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Quebec: Caught in a bind Province freezes drilling to conduct environmental review, introduces royalty regime in anticipation of eventual 50 tcf development Gary Park For Petroleum News
Of all the North American jurisdictions with shale gas resources, few if any have as much to win or lose as Quebec.
Early calculations estimate its Utica formation, stretching over 160 miles of the St. Lawrence Lowlands between Montreal and Quebec City, holds at least 50 trillion cubic feet of recoverable resources which could yield 700 million cubic feet per day within 10 years of commercial development being approved.
That, in turn, would take a large bite out of the C$16 billion a year Quebecers pay to import oil and gas.
It could also improve Quebec’s trade balance if gas is ever exported across the border to key markets in the U.S. northeast.
The provincial government has taken every chance it could to promote those benefits.
But the administration of Premier Jean Charest, which is facing a heavy defeat in the next election, is just as mindful that opposition in Quebec to shale gas development is probably more strident than anywhere on the continent.
Public meetings have turned into heated encounters, 128,000 residents have signed a petition opposing development and recent polls indicate up to 77 percent of Quebecers will not easily be persuaded that shale gas exploration and production will do anything but harm to water supplies and the environment.
Review agency findings accepted The public mood easily won the day March 8 when the government wasted no time accepting the findings of its environmental review agency and effectively shut down any new shale gas activities for two years, pending a “strategic environmental evaluation” of hydraulic fracturing.
The action came within hours of the government receiving a 323-page report compiled over the last six months that called for a freeze after concluding scientific evidence on the impact of fracking is “partial or nonexistent.”
The agency said a major piece in the shale gas puzzle covering the impact on water will be available in 2012 when the U.S. Environmental Protection Agency delivers the findings of a two-year study.
Environment Minister Pierre Arcand said in a statement “Quebecers should know we will not accept any compromise on health, safety and respect for the environment,” despite the commercial potential of shale gas. But he backed away from imposing an outright moratorium.
“The conclusion of the (review agency) is clear: the lack of knowledge about shale gas requires the government’s close supervision,” he said. “We will take the time needed to answer all the questions.”
Arcand said 18 wells have so far been fracked and, for “scientific purposes,” the government will allow fracking at another 13 wells that have been drilled.
He said new regulations would eventually be adopted to tighten controls over shale gas exploration once a committee of experts and government officials completes a “strategic environmental review” by June or July.
Sliding scale royalties While awaiting results from the environmental review, the government announced that if development proceeds, it will charge royalties on a sliding scale of 5 percent to 35 percent, depending on gas prices and well productivity.
Finance Minister Raymond Bachand said Quebec’s share of production revenues could climb to 50 percent once corporate taxes were included, generating up to C$440 million in annual royalties and taxes for the province.
He said the government’s goal would be to encourage exploration by allowing producers to pay lower royalties in the initial development and commercialization stages in exchange for higher royalties once upfront costs were recovered, adding “it is now reasonable to believe that Quebec’s subsoil holds substantial shale gas potential.”
The budget said all Quebecers must benefit from commercial development of the resource, including a C$100,000 per-well compensation to municipal governments to be paid over 10 years.
250 wells a year estimated The government estimated that 250 wells could be drilled each year if production receives the go-ahead, building to 3,030 producing wells within 15 years and a productive life for the resource of 16 to 72 years.
Currently 12 companies have interests in shale gas exploration, led by a joint-venture of Talisman Energy and Questerre Energy, but all have either shelved or slowed their activities, citing high drilling costs, the lack of a service industry and the uncertain regulatory outlook.
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, noted that in adjoining New York State a similar temporary moratorium has been placed on fracking.
“I think that once the science and facts (are known), Quebec will be comfortable moving forward with shale gas. The province knows there are billions of dollars in royalties and thousands of jobs that can be created by developing its shale resources,” he said.
Grant Daunheimer, an analyst with Dundee Securities, said in a research note he does not expect “any material news from the play for up to 24 months.”
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