Canadian Regulators Smooth the Way for New Pipes, Production

While Canadian natural-gas producers scramble to increase supplies, federal and provincial regulators are embarking on efforts to clear long-standing hurdles from the industry's path. A record 600 drilling rigs - 96% of the nation's 627-unit fleet - were at work as of mid-January. Although oil hunts are reviving, industry analysts estimated two-thirds or more of the activity is directed at gas.

The concentration on gas - and on deep drilling for large targets - showed in northeastern British Columbia, where oil is almost never the objective but 118 rigs were in the field. Alberta, which accounts for four-fifths of established Canadian production, remained the center of activity with 430 rigs in the field. But the fleet also was active in the Northwest Territories, Saskatchewan and Manitoba.

At the same time, the National Energy Board set out to save time and headaches for the industry and landowners alike when the time comes to connect wells to markets with pipelines. The NEB circulated, for industry and public comment, a draft manual for resolving disputes over pipeline rights-of way with mediation rather than board hearings. Although the NEB primarily deals with long-distance pipelines, it has lately been increasingly involved with short and relatively small projects that cross provincial boundaries to put new fields into production. The board said it was encouraged to try devising a standardized mediation process after a successful pilot project with settlement procedures on laterals off the Maritimes & Northeast Pipeline in Nova Scotia and New Brunswick. Canadian landowners as well as the company expressed a high level of interest in resolving disputes rather than going through fights at regulatory hearings, the NEB said.

At the provincial level, the Alberta Energy & Utilities Board is tackling head-on an even tougher issue - development of "sour" gas laced with hydrogen-sulphide that at best spreads intense rotten-egg stinks and at worst is lethal in concentrations as low as 1% if it leaks into the atmosphere. About one-third of Alberta production is sour and the proportion is rising as drilling accelerates into formations most prone to the impurity, at increasing depths and along the foothills of the Rocky Mountains.

The AEUB is crafting responses to recommendations after a year-long review of escalating conflicts over sour gas among producers, processors, landowners, local governments, environmentalists, scientists, farmers, ranchers and health agencies. All interests were represented on a review panel, which was led by retired AEUB Chairman Gerry DeSorcy. The review was commissioned because long, hot wrangles have become increasingly common, with disputes over modest additions to the field pipeline grid or even single wells in populated areas.

To heal the wounds and keep them from re-opening, the panel made 87 recommendations ranging from assembling comprehensive health effects information and clarifying the science of assessing sour-gas risks to toughening gas-field leak policing and putting a stop to proliferation of sour-gas processing plants.

The AEUB has made it plain that the review's results will be taken seriously by already implementing a set of recommendations on public consultation that the panel described as "an area of major concern." Under new rules enacted as the winter drilling season got under way, the industry is being required to provide full, early and extensive disclosures of its plans and to show willingness to change them rather than appeal to the AEUB for approvals over public objections. The next provincial budget is expected to include increased spending on board activities related to sour gas.

The drilling and the regulatory efforts accelerated at the same time as the industry saw yet another reminder that it has a huge market opportunity if it can come up with the supplies to fulfill it. Another two record-breaking years are ahead for the principal driving force of the Canadian gas industry's growth, exports to the United States, according to the first monthly outlook report of 2001 by the U.S. Department of Energy's Energy Information Administration (see related story this issue).

EIA projected that after hitting a record estimated at 3.49 Tcf in 2000, U.S. gas imports will rise again this year to 4 Tcf then again in 2002 to 4.19 Tcf. "Net imports of natural gas are projected to rise by about 16% in 2001 and by another 4% in 2002," EIA said. "While Canadian export capacity may not be fully utilized this winter, we expect net imports to be 7.8% higher than last winter's imports."

EIA is counting on Canadian gas exports to keep U.S. supply and demand in balance even though it also believes American production is poised to expand. EIA estimated American gas output rose 1.1% in 2000 and can increase 5.4% this year then 2.5% in 2002. The growth is viewed as essential even though increases in demand are now expected to slow down sharply from the 2000 rate of 4.5% to 2.9% this year then 2.7% in 2002 as industrial and electrical plants respond to this winter's price spikes by switching fuels to the extent they are able. Despite changing economic conditions, EIA warned that "significant increases in new supply will be required to meet expected increases in demand for space heating and power generation, and to prevent storage conditions from deteriorating to a worse condition than has already been experienced this year."

In Canada, economists at the Bank of Montreal agreed that gas markets have reached a new plateau of tightness even though this winter's prices are best described as a spike owed to weather-driven demand and lags in supplies. The bank said "the price for natural gas is not going to fall back to year-ago levels. We think prices will ease in coming months but they'll still be much, much higher than homeowners and businesses are used to."

A commodity price index compiled by the bank records a 124% increase in Canadian natural gas and oil prices over the past year, resulting in 50% increases in residential and commercial heating expenses and curtailed production by heavy industrial users such as fertilizer and aluminum manufacturers.

Gordon Jaremko, Calgary

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