The government of Quebec announced Tuesday that hydraulic fracturing could continue in the province for exploration purposes only, after the release of a much anticipated report that urged further study of the practice.

Pierre Arcand, the province's environment minister, released a report by the Bureau d'audiences publiques sur l'environnement (BAPE) and said the government would move forward with its recommendation of conducting a two-year strategic environmental assessment on shale gas.

"The government is committed to ensuring that this industry develops properly, or else close down," Arcand said Tuesday. "The people of Quebec need to know that we will abide no compromise on matters of health, safety or respect for the environment, and that we will take all the time needed to ensure that these conditions are fulfilled."

Jacques Dupont, an environment associate deputy minister with the Quebec government, told NGI's Shale Daily that drilling would remain permissible in the province, but companies would need to go through an approval process to do so.

"There will be some rules set up in the weeks and months to come to improve the regulations governing the shale gas exploration process," Dupont said Wednesday. "All new fracking projects conducted in the future will have to be part of this [assessment]. The team of scientists conducting this will be able to follow and manage the process of fracking in Quebec, so as to be able to observe and assess what would be needed [for] eventual new regulation needed to govern this exploration.

"It's a lab process. It's not a moratorium. It won't stop the projects."

The new restrictions sent the stocks of several oil and gas companies exploring the Utica Shale play in Quebec into decline on Wednesday. In late afternoon trading on the Toronto Stock Exchange, Questerre Energy Corp. stock was down C39 cents to C$1.20 a share, a decline of more than 24%. Talisman Energy Inc. stock fell C38 cents to C$22.96 a share, a decline of 1.63%.

Talisman is the largest acreage holder in the Utica Shale with 756,000 net acres, while Questerre is number two with 336,440 net acres.

"They are restricting activities," David Mann, vice president and spokesman for Calgary-based Talisman, told NGI's Shale Daily on Wednesday. "Hydraulic fracturing will be permitted only as part of an environmental assessment if it can provide scientific information and builds Quebec's competence in geology and hydrogeology."

The 323-page BAPE report contains 43 observations and 101 opinions, most of them urging the provincial government to intervene. BAPE contends that a "knowledge deficit" -- among the industry, the government and the general population -- must be addressed. The report also calls for public hearings and tighter regulations.

"I think there is a knowledge deficit," Corridor Resources Inc. CEO Phillip Knoll told NGI's Shale Daily on Wednesday. "I also believe there is some misinformation about the impacts of hydraulic fracturing. Obviously industry has to do a better job in Quebec of informing the public and the regulators on why we believe that this can be conducted safely. And we have to do more to dispel the misinformation that is out there."

Arcand announced Tuesday that a committee of local and provincial government officials and industry experts would be formed in the near future. Dupont said the committee would be formed by the end of spring.

BAPE conducted public hearings for its report from September to November 2010, and received more than 200 briefs both supporting and opposing drilling (see Shale Daily, Dec. 23, 2010; Oct. 6, 2010; and Daily GPI, Sept. 1, 2010).

Quebec officials first warned in January that natural gas development might not be allowed to proceed, after inspectors with the Natural Resources Department in November and December 2010 had found minor gas leaks at 19 of the 31 shale gas wells drilled in the province (see Shale Daily, Jan. 24).

Quebec revealed last September that 13 companies were permitted to drill in the Utica Shale play.

Interest in drilling in the province began in 2008 after Denver-based Forest Oil Corp. announced that it had discovered gas on its nearly 270,000 net acres in Quebec (see Daily GPI, April 2, 2008). Talisman holds 770,000 acres of leasehold in Quebec and has drilled two horizontal wells there (see Daily GPI, Nov. 4, 2009; May 21, 2009). Talisman also partners with Questerre, which has more than one million acres gross in the region. And TransAmerican Energy Inc. acquired 136,000 net acres in Quebec in March 2010 (see Daily GPI, March 16, 2010).

Questerre put two projects in the St. Lawrence Lowlands on hold in January in anticipation of the BAPE report (see Shale Daily, Jan. 20). Meanwhile Corridor Resources and Petrolia Inc. reported in February that test wells into Macasty Shale on Quebec's Anticosti Island yielded encouraging results and gave no indication that a delay was imminent (see Shale Daily, Feb. 14).

"It's very early in the development of the shale oil prospect, so we've got a lot of exploration work to do there before we ever get to the point of hydraulic fracturing," Knoll said. "We've got to review the [BAPE] report in much more detail to fully understand the moratorium they're placing here. But I don't think it's going to slow down our exploration plans on Anticosti at this point."

Mann concurred. "We have to review the report and the implications," he said. "Quebec is still in its very early stages in evaluating the shale business. Talisman has been drilling pilot wells to assess the commerciality of the Utica Shale. [But] neither ourselves nor the government right now know if there is a viable shale business to be had in Quebec. At this very early phase in the play the government wants to make sure that things are done properly and they understand the implications of shale development in the province."

Dupont said at least two or three years of exploration were still needed in Quebec to determine the economic benefits of drilling for shale in the province.

"We weren't ready to go into exploitation because we're not sure yet if there is a true potential," Dupont said. "It needs to be assessed. There were only 31 wells drilled until now, so before the end of [the assessment], to be sure that the potential is there, I think there will have to be a few other wells drilled."