Investors like riding on the bandwagon of junior oil and gas companies. But beware of a looming bump on the road.

Sixty-four publicly traded junior players with operations in Western Canada out- performed the TSX 1000, according to a report by Iradesso Communications Corp. The companies have average production of between 500 and 15,000 barrels of oil equivalent daily.

Their average share price jumped 15 per cent for the quarter ended June 30, and then rose another 14 per cent in July and August.

In comparison, the TSX 1000 increased 10 per cent in the same quarter and another eight per cent in July and August.

Iradesso’s report compares the companies’ strengths and weaknesses in 11 different areas. The junior oil and gas firms have a total market capitalization of more than $6 billion, and are weighted 61 per cent to natural gas production – reflecting forecasts of continuing strong gas prices.

The bump could come at the end of this month. That’s when securities regulators will adopt more stringent rules for companies reporting their oil and gas reserves.

Firms will have to re- evaluate their reserves every year and can only include as “proved” reserves those with a 90-per-cent probability of recovering the oil and gas. In cases where companies have to reduce their reserves, junior players with only a few properties will be hit harder than large corporations with many holdings.

THE REST OF THE STORY
Alberta’s energy regulator needs a new calculator – one with a minus sign.

A new report from the Energy and Utilities Board (EUB) offers some useful numbers in the debate about how sour gas, which contains poisonous hydrogen sulphide, should be exploited in a way that benefits all Albertans.

Unfortunately, the EUB leaves out half of the equations.

The report, Nature of Local Benefits to Communities Impacted by Sour Gas Development, is the result of a recommendation made in December 2000 by a provincial advisory committee that reviewed sour-gas development and public health and safety.

The report assesses the economic benefits and the impacts on residents of sour-gas development in the entire province, as well as in the more than 50 municipalities where the sour-gas industry operates. It also takes a more detailed look at four specific municipalities located in regions producing sour gas.

Across the province, the sour-gas industry supports more than 37,000 direct and spinoff jobs, and generates approximately $1.3 billion in wages and salaries, according to the report.

In 2000, the province collected $1.52 billion in royalties from sour-gas production, $41 million in mineral taxes and $225 million in provincial taxes.

In the more than 50 municipalities where the industry operates, sour-gas operations and spinoff economic activity generated about $60 million in gross revenue.

The four municipalities examined in greater detail, although each different in terms of economic base and population, all gained from sour gas. In 2000, the financial net benefit amounted to $1.3 million for the Rocky View district, $500,000 for the Foothills district, $3.8 million for Clearwater County and $1.6 million for Saddle Hills County.

It’s a compelling portrait of the benefits, but it’s only half the picture.

The EUB’s report fails to balance the benefits of sour-gas development with a similar analysis of the negative impacts on residents. There is not a single dollar figure attached to impacts such as lower property values, loss of grazing lands, costs of increased human health care or veterinary services for livestock, or diminished quality of life.

Instead, this section of the report is rife with useless generalizations obvious to any Albertan who hasn’t been living at the bottom of a well for the last 50 years.

Here’s a typical example of the “revelations” – “Some residents who live near sour-gas facilities have concerns about the industry with respect to safety, health, the environment, lifestyle and the time commitment required to deal with sour-gas issues.”

No kidding! And what are the financial costs of these negative impacts? The report doesn’t offer a clue.

If the EUB is able to quantify the benefits of sour-gas development, it should also have the capacity to put a dollar figure on the downside.

In fact, given the lop- sidedness of this report, the regulator now has the obligation to do exactly that.

B.C. CATCHING UP
Is Alberta in danger of losing its crown as Canada’s energy province?

British Columbia sold a remarkable $418 million in oil and gas rights at its September auction, eclipsing the previous monthly high in Canada of $139 million set by Alberta in December 2000.

Companies focused their buying on the foothills of northeast B.C., in an area between Dawson Creek and Tumbler Ridge that geologists believe holds deep deposits of natural gas.

Winners in the sealed-bid auction weren’t revealed. But gas producers active in northeast B.C. include EnCana Corp., Talisman Energy Inc., Apache Canada Ltd. and Canadian Natural Resources Ltd.

B.C. has raised $600 million through its sales of oil and gas properties this year, and is closing in on Alberta’s tally of $636 million to date.

The oilpatch investment in B.C. is as welcome as rain for the forest fire-scorched province, where the government last week cut the expected GDP growth for 2003 to just 1.5 per cent – down from an earlier forecast of 2.4 per cent.

TIME TO TRIM
Tiny UTS Energy Corp. is trying to swallow the much bigger stake of TrueNorth Energy Corp.’s interest in the shelved $3.5-billion Fort Hills oilsands project near Fort McMurray.

If UTS were smart, it would also trim the project a little, to save money and make it more palatable to environmental groups. UTS, which employs only six people, wants to buy TrueNorth’s 78-per-cent interest in the proposed open-pit oilsands mine, to try to get the project moving again.

TrueNorth, after receiving conditional approval from provincial regulators, put the project on hold in January. The company cited its inability to find a financial partner and uncertainty about the cost of reducing greenhouse gas emissions under the Kyoto accord.

But under its approval conditions, TrueNorth also faced a series of costly measures aimed at protecting the McClelland Lake complex, a significant, rare peat wetlands. The operation would have directly affected almost half of this ecologically sensitive area.

Conservationists say the area could be protected by making just over four per cent of TrueNorth’s original 3,450-square-kilometre mining area into an ecological reserve.

It’s something UTS should seriously consider. It might prevent a lot of indigestion.