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EUB back-pedalling still leaves oils sands situation unclear

Despite first impressions, the Alberta Energy and Utilities Board clearly blinked on the complex gas-versus-bitumen issue, but many in the oil patch still think the regulator is not seeing the issue clearly.

The EUB decided Tuesday to stand by its June decision to shut gas wells near the province's oil sands on the grounds that continued production could interfere with future bitumen recovery. But while it appeared to bravely stand its ground and fend off impassioned pleas for an eight-month reprieve, it effectively backtracked substantially in granting what amounts to a five-month delay in the shutdowns.

This can only be interpreted as an acknowledgment that its June 3 bulletin announcing the unilateral shutting of 2 per cent of Alberta's natural gas production as of Aug. 1 was not only imprudent but perhaps illegal.

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The gas producers and their supporters argue that the June 3 decision was imprudent because it didn't follow due process.

The legal argument is made based on a 2000 case involving Giant Grosmount Petroleum Ltd. That case, according to chief executive officer Robert Watson, set a precedent that requires a particular procedure be followed when the EUB wants to order companies to shut production.

The "shoot first, ask questions later" mandate more than raised the hackles of the oil patch, regardless of whether a company was operating in northeastern Alberta, because the board had arrived at the decision in the absence of an application by a bitumen producer and therefore was acting as judge, jury, plaintiff and defendant.

This simply was not an action that would inspire future investment in the area.

With this week's decision, however, it appears the EUB listened to submissions and then announced modifications, even though they were not exactly what everyone was hoping for.

The first piece of good news is that the shutting of the wells will happen one month later than originally mandated, but as long as companies apply for an exemption, wells that are clearly not overlying bitumen reserves or that came into production after July, 1998, can stay in production.

If there is an issue, the board or an existing bitumen producer can challenge the exemption and then the onus is on the company to prove that the natural gas is in fact "not associated" with the bitumen reservoir; in other words, that producing the gas won't affect the pressure in the reservoir in a way that could affect future bitumen recovery.

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What puzzles Mr. Watson, who has been active in the region for about 30 years, is that there are ways to repressurize the gas reservoir so the ability to produce the oil is not compromised.

"It's done all the time, all over the world," says Mr. Watson, who testified at the July hearings on his company's behalf.

The exemptions will be subject to the results of a geological model of the region, which the EUB says will be completed at the end of December.

Add it all up and the natural gas producers have effectively been granted a five-month reprieve.

While that is better than the blanket ruling that was going to require all 938 wells be shut on Aug. 1, there is much that remains unanswered.

It's curious that the board brought forward the original order in the absence of any formal application by a bitumen producer -- which was the case back in November, 1996, when Gulf Canada Resources Ltd. first asked that natural gas production in the Surmont area be shut down.

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It took until 1999 for that case to be resolved, with the result that ConocoPhillips, the new owner of Gulf, along with the provincial government, had to compensate the affected gas producers to the tune of $85-million for lost revenue -- but that was only one-third of the value.

Given that Surmont set a precedent for compensation, it's tough to imagine that payment won't be demanded by the parties affected by the current ruling.

So who will pay? It likely won't be the bitumen producers, so that leaves the Alberta government to dig into its royalty-laden coffers. And because Albertans arguably own the resource, it's essentially Alberta taxpayers who could be on the hook -- at a much higher price than in 1999.

As well, according to Mr. Watson, the EUB has chosen to rely on computer models to determine the size of the bitumen reserve and its recoverability.

He points out, and rightly so, that more than 50 per cent of the gas wells in question do not overlie an existing bitumen lease. The conclusion to be drawn from that bit of information is that the bitumen leases have been deemed uneconomic, otherwise someone would have picked them up by now.

The good news is that the EUB did some back-pedalling this week, but it will take a long time before the unease and distrust created as a result of its initial June ruling is forgiven, let alone forgotten.

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