Final Bitumen Ruling Affirms Alberta Gas Producers Must Give Up 917 Wells

A seven-year civil war in the Alberta energy industry ended with a provincial decision that affirms that natural gas producers must give up 917 gas wells capable of producing 120 MMcf/d because the wells threaten future oilsands development.

In a final ruling on the marathon faction fight, the Alberta Energy and Utilities Board (AEUB) rejected appeals to save the northern gas wells. The appeals were made during a summer of technical hearings on previous bitumen conservation decisions.

The AEUB refused to make significant changes to a 2004 interim ruling. But although the gas faction repeated claims that the shut-in remains unnecessary, no producers stepped forward to fire off further appeals to the courts. The Alberta Department of Energy lowered the temperature of the dispute last winter by announcing a compensation policy of royalty reductions for companies hurt by the board decision.

The new ruling repeated the gas wells must be turned off to preserve underground pressure that oilsands developers and board engineers believe will be required for eventual production of 25.5 billion barrels of bitumen.

Companies that resisted the policy did not convince the board that they are within sight of devising means to protect the bitumen while producing the gas.

The dispute centers on Athabasca oilsands deposits in the Fort McMurray region of northeastern Alberta but outside the area's internationally renowned bitumen strip-mining district. The deposits involved in the conflict are too deeply buried for mining, and an emerging branch of the oilsands industry uses wells and heat injections to make hot bitumen flow to the surface.

The AEUB estimated the amount of oil being saved by its hotly contested decision is equivalent to 500 times the energy in the volume of gas being sacrificed.

The policy shuts in about 280 Bcf of gas, or seven-tenths of 1% of Alberta's total reserves. Nearly 15% of the province's bitumen reserves are involved in the case.

Alberta Energy's compensation program does not pay out cash to companies losing gas production as a result of the AEUB policy. Instead, royalties are reduced on production from other wells owned by the companies outside the oilsands belt.

The compensation scheme was initially projected to cut provincial revenues by about C$95 million a year (US$76 million). But the Energy Department said the amount could turn out to be higher because the value of foregone royalties will depend on gas prices, which have climbed steadily since the compensation was granted.

The leader of the resistance, Paramount Energy Trust, alone collected C$32 million (US$26 million) in compensation for shut-in Athabasca gas wells since the program started.

In a statement Nov. 11, Paramount described the royalty cuts as still only "partial relief." The trust said it "still owns the shut-in reserves and they would be much more valuable were they returned to production."

Paramount added the final AEUB decision does no significant new harm and made no move to repeat past appeals to the courts. But the trust vowed to keep trying to revive its 17.4 MMcf/d in shut-in oilsands region gas production by other means. After repeated regulatory and legal setbacks, the gas faction has turned to technical research on ways to revive production without interfering with bitumen development prospects.

Paramount also vowed to maintain a close watch on the oilsands developers as they step up activity in the contested region with a technology known as SAGD or steam-assisted gravity drainage, which uses paired horizontal wells for simultaneous heat injections and production flows of hot bitumen.

"Associated gas production and contamination from SAGD operations is a serious concern for all owners of shut-in gas reserves," Paramount said.

The conflict over gas and bitumen has divided the Alberta industry into dueling factions since 1998, when the AEUB took action on warnings by oilsands developers that vast potential production was in jeopardy. In some cases such as EnCana Corp. companies found themselves divided internally, with gas and oilsands divisions on both sides of the conflict. EnCana is a leader of efforts to find a technical solution that would allow both gas and bitumen production in the Athabasca region.

The oilsands faction also won an earlier preliminary round of the fight, when gas wells were closed down to protect the pioneer Surmont SAGD project south of Fort McMurray.

Seeds of the conflict date back to early 1990s oilsands technology advances. Previously, deep deposits were thought to be beyond reach of development. In the 1980s, when royalty revenues were severely depressed and oilsands development appeared to be dead due to poor commodity prices, the province sold separate rights to tap natural gas in the Athabasca region.

Copyright 2005 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.

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