The proposed plan by Alberta regulators to shut in 900 natural gas wells in northeastern Alberta on Aug. 1 to preserve crude bitumen production may have the immediate effect of curtailing 250 MMcf/d of gas production and stopping future gas development, but its impact is far more devastating than the numbers show, Paramount Energy Trust President Susan Riddell Rose said in a conference call last Thursday.

“If you extrapolate where the industry was going based on the front end of the curve in 1996, you can see that we might have been around 1.5 Bcf/d,” Rose said. “The effect of all this [regulatory intervention is the loss of] more than 1 Bcf/d.”

But the impact goes far beyond that, she said. The financial impact of the policy will be measured in “billions” of dollars, not “millions” of dollars.

The proposed policy is designed to preserve thermal recovery of as many as 100 billion barrels of crude bitumen reserves from a portion of the 5.5 million acre Athabasca Oil Sands area. Evidence indicates that gas production from the area poses a risk of bitumen loss, as bitumen may not then be recovered through existing thermal recovery techniques, such as steam-assisted gravity drainage, according to the Alberta Energy and Utilities Board (AEUB) (see NGI, June 9).

On June 4, Alberta regulators issued General Bulletin 2003-16, which invites continued consultation on its proposed “Gas Production in Oil Sands Areas” conservation policy. Interested parties are invited to provide comments on the proposed policy at a public two-day consultation meeting beginning July 3 in Calgary. The completed policy will be released shortly thereafter.

Paramount said the policy would force the shut-in of about 50% of its gas production. When the company explained the impact to investors on June 4, within about one minute of stock trading it lost C$230 million in value as its shares plummeted on the news. “The confidence of our investors is shattered. We’re forever tainted with this,” said Rose.

But it certainly didn’t have to be that way, she said. About 95% of the Paramount gas production that will be shut in to avoid the risk of bitumen loss in the Wabiskaw-McMurray strata would never have had an impact on the bitumen production, she said.

“Does gas production pose an unacceptable risk to thermal bitumen recovery wells? Much of industry thinks not,” said Rose. “That includes both bitumen producers and gas producers. This is not an issue of gas producers versus bitumen producers. There are some bitumen producers that feel there is some risk, but clearly there are bitumen producers that believe in concurrent production. It’s the AEUB that believes there is a conservation risk here. The technical argument is far from conclusive though.”

Rose said a large amount of the gas that would be shut in under the proposed policy “clearly poses no [bitumen] conservation issue at all.” She said that in fact there is “no empirical evidence at all” that gas production has impacted bitumen recovery anywhere in the province of Alberta.

“There’s a lot of uncertainty about this, and to go and shut in without taking a look at this in detail [is wrong]. The final point is that the commercial viability of bitumen is currently uncertain with gas prices being where they are — that being their major source in fuel. It’s C$15-16/bbl just for fuel costs alone just to generate a barrel of bitumen. I can tell you when you add on all the other costs…there’s not a lot of money left, if any.”

Rose said that up until the AEUB started looking into this matter in 1996, the region had seen significant growth in gas production. “The inquiry basically paralyzed the industry,” leading to a significant amount of lost gas supply, she said. Gas production started falling in 1996 and now is down to 600 MMcf/d from 1.2 Bcf/d. The AEUB is proposing to shut in another 250 MMcf/d, leaving only 350 MMcf/d.

“It probably increases the uncertainty in the rest of the province; what’s the AEUB going to do next? It’s created some major damage to producers, particularly to our trust,” she said. “It’s provided a very short timeframe for industry to respond, which is really reprehensible… It abandons due process.

“It proposes to shut in 2% of Alberta’s gas production at a time when basically you can’t access these areas, so a lot more production will be shut in than is ever required just because of the Aug. 1 date; you can’t get in with rigs to bring other gas flows on at this time of year. It leaves the future of gas production in this region uncertain.”

There will be gas production that no longer will be economic to produce because of this, she added. This policy is “serving to constrict gas supply during what many have deem a crisis in the current North American gas market.”

In addition, it would create a huge liability for the province of Alberta, she said. “The compensation price tag is well in excess of $2 billion. And what’s the impact on gas prices of shutting in 2% 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.”

Rose said Paramount has formed a new consortium with all the gas producers in the area and the majority of the bitumen producers to address these issues. She said Paramount wants the issue to go through technical evaluation ensuring due process. “Gas should not be shut in here. The [previous] process has been working; it should be maintained… We need a clear commitment for full and timely compensation if due process does in fact support that there is some risk to bitumen in certain areas.”

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