Although a final decision has not yet been handed down by the Alberta Energy and Utilities Board (EUB) on its proposed plan to shut in 900 natural gas wells in the Athabasca Oil Sands area in northeastern Alberta on Aug. 1 in order to preserve crude bitumen production, such a decision could have a significant upward impact on Canadian gas prices, according to Thomas Driscoll of Lehman Brothers. Driscoll estimates that gas consumption in Canada would have to decline 6-10% this year as a result of the policy decision.

The EUB held consultation meetings last week with industry on the dispute and is expected to make a decision on the matter soon. If approved, the proposal would shut in about 240-250 MMcf/d of natural gas production from the Wabiskaw and McMurray formations, comprising an estimated 1% of total Canadian gas production.

The EUB believes that continued production of this gas, which is in a late stage of depletion, will cause a loss of subsurface pressure, jeopardizing the recovery of the vast bitumen resources (100 billion bbl) that lie within the McMurray. The EUB estimates that recoverable bitumen reserves in the area are almost 600 times that of the remaining recoverable Wabiskaw-McMurray gas reserves (1 Tcf) on an energy equivalent basis. The conflict between gas production and bitumen production was initially brought to the EUB in 1996.

The Alberta Legislature and other branches of the Alberta government have chosen to stay out the dispute. Alberta Energy Minister Murray Smith said over the weekend that the matter is for experts to decide.

Meanwhile, Canadian gas companies, such as the largest Wabiskaw-McMurray gas producer, Paramount Energy Trust, have warned of a legal battle if the government shuts in their gas.

“The compensation price tag is well in excess of $2 billion,” Paramount Energy Trust President Susan Riddell Rose said in a recent conference call with investors (see Daily GPI, June 20). “And what’s the impact on gas prices of shutting in 2% [of Alberta gas production] on the margin? We know that the numbers are definitely in the billions of dollars, not the millions. The value of the reserves themselves is over $1.5 billion. There’s infrastructure that’s stranded. There is reclamation that will have to move forward. There’s loss of investment opportunities. All these have to be factored into compensation.”

Driscoll said he believes the Alberta government along with the EUB already are looking at ways to potentially compensate companies. But the impact on the consumer could be even greater.

“If the EUB’s proposal is implemented, we estimate that total Canadian natural gas production will fall 3-5% this year,” he said in a note to clients Tuesday. “This compares to our current estimated decline of 2-4%. Given the low storage levels in Canada (currently 136 Bcf below last year’s level and 88 Bcf below the five-year average), we believe operators will clearly want to refill inventories.”

Net exports to the United States already are expected to fall 5% this year in order for Canadian natural gas storage levels to get back to historical averages. With the impact of the EUB decision, gas consumption in Canada will have to drop as well by an estimated 6-10% this year, said Driscoll.

“We are skeptical that Canadian natural gas demand will decline by 6-10% and feel that Canadians are likely to bid gas away from U.S. consumers (would result in lower net exports to the United States) and/or storage (would result in lower injections…).”

Driscoll said the EUB decision would likely lead to the following estimated production losses by Canadian gas production companies:

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.