Alberta Government Sets Royalty Reductions for Shut-in Producers

Compensation has been granted to 30 Canadian natural gas producers affected by an order to shut-in wells found to jeopardize future exploitation of oil sands by the Alberta Energy and Utilities Board.

The Alberta government declared intentions to grant royalty reductions on volumes of other production equivalent to the amount taken off the market by the conservation order. The break works out to about C$0.60 (US$0.45) per Mcf. The province also said it intends to cancel lease payments due on northern Alberta properties affected by the order.

So far, the Sept. 1 order has cut gas production by about 95 MMcf/d from 377 wells. The order potentially could close off up to 938 wells, production of 250 MMcf/d and 2 Tcf of reserves -- or about 2% of Alberta gas supplies.

The status of multiple individual wells remains contested in a technical review process, launched to resolve by mid-2004 whether or not they affect oil sands deposits. The order is also being appealed to the courts, with a handful of protesting producers claiming that the AEUB overstepped its jurisdiction.

The producers that have been affected range from senior companies such as EnCana Corp., BP Canada and Devon Canada to independents like Paramount Energy Trust. The latter, one of the key gas producers in northern Alberta, said it expects to have nearly C$2 million in royalties deferred for the 12 months ending Sept. 30, 2004.

When a final decision is made, the value of deferred royalties will be deducted from the amount of compensation ultimately calculated by the province. The energy ministry is aiming to come up with a final plan by the end of the year.

The estimated interim royalty relief of about $25 million, is aimed at helping producers manage their cash flow and allow them to avoid financial hardships while the wells are shut in.

Susan Riddell Rose, Paramount's president, told the Calgary Herald that while the program falls short of replacing lost cash flow, estimated at $8 million a year, it does make for a "good first step. Directionally, we're pleased the government is working with us."

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