The founding cornerstone of regulation in Canada’s chief energysupply province has turned out to be alive and well — andoperating at the expense of natural gas producers.

In a landmark ruling that delivered a sharp reminder of theoriginal meaning of conservation, the Alberta Energy and UtilitiesBoard ordered seven gas producers to shut in 146 wells as of May 1.The action was taken in order to protect a C$1.4-billion(US$965-million) oilsands project.

Following 47 days of at times acrimonious hearings, the EUBruled the gas wells would deprive Gulf Canada Resources Ltd. ofunderground pressure it needs to proceed with the Surmont projectin northeastern Alberta. The decision evoked the reason for theEUB’s birth (originally as the Alberta Oil and Gas ConservationBoard) before the Second World War.

The agency was created to prevent any repetition of haste andwaste that ended in the industry being unable to tap most ofAlberta’s first major oilfield, Turner Valley south of Calgary.From the provincial government’s point of view, the lapse meantlosses of king’s ransoms in royalty revenues. In the pre-war era,the gas was flared to get at the oil. In the process, aboutnine-tenths of the oil wound up left in the ground to this daybecause depletion of the reserves’ gas cap took away pressureneeded to drive flows to the surface.

In the Surmont case, the gas was destined for market and itsproducers protested that they stood to lose combined revenuesexceeding C$900 million (US$620 million) per year. But the EUBfound that the area’s remaining recoverable gas reserves —estimated at 95-180 Bcf — represented about one-half of 1% of theenergy content awaiting production in the oilsands deposit. Theboard calculated that the remaining gas reserves were equivalent to17-32 million barrels of oil. At current oilsands recovery rates of35-50% with a heat-injection system of paired horizontal wellsknown as SAGD or steam-assisted gravity drainage, the EUB projectedSurmont production at 5.25-7.5 billion barrels of bitumen.

“To put this into perspective,” the ruling said, “about 12billion barrels of light-medium crude oil had been produced inAlberta to the end of 1998. Hence, the bitumen resources of Gulf’sSurmont leases represent a significant energy resource for theprovince, which the board believes warrant consideration forprotection for future development…it would not be in the publicinterest to accept the possibility of sterilizing a vast bitumenresource by allowing continued gas production.”

No compensation was discussed by the EUB. The board pointed outthat a political decision has to be made first. Under Alberta’slegal and regulatory regime, there are potentially rights to becompensated losses for energy conservation decisions. But thedecision has to be made by the provincial cabinet. The EUB onlyprepares a compensation scheme if the full cabinet passes a formalorder-in-council ordering the work to be done.

There has been no such compensation action in memory. Albertapoliticians stayed quiet as they reviewed the decision and waitedto hear from the industry. Irate Surmont gas producers predictedsome compensation has to be devised if the province wants to avoidgetting a reputation as a banana republic. Instead of cash,compensation might take the form of drilling leases in othergas-prone areas. No knee-jerk reactions were expected fromAlberta’s Conservative government, which invariably tries to stayout of disputes among industry factions.

The gas producers were also considering options for requesting arehearing or appealing to the courts on procedural grounds. InCanada, legal appeals against regulatory decisions rarely succeed,and only trigger additional reviews when they do. Canadian courts,as a matter of well-established doctrine, refuse to second-guess ormodify the rulings of expert regulatory agencies. Courtinterventions in the work of regulatory agencies only come in caseswhere protesters show they have been denied due process or thatjurisdiction has been exceeded under the Canadian constitution’sfederal-provincial division of powers. Conflicts between gas andoil production have been on the rise as both venture into theoilsands region of northern Alberta. As dwindling conventionalreserves run dry, Canada is projected to rely on the oilsands forabout 60% of its total 2.2 million b/d of crude production by 2010.

In the oilsands regions, rights to gas and crude reserves can bebought separately from their constitutional owner, the provincialgovernment. When there are conflicts, gas does not always lose eventhough it has fared worse so far. In a second ruling, the EUBordered Alberta Energy Co.’s AEC East operating arm to shut in fouroilsands bitumen wells after Goodwell Petroleum Corp. complainedthat they were siphoning off gas from its overlapping leases.

The EUB acknowledged that split mineral rights are generating a”complex resource management issue.” The board declared intentionsto launch, as soon as possible, a review of regulatory policies andoperating practices by a committee including representatives ofproducer associations and the provincial energy department.

Gordon Jaremko, Calgary

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