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Alberta Regulators Shoot Down Shell's Drilling Plans

Alberta Regulators Shoot Down Shell's Drilling Plans

The Alberta Energy and Utilities Board dealt a blow to Shell Canada Ltd. by rejecting an application to drill a prime target that the company wanted badly enough to invest more than two years in seeking approval. The dramatic regulatory setback has left industry executives voicing hope that it was an isolated case and confirmed that the Canadian Association of Petroleum Producers has been right to target access to drilling targets as a priority issue.

"We hope that's a one-off," said an industry veteran who preferred anonymity to taking a risk on being identified as potentially misunderstanding the case. Officially, CAPP president Pierre Alvarez has repeatedly indicated the industry gets the message by rating access to resources as a top-priority issue in Canada on two fronts, environmental regulation and community relations.

The Shell case pointed to the depth of spreading resistance to drilling for "sour" gas laced with lethal hydrogen-sulphide, a poison that can kill in atmospheric concentrations of less than 1%. About one third of production in Alberta, source of about 80% of Canadian gas, is already sour. The amount is expected to increase because the impurity tends to be found in the targets being relied upon to ramp up production, deep wells and formations along the foothills of the Rocky Mountains.

Shell's target was projected to be 36% hydrogen-sulphide but lay in a region about 100 miles northwest of Calgary where it has been producing such sour gas for about 10 years at a rate of 300 MMcf/d for its Caroline gas plant. The problem was one encountered with increasing frequency in the Canadian industry's home base - the most gas-rich rural areas tend to be the most attractive parts of the province and are filling up with recreational, country-residential and retirement developments.

Unlike farmers - who often have their own pollution problems, get paid rent for well sites or pipeline rights-of-way, double as gas-field service contractors and send their children to work in the industry -the newcomers from urban areas can be counted upon to be at best suspicious of drilling and at worst dogmatically opposed.

Shell's target was about five miles from a center of changing land use, Rocky Mountain House, a growing town along a scenic highway that follows a 19th-Century explorers' and fur trappers' route into its namesake range.  In turning down the drilling application over technical aspects of an emergency-response plan required for tackling seriously sour targets, the AEUB gave the industry hope that at least the objective health, safety and environmental problems can still be worked through. The board called the situation "unique" and declared its decision was "without prejudice to any future application." But the AEUB also made it plain that resolving the community-relations issue is a tall order --- and getting taller.

Since its beginnings in late 1998, Shell's proposal escalated into a celebrated case by drawing a lineup of interveners and becoming the subject of a film by a Canadian national television environmental evangelist, David Suzuki.

The AEUB cited two flaws in the proposal. Shell's technical mistake was to restrict emergency alert and evacuation planning to a four-kilometer (2.5-mile radius) around the well site. Rocky Mountain House is within about eight kilometers (five miles). A community relations mistake turned out to be more serious because it could not be fixed by changing plans. By its own admission to the board, Shell underestimated rising levels of public anxiety over sour gas even in areas studded with production and processing facilities. The board observed that mediation efforts failed after company representatives lost trust in the community by initially taking acceptance of sour-gas operating standards for granted. "Shell significantly underestimated the concerns of the area residents," the AEUB said.

The case also ended in opening up a bigger can of worms. Besides health, safety and environmental concerns, the Rocky Mountain House case became an arena for a vigorous new inning of long-standing debates over an equally hot topic - the effect of oil and gas operations on local property values. The AEUB said the results of the case include a directive for board staff to craft options for holding a wider review of the gas industry's effects on markets for privately-owned real estate.  The AEUB said the new review needs to be done under its mandate of "determining whether an energy development is in the public interest and that includes the environmental, social and economic effects of the project. While there are relatively simple tools for assessing the net benefits of a project (comparing its costs to business, royalty and tax revenues), similar methods for assessing the economic costs to nearby landowners are not as readily available. The board believes that if the growing public concerns regarding the long-term impacts of oil and gas development on property values are to be adequately addressed in the future, a process needs to be developed that allows both applicants and landowners to approach this issue from a common point of view."

The Rocky Mountain House case generated conflicting evidence. The AEUB concluded that "studies previously carried out to try to quantify this issue also now appear to be potentially dated in light of the apparently changing public attitudes to sour gas."

Shell experts suggested that property values have risen as a result of improved roads and services associated with the Caroline project. The AEUB said that while it has no doubt the country real-estate market has prospered in the scenic region of plains, woods, rivers and scenic mountain views, it has no way of knowing how much credit to give to side-effects of the industrial development.

There was likewise no reliable way available to measure effects on private property values of a decade of intensifying fears of sour gas.  Repeating a frequent theme in such cases, property owners warned they would feel compelled to sell out and leave to escape the encroachment of industry. The ruling said the AEUB "is prepared to accept that sour-gas operations may adversely affect some individuals' perceptions of the value of neighbouring lands." The negative appraisals could continue after the drilling, particularly if it succeeded in establishing new production.

"However," the ruling said, "the Board is not prepared to conclude, based solely on the evidence available, that this would result in direct tangible effects on property values. The board does expect that if landowners believe they are in effect being forced to sell their property quickly and that if, furthermore, several properties do go on the market at the same time, there is a reasonable expectation that this may have a negative effect on the value received for the property. The board is not able, however, to determine what the relative size of this impact might be or if it would be significant."

Shell and industry specialists issued no statements but pored over the complex, 41-page decision after it was handed down unannounced March 20. Gordon Jaremko, Calgary

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