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| Right decision - Tuesday, July 29, 2003 at 15:12 |
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Right decision Calgary Herald Sunday, July 27, 2003 Energy Minister Murray Smith has been commendably prompt to promise talks on compensation for gas producers injured by gas well closures in the Wabiskaw-McMurray area. As the situation arose from the province's splitting of gas and bitumen rights there back in the '80s, its liability is clear. Both industry and investors needed quick assurance the province would step up to the plate. Rights splitting was a departure from normal oilpatch practice. Typically, rights to conventional oil and gas were marketed together. Their subsequent production was regulated by the Alberta Energy and Utilities Board, oil first, and gas only when it was no longer needed to pressurize the oil well. At the time, tar sands production was open pit. Deep deposits were considered inaccessible and, since the gas seemed unrelated to bitumen extraction, the province marketed the gas rights to stimulate gas production in the north. Only later, when steam-assisted gravity drainage put the buried bitumen within reach, did this become a problem. As in conventional extraction, SAG-D requires gas pressure to operate efficiently. But by then, large areas of land around Fort McMurray had been parcelled out with split rights. This is the source of the tension between gas and bitumen producers, both of whom had applied in good faith to extract resources under the terms set by the province. It is hard to fault the shut-in decision itself, of course. The evidence seems compelling that continued operation of the wells would have seriously impeded bitumen extraction. As the bitumen is said to be about 600 times the worth of the natural gas, the board made the logical decision. Yet, gas producers' rights have been summarily set aside. While the gas is still retrievable after the bitumen is gone, that could be years away. The issue of compensation cannot be avoided. There is one precedent. In 1996, Gulf complained gas production in the Surmont area was interfering with its attempts to extract bitumen (and, in the process, sparked the six-year EUB review which led to Tuesday's shut-in decision). Eventually, a deal was brokered which accommodated both Gulf's need for gas pressure and the expectations of gas producers, who were compensated with an $85 million royalty release on their other production. Doubtless that deal will be a starting point for negotiations, with the earliest leaseholders presenting the strongest case. Later arrivals -- since 1996 -- arguably should have known the risks, and have already got up to seven years out of wells that typically have a life of eight to 10 years. Still, there is no alternative to doing the right thing. Legitimate claims should be dealt with quickly and fairly. Above all, when the present moratorium on lease sales in the area is lifted, the government must resume marketing gas and bitumen rights together. Clearly, much has changed and bitumen, not gas, is now the key product.
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