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Gas shut-in plan flares Government wavers as investors ponder class-action lawsuit Gary Park Petroleum News Calgary Correspondent
A stunning decision by Alberta’s energy regulator to shut in 2 percent of the province’s natural gas production at a time of rising supply worries is not inflexible.
The Alberta government and the Energy and Utilities Board have both indicated a willingness to consider alternatives to the board’s June 4 proposal to idle 900 gas wells and 250 million cubic feet per day of volumes in the interests of protecting 100 billion barrels of recoverable bitumen.
Paramount Energy Trust, hardest hit by the proposed shut-ins, warned June 18 the total lost output could eventually grow to 1 billion cubic feet per day or 8 percent of Alberta’s production, opening the door to compensation claims of C$2 billion.
The board set an Aug. 1 deadline for the indefinite gas shut-in, triggering a furor among gas producers including threats of a class-action lawsuit from Paramount Energy Trust and setting in motion an attempt at peace-making among both gas and oil sands operators in northern Alberta.
Alberta Energy Minister Murray Smith joined those trying to tone down the controversy by offering to work with industry to seek “appropriate solutions.” Fair and reasonable outcomes In June 9 letters to the Canadian Association of Petroleum Producers and the Small Explorers and Producers Association of Canada, he said the government is anxious to maintain “confidence in Alberta’s investment climate and the integrity of the mineral rights business of the province,” while finding “fair and reasonable” outcomes.
But, in giving priority to “the principle of conserving natural resources,” he cautioned the industry that it must recognize the reality that “there are physical and regulatory risks in oil and gas investments.”
Smith also noted that the Energy and Utilities Board since 1996 has held one inquiry, two full-scale hearings and a consultation process, including a March 2002 decision to shut in 146 of 183 gas wells, based on the comparative value of the resources — 95 billion to 180 billion cubic feet of gas reserves vs. 15 billion barrels of bitumen.
In its latest finding, the board, faced with declining oil sands reservoir pressures because of the gas production, said that because the gas pools over 5.5 million acres of oil sands are at an advanced stage of depletion “immediate action is needed to mitigate further risk to thermal bitumen recovery.” Contrasts stark This time the contrasting economic values were just as stark — 1 trillion cubic feet of gas (the energy equivalent of 175 million barrels of oil) vs. 100 billion barrels of recoverable bitumen.
The board has since said that its Aug. 1 shut-in target could be postponed after two final days of consultation are completed July 3 and 4.
A spokesman for the board said Aug. 1 is not a definitive date and no gas producer will be required to cease operations until a final policy is issued sometime between July 31 and Dec. 31.
Meanwhile, the pursuit of a compromise has intensified among both the gas and oil sands sectors, especially those with cross-over interests such as EnCana and Canadian Natural Resources.
EnCana is developing technology that it believes can allow gas production without lowering pressures to the point where operators can no longer extract underlying bitumen. That could involve nitrogen injection to stabilize reservoir pressures.
Canadian Natural has called for an industry coalition to work on a more balanced solution.
But, reflecting the strongly held views, Petro-Canada insists there should be no gas production until the bitumen has been removed and that could take decades. Investors discussing legal action Caught off guard by the abruptness of the board’s announcement, retail and institutional investors in Paramount Energy Trust are discussing possible legal action based on an argument that their property has been confiscated by a government agency without compensation.
Following last year’s ruling, the seven gas producers were offered C$85 million in compensation, although any technical solution acceptable to the gas producers, government and oil sands leaseholder ConocoPhillips Canada before 2007 could open the way for the board to lift or vary the shut-in order.
Paramount, which lost 20 million cubic feet per day of gas volumes last year, is now faced with losing another 44 million cubic feet per day or more than half its daily output.
Since June 4, the market value of its units has tumbled close to C$9 from almost C$14 only a month after it issued a final prospectus on which it raised C$55 million at C$12.65 a unit.
Clay Riddell, Paramount’s chairman and chief executive officer, who has lost more than C$90 million from his own 49.6 percent holding in Paramount, is ready to “turn every stone we can legally” to reverse the board decision or gain compensation.
George Kesteven, manager of investor relations at PrimeWest Energy Trust, said PrimeWest will make its case at the July 3 and 4 hearing that the “time frame is extremely short ... the whole thing seems to be very, very fast.”
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