Alberta regulators concluded last week that they must force the shut in of about 123 MMcf/d of natural gas production in the Athabasca Oil Sands Area on July 1. The total is about half what the regulators originally estimated was needed in order to preserve future recovery of bitumen from an oil sands region in northeastern Alberta.

The Alberta Energy and Utilities Board (AEUB) rejected the pleas of many gas producers in order to preserve about 25.5 billion barrels of potentially recoverable crude bitumen. It said the bitumen being conserved represents about 14.6% of the province’s remaining bitumen reserves and has 500 times the energy content of the shut in gas production, which totals about 280 Bcf. Gas producers, however vowed to appeal the order.

“These are the latest steps in a fair and balanced process to protect the bitumen for current and future generations of Albertans,” said AEUB Chairman Neil McCrank. “The decision (2004-045) and orders (04-001 and 04-002) balance the interests competing for these resources and also clearly reflect the AEUB’s mandate of conserving Alberta’s energy resources.”

The ruling sets final parameters on a process that came to a head last summer when Alberta regulators ordered the interim shut in of about 938 gas wells and 250 MMcf/d of gas production. About 80% of those wells remained flowing, however, after 11 production companies filed a flood of about 740 exemption applications. This decision issued Tuesday, which follows a geologic study by the board and a hearing earlier this year. It represents a final count on the wells that must be shut in. Nevertheless, producers will have one more opportunity to be heard in a final hearing scheduled for this fall.

The AEUB continues to believe there is an immediate and ongoing risk to bitumen recovery from the production of some natural gas in the Wabiskaw-McMurray formation that is in contact with the bitumen. As this gas is extracted, there is a drop in pressure within the gas pools. The AEUB has found that gas production in these circumstances poses an unacceptable risk to bitumen recovery using thermal techniques, such as steam-assisted gravity drainage (SAGD).

Some producers, however, disagree. The gas industry is conducting some small-scale tests of technologies that might allow extraction of both natural gas and bitumen. Both the results of those test are unlikely to provide any immediate relief to the gas producers affected by this order.

Paramount Energy Trust (PET) will be required to shut-in wells producing 15 MMcf/d or 16% of its current average daily production. This volume is in addition to the 4.5 MMcf/d remaining shut-in from wells shut-in on Sept. 1, 2003 pursuant to the AEUB’s interim shut-in order.

Paramount said the AEUB accepted “almost none of the technical arguments presented by gas producers and oil sands rightsholders” at the recent interim hearing.

“The tenacity of the AEUB in pursuing its intended course of action on this matter and its lack of consideration for the technical input from industry over the past 12 months threatens to jeopardize Alberta’s role in North American natural gas markets,” said PET President Sue Rose.

PET continues to say that the entire regulatory review over the past year “lacked the due process required and expected.

“This decision also gives the appearance of a disregard for a resource which took decades and billions of dollars validly invested by Albertans to develop,” PET added in a statement. “In today’s market this gas production remains of significant value to gas producers and Albertans through royalties, continued investment, employment and other tertiary benefits relative to any lost value from reduced incremental bitumen recovery which might ultimately be placed at risk by its production.”

PET continues to have discussions with the Alberta government regarding financial compensation for its lost production and assets as a result of the order. “While the trust is disappointed that a comprehensive financial solution was not announced prior to or concurrently with the AEUB decision, PET is hopeful that ongoing discussion in that regard will lead to such an announcement in a timely fashion,” the company said.

Meanwhile, it plans to proceed with the appeal process that was granted to it and to other producers by the Court of Appeal of Alberta on Jan. 28. PET said it does not believe the hearing process set up by the AEUB allowed for an “adequate assessment of which, if any, gas production poses a threat to ultimate potential bitumen recovery.”

The AEUB will hold a pre-hearing meeting on Sept. 15 to determine the scope and participants of a final public hearing on the matter.

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