The founding cornerstone of regulation in Canada’s chiefenergy-supplier jurisdiction 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 theoriginal meaning of conservation, the Alberta Energy and UtilitiesBoard 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 EUBruled that the gas wells would deprive Gulf Canada Resources Ltd.of underground pressure which it needs to proceed with the Surmontproject in northeastern Alberta. The decision evoked the reason forthe EUB’s birth (originally as the Alberta Oil and Gas ConservationBoard) before the Second World War.

The agency was created to prevent any repetition of haste andwaste that ended in the industry being unable to tap most ofAlberta’s first major oilfield, Turner Valley south of Calgary.From the provincial government’s point of view, the lapse meantlosses of king’s ransoms in royalty revenues. In the pre-war era,the gas was flared to get at the oil. In the process, aboutnine-tenths of the oil wound up left in the ground to this daybecause depletion of the reserves’ gas cap took away pressureneeded to drive flows to the surface.

In the Surmont case, the gas was destined for market and itsproducers protested that they stood to lose combined revenuesexceeding C$900 million (US$620 million) per year. But the EUBfound that the area’s remaining recoverable gas reserves —estimated at 95-180 Bcf — represented about one-half of 1% of theenergy content awaiting production in the oilsands deposit. Theboard calculated that the remaining gas reserves were equivalent to17-32 million barrels of oil. At current oilsands recovery rates of35-50%. The EUB projected Surmont production at 5.25-7.5 billionbarrels of bitumen.

No compensation was discussed by the EUB. The board pointed outthat a political decision has to be made first. Under Alberta’slegal and regulatory regime, there are potentially rights to becompensated for losses for energy conservation decisions. Thedecision has to be made by the provincial cabinet.

There has been no such compensation action in memory. Albertapoliticians stayed quiet as they reviewed the decision and waitedto hear from the industry. Irate Surmont gas producers predictedsome compensation has to be devised if the province wants to avoidgetting a reputation as a banana republic. Instead of cash,compensation might take the form of drilling leases in othergas-prone areas.

The gas producers were also considering options for requesting arehearing or appealing to the courts on procedural grounds, but inCanada, legal appeals against regulatory decisions rarely succeed.

Conflicts between gas and oil production have been on the riseas both venture into the oilsands region of northern Alberta. Asdwindling conventional reserves run dry, Canada is projected torely on the oilsands for about 60% of its total 2.2 million b/d ofcrude production by 2010.

In the oilsands regions, rights to gas and crude reserves can bebought separately from their constitutional owner, the provincialgovernment. When there are conflicts, gas does not always loseeven though it has fared worse so far. In a second ruling, the EUBordered Alberta Energy Co.’s AEC East operating arm to shut in fouroilsands bitumen wells after Goodwell Petroleum Corp. complainedthat 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 intentionsto launch, as soon as possible, a review of regulatory policies andoperating practices.

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.