded and faulted formations of the Mississippian

age The heavier crude oil and drier gas reserves are found in the

eastern areas, whereas the lighter crude oil and wet and sour gas

(containing hydrogen sulphide gas) are found mainly in the western

portion of the Basin Coal occurs mainly in the Cretaceous

sedi-ments, with the higher heating value coals being encountered in the

mountain and foothills areas

Reservoirs

Oil and gas reservoirs are commonly referred to as pools A general

area underlain by one or more pools, often in strata found at

differ-ent depths, is known as an oil or gas field Rather than existing as

a vast cavern filled with oil or gas, as is often pictured in the minds

of laymen, reservoirs actually consist of sections of porous rock or

sand with oil and gas in the pore spaces As one author has

ex-plained, "In geologic time, oil and gas, and associated salt water

migrated through the pores in rocks (usually called sand), and when

a barrier or impermeable material was encountered, the migration

stopped and the oil and gas became trapped The result was an

ac-cumulation of oil and gas, or a pool."9 The pore space in reservoir

rocks can vary from less than 5% to over 35% For limestones a

range of 5 to 12.% is common, and for sandstones, 15 to 35%.10

From 5 to 70% of the total pore space can be occupied by water

(connate water), thus reducing the space available for oil or gas

Oil- and gas-bearing rocks vary not only in terms of their

"poros-ity" but also in their "permeability," or the ease with which they

permit the migration of fluids In the case of oil, flow within the

res-ervoir is also a function of its viscosity A low viscosity or light oil

moves more readily than a sticky, highly viscous heavy oil

Remain-ing variables that define the quality of a reservoir are the depth or

thickness of the petroleum-bearing formation and its areal extent

So far, the largest single oilfield discovered in Alberta is the

Pem-bina field, which contains the large Cardium pool, comprising an

accumulation in Cretaceous sediments The largest gas

accumula-tion by area is known as the Southeastern Alberta Gas system The

several characteristic "structures" known to geologists as likely

sources of trapped oil and gas in Alberta are shown in Figure INT.2

I N T R O D U C T I O N

pores of rock and flow to the surface Either water encroachment or

gas expansion provides the natural driving force that allows

pro-duction to occur These forces become operative only with the

re-lease of pressure that takes place when a hole is bored into the

res-ervoir rock to provide a connection between the high-pressure oil

I N T R O D U C T I O N

reservoir and the much lower pressure existing at the surface out sufficient pressure differential between the reservoir and thesurface, oil will not rise to the surface, hence the importance ofmaintaining reservoir pressure There are three main mechanisms,

With-or "reservoir drives" in the parlance of the petroleum industry, bywhich oil can be displaced and driven to the wellbore: water-drive,gas-cap drive, and dissolved-gas or solution-gas drive The first pe-riod in the producing life of a reservoir, when the oil is displaced byone or more of these natural reservoir drives, is known as the "pri-FIGURE INT 2 Examples of Several Entrapment Conditions for Oil

and Gas

FIGURE INT.3 Water-drive Reservoir

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mary production" or "primary recovery" phase In the early

devel-opment of the industry, the natural drives were allowed to function

until they were depleted or exhausted, and then "secondary" or

"improved recovery" was attempted through the introduction of

more costly artificial drive mechanisms In modern petroleum

reser-voir management, the artificial mechanisms are introduced at the

optimum time, which is usually long before the natural mechanisms

are depleted

Water-drive Reservoir

The water in most water-bearing formations has a fluid pressure

that increases with depth beneath the surface When the reservoir

rock is penetrated by the wellbore, the compressed water expands

and moves towards the region of pressure release, driving the oil in

front of it, as shown in Figure INT 3 Water, the displacing agent,

typically encroaches from below the oil ("bottom-water drive") or

from the edges of the reservoir ("edge-water drive") Although the

recovery efficiency of a water-drive is normally superior to other

natural drive mechanisms, with recoveries as high as 70% of the

oil-in-place being reported, high efficiency is achieved only when

the reservoir characteristics are extremely favourable and the

ad-vance of the water front is uniform and slow It is important

there-fore to produce from a water-drive reservoir at a rate in keeping

with the rate of advance of the water front.11

Solution-gas-drive Reservoir

Even where water exists in the reservoir, if the crude oil contains

gas in solution, a solution-gas drive could develop, supplementing

I N T R O D U C T I O N

FIGURE INT.4 Solution-gas-drive Reservoir

any water drive In such reservoirs, the lighter hydrocarbon nents remain dissolved in the liquids at formation pressures in ex-cess of the saturation pressure—the pressure at which gas normallybegins to come out of solution When the wellbore taps the reser-voir and production occurs, the reservoir pressure declines Afterthe saturation pressure is reached, the dissolved gas comes out ofsolution and expands, thus displacing the oil and driving it to thesurface, as shown in Figure INT.4 As the drop in pressure below thesaturation pressure extends away from the wellbore and increases,more gas comes out of solution to displace the oil Solution gas isthe most common natural energy source for oil production, butbeing a depletion-type mechanism it is inherently inefficient Re-coveries ranging from as low as 5% to as much as 30% of the oil-in-place are typically expected Pressure declines quickly and con-tinuously in solution-gas reservoirs, thus requiring the assistance

compo-of well pumps and making some form compo-of artificial pressure nance desirable at an early stage Field production practices that en-hance this relatively low rate of recovery are therefore of particularconcern to conservation authorities

mainte-Gas-cap-drive Reservoir

Gas-cap drive is the third type of displacement process, and its covery efficiency typically ranges between that of the solution-gasand water-drive mechanisms A gas-cap drive occurs where gas un-der pressure is trapped above the oil as shown in Figure INT 5 Dis-placement of the oil occurs through the downward expansion of theoverlying gas cap that takes place when the penetrating wellbore al-lows the release of reservoir pressure With production, the reser-

re-FIGURE INT 5 Gas-cap-drive Reservoir

I N T R O D U C T I O N

voir pressure declines, and some of the gas-cap gas will be produced

with the oil if production rates are too high Therefore, as for water

drive, the gas-cap mechanism is production-rate sensitive, and the

downward rate of movement of the gas-oil interface should be kept

low Preservation of the gas cap that provides the driving energy is

essential, and this accounts for the efforts of conservation

authori-ties to reduce and normally prohibit the significant production of

gas-cap gas until most of the recoverable oil has been produced

Gravity Drainage and Combination Drive

In reservoirs, the force of gravity is always at work, and gravity

ef-fects can sometimes play an important role in recovery as original

gas or water drives decline, especially in thick or steeply tilted,

highly permeable reservoirs In such situations, oil moves

down-wards to producing wells and gas coming out of solution migrates

to the crest of the reservoir, forming a gas cap This gas cap

ex-pands as pressure declines further, sometimes providing an effective

driving mechanism

Additionally, there are certain reservoir situations where some of

these drives can function in combination A gas-cap drive, for

ex-ample, might be combined with a water drive or a gas-cap drive

with gravity drainage Similarly, a solution-gas drive can be

aug-mented by bottom-water encroachment

The reservoir characteristics described so far are critical factors

in determining the number and location of wells that ideally should

be drilled into an oil-bearing stratum to assure efficient and

maxi-mum recovery Porosity and permeability of rock, as well as oil