The Alberta government has enacted an amendment to its natural gas royalty regulations in an effort to compensate gas producers who were forced to shut in production from the Wabiskaw-McMurray formation in the Athabasca Oil Sands Area of northeastern Alberta because of the Alberta Energy and Utilities Board (AEUB) bitumen conservation decisions.

After about seven years of debate over the issue, the AEUB in summer 2003 ordered the shut in of about 938 gas wells in the Athabasca Oil Sands Area to maintain underground pressure in order to preserve about 25.5 billion barrels of potentially recoverable crude bitumen, which represents about 14.6% of the province’s remaining bitumen reserves and has 500 times the energy content of the expected 250 MMcf/d of shut in gas production.

Gas producers fought the measure tooth and nail, filed for exemptions and ended up filing appeals. The Alberta government also put in place interim compensation measures last fall based on the amount of cash flow lost because of shut in production.

Gas production shut ins ended up being much lower than originally expected. In July, the AEUB estimated that total gas production shut ins would be about 123 MMcf/d. Total reserves lost because of the well shut ins could be about 280 Bcf (see NGI, June 9, 2003, June 23, 2003, July 28, 2003, Sept. 8, Jan. 12, Feb. 2, June 14)

The amendment passed last week is an effort to further placate the Wabiskaw-McMurray gas producers. It provides a mechanism that allows the Alberta Minister of Energy to reduce royalty requirements on gas wells in an amount based on the amount of shut in gas production they have. If the minister acts on the measure, Alberta Crown royalty invoices for affected operators would be adjusted to include a reduction of Alberta Gas Crown Royalties equivalent to a portion of an individual operator’s lost cash flow from the shut-in production.

It will cost Alberta an estimated C$175 million in royalty revenues to compensate natural gas producers for lost production, Alberta Energy Minister Murray Smith said Thursday. “I think this solution reflects appropriate signals to the investment community, the oil and gas industry and to the integrity of the Energy and Utilities Board in protecting Albertans’ interest in the resource,” said Smith. He said the compensation would likely begin within the next month and represent a 45-55% royalty credit to the affected companies. The length of time the royalty breaks apply depends on whether a technical solution is found to the bitumen issue, the rates of production and the rates of decline, Smith said.

“I am very encouraged by this amendment,” said Sue Riddell Rose, COO of Paramount Energy Trust, one of the largest producers of gas from the Wabiskaw-McMurray formation. “A consortium of gas producers affected by recent AEUB gas/bitumen decisions is engaged in ongoing consultation with the Department of Energy in an effort to seek a financial solution for the production shut-in by the AEUB. The minister now has both the authority and a mechanism to implement a financial solution through the Alberta Crown royalty system.”

Paramount said it potentially could realize savings from the royalty reduction totaling $1.2-1.4 million per month, based on its 17.2 MMcf/d of shut-in gas production in the Athabasca Oil Sands Area. “It is anticipated that this would be retroactive to the date of shut-in and replace the interim financial assistance of $0.60/Mcf of foregone production currently in place through the royalty system,” Paramount in a statement.

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