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Alberta Regulators Order Producers to Shut in 146 Wells

Alberta Regulators Order Producers to Shut in 146 Wells

The founding cornerstone of regulation in Canada's chief energy supply province has turned out to be alive and well --- and operating at the expense of natural gas producers.

In a landmark ruling that delivered a sharp reminder of the original meaning of conservation, the Alberta Energy and Utilities Board ordered seven gas producers to shut in 146 wells as of May 1. The action was taken in order to protect a C$1.4-billion (US$965-million) oilsands project.

Following 47 days of at times acrimonious hearings, the EUB ruled the gas wells would deprive Gulf Canada Resources Ltd. of underground pressure it needs to proceed with the Surmont project in northeastern Alberta. The decision evoked the reason for the EUB's birth (originally as the Alberta Oil and Gas Conservation Board) before the Second World War.

The agency was created to prevent any repetition of haste and waste that ended in the industry being unable to tap most of Alberta's first major oilfield, Turner Valley south of Calgary. From the provincial government's point of view, the lapse meant losses of king's ransoms in royalty revenues. In the pre-war era, the gas was flared to get at the oil. In the process, about nine-tenths of the oil wound up left in the ground to this day because depletion of the reserves' gas cap took away pressure needed to drive flows to the surface.

In the Surmont case, the gas was destined for market and its producers protested that they stood to lose combined revenues exceeding C$900 million (US$620 million) per year. But the EUB found that the area's remaining recoverable gas reserves --- estimated at 95-180 Bcf --- represented about one-half of 1% of the energy content awaiting production in the oilsands deposit. The board calculated that the remaining gas reserves were equivalent to 17-32 million barrels of oil. At current oilsands recovery rates of 35-50% with a heat-injection system of paired horizontal wells known as SAGD or steam-assisted gravity drainage, the EUB projected Surmont production at 5.25-7.5 billion barrels of bitumen.

"To put this into perspective," the ruling said, "about 12 billion barrels of light-medium crude oil had been produced in Alberta to the end of 1998. Hence, the bitumen resources of Gulf's Surmont leases represent a significant energy resource for the province, which the board believes warrant consideration for protection for future development...it would not be in the public interest to accept the possibility of sterilizing a vast bitumen resource by allowing continued gas production."

No compensation was discussed by the EUB. The board pointed out that a political decision has to be made first. Under Alberta's legal and regulatory regime, there are potentially rights to be compensated losses for energy conservation decisions. But the decision has to be made by the provincial cabinet. The EUB only prepares a compensation scheme if the full cabinet passes a formal order-in-council ordering the work to be done.

There has been no such compensation action in memory. Alberta politicians stayed quiet as they reviewed the decision and waited to hear from the industry. Irate Surmont gas producers predicted some compensation has to be devised if the province wants to avoid getting a reputation as a banana republic. Instead of cash, compensation might take the form of drilling leases in other gas-prone areas. No knee-jerk reactions were expected from Alberta's Conservative government, which invariably tries to stay out of disputes among industry factions.

The gas producers were also considering options for requesting a rehearing or appealing to the courts on procedural grounds. In Canada, legal appeals against regulatory decisions rarely succeed, and only trigger additional reviews when they do. Canadian courts, as a matter of well-established doctrine, refuse to second-guess or modify the rulings of expert regulatory agencies. Court interventions in the work of regulatory agencies only come in cases where protesters show they have been denied due process or that jurisdiction has been exceeded under the Canadian constitution's federal-provincial division of powers. Conflicts between gas and oil production have been on the rise as both venture into the oilsands region of northern Alberta. As dwindling conventional reserves run dry, Canada is projected to rely on the oilsands for about 60% of its total 2.2 million b/d of crude production by 2010.

In the oilsands regions, rights to gas and crude reserves can be bought separately from their constitutional owner, the provincial government. When there are conflicts, gas does not always lose even though it has fared worse so far. In a second ruling, the EUB ordered Alberta Energy Co.'s AEC East operating arm to shut in four oilsands bitumen wells after Goodwell Petroleum Corp. complained that they were siphoning off gas from its overlapping leases.

The EUB acknowledged that split mineral rights are generating a "complex resource management issue." The board declared intentions to launch, as soon as possible, a review of regulatory policies and operating practices by a committee including representatives of producer associations and the provincial energy department.

Gordon Jaremko, Calgary

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