Paramount Energy Trust, the largest Canadian gas producer affected by Alberta regulators’ decision last week to shut in up to 938 gas wells in Northeastern Alberta on Sept. 1 to preserve crude bitumen production, indicated that the impact on gas production could be less severe than previously thought.

Under concessions the Alberta Energy and Utilities Board (EUB) granted the gas industry, many gas wells either will be exempted from the policy or grandfathered under a previous ruling, allowing much of the relatively small amount of Alberta gas production affected by the decision to continue to be produced.

The EUB handed down a final decision on the new policy last Tuesday to preserve thermal recovery of 100 billion barrels of heavy oil from a portion of the 5.5 million acre Athabasca Oil Sands Area. Evidence indicates that the 250 MMcf/d of gas production from the area, which represents only 1-2% of total Alberta gas production, poses a risk of bitumen loss, as bitumen may not then be recovered through existing thermal recovery techniques, such as steam-assisted gravity drainage (SAGD), according to the EUB.

SAGD involves continuous heat injections and production flows with paired horizontal wells. The system requires the assistance of natural underground pressure. And the EUB said that no technology exists yet to make up for loss of natural pressure once the natural gas that is in contact with the oil-sands deposits is removed.

Some analysts have been saying the decision to shut in the natural gas would have a serious negative impact on Canadian gas storage injections and gas prices this winter. “We were just saying that at most that was what could happen [i.e., 250 MMcf/d could be shut in]. We’re not saying that is exactly what will happen,” said Philip R. Skolnick, an analyst with Lehman Brothers.

In a research notice released Wednesday morning, Skolnick and another Lehman Brothers analyst, Thomas Driscoll, said, “We believe this will exacerbate an already troubling supply situation in Canada, where storage levels are still at historical lows and production is declining.” Previously, the Lehman Brothers analysts said they expected a significant increase in Canadian gas prices because less supply would mean Canadian consumers would have to bid away production from U.S. consumers in order to replenish Canadian storage for next winter.

The EUB policy calls for the shut in of 938 gas wells, but the number of wells actually shut in on Sept. 1 probably will be significantly lower. In fact, out of the 221 Paramount wells initially identified as being impacted by the new policy, only a small percentage will end up being shut in.

Paramount originally said a total 44 MMcf/d of its gas production was expected to be shut in, but now it is saying that only about 6-12 MMcf/d will end up being lost and possibly a third of that could be made up by new production.

“The Trust interprets that approximately 6 to 12 MMcf/d of its current 90 MMcf/d (less than 15%) of total gas production is at risk of shut-in on Sept. 1,” Paramount said in a statement.

Certain wells will be exempted from shut-in if they have been approved for production under a previous ruling, ID 99-1, issued on July 1, 1998. Paramount said it has 31 wells, representing 10 MMcf/d of production, that fall under this category and will not be shut-in.

The EUB will further exempt from shut-in grandfathered gas (in zones completed prior to July 1, 1998) that are not associated with potential commercially recoverable bitumen. Paramount said it has 18 grandfathered wells in this category producing 9 MMcf/d as well as an additional 9 MMcf/d from 20 wells previously approved under ID 99-1 that will be exempt from shut-in. It also believes that many additional grandfathered zones are not associated with potentially recoverable bitumen and these will continue to be assessed in detail using the EUB’s ID 99-1 criteria.

In addition, producers will continue to fight the new policy and look for technological solutions to preserve future bitumen supply. Paramount said it considers the EUB’s “definition of potential commercially recoverable bitumen to be wrong.” The Trust also believes there is, or will be, technical solutions to alleviate any risk to bitumen recovery from gas production.

It said it will “continue to pursue all potential avenues to preserve its production base, including revisiting some or all of this shut-in production through a EUB hearing process in 2004, pursuant to our fundamental belief that no gas production in Northeast Alberta poses a threat to ultimate commercial bitumen recovery that cannot be alleviated by technological solutions.”

The EUB chairman will convene a meeting of senior industry executives on July 28 to discuss additional opportunities for collaboration among stakeholders. Paramount said it plans to “proactively participate” in the meeting to “establish a process to expedite the development of the regional geological study and advance technological solutions.”

Although the government of Alberta has not issued a formal statement regarding compensation, Paramount said it expects compensation for shut-in gas to be “fair, reasonable and timely.

“The Trust continues to await advice from the province of Alberta as to its position. The Trust will continue to consider all options to recover the economic loss to its unitholders resulting from the shut-in of gas.”

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