http://www.bloomberg.com/apps/news?pid=20601082&sid=aMuolV93tMfc

April 26 (Bloomberg) -- Quebec wants to build its nascent natural-gas industry by crafting a new law to make it easier for producers to operate in the province, Natural Resources Minister Nathalie Normandeau said.

Normandeau plans to introduce legislation in the fourth quarter to regulate oil and gas production, she said in an interview in Montreal. While Quebec doesn’t yet produce oil or gas commercially, companies such as Talisman Energy Inc., Forest Oil Corp. and Questerre Energy Corp. have begun exploring in the province.

Exploration for hydrocarbons is so new in Canada’s second- most populous province that there is no law specifically designed to govern oil and gas operations. Drillers are regulated by a hodgepodge of six laws, including the Mining Act and Forest Law.

“We want to create a fiscal and legal framework that can make a company decide to invest in Quebec rather than Pennsylvania,” said Normandeau, who also is the province’s deputy premier.

Edward Kallio, director of gas consulting at Ziff Energy Group in Calgary, said Quebec may hold about one-tenth as much gas as the Haynesville Shale in Louisiana and Texas, which the U.S. Department of Energy estimated last year holds about 251 trillion cubic feet of gas in shale-rock formations.

“It’s relatively small, but it’s a nice resource to have on your doorstep,” said Kallio, who doesn’t expect production in the province to start before 2015. Quebec would have the potential to supply as much as 500 million cubic feet of gas a day from the Utica Shale by 2020, he said.

Test Wells

Normandeau declined to give details of the regulatory changes she is considering.

“We will not do this at the expense of the environment,” she said. Provincial legislators would have to vote to approve the new law.

Talisman, which is exploring a formation known as the Utica Shale in the St. Lawrence River valley, has plans to test four horizontal pilot wells in Quebec this year. Paul Smith, the company’s executive vice president for North American operations, told analysts on a Feb. 10 conference call that the company would know more about Quebec’s potential by mid-year.

North American gas producers are boosting output from shale formations, where rocks hundreds of feet below the ground are fractured to free trapped natural gas, which is then pumped to the surface. Techniques created in the 1990s to tap gas in shale are allowing producers to extract liquid hydrocarbons from formations that were previously too dense to exploit profitably.

Royalties, Taxes

Developing natural-gas production may help create as many as 10,000 jobs in the province of 7.8 million people over several years, Normandeau said. Producing gas locally would increase government revenue from royalties and taxes while allowing Quebec to reduce its dependence on shipments from western Canada, said Ziff Energy’s Kallio.

Natural gas accounts for 13 percent of Quebec’s energy consumption, compared with 38 percent for oil, according to the government.

State-owned Hydro-Quebec supplies almost all of the province’s electricity, with about 95 percent coming from hydroelectric stations. Gas is used mainly for heating and industrial purposes.

“If we are able to start producing gas, I can see a day when it will play a bigger role than oil in meeting our energy needs,” Normandeau said.

Environmental Concerns

Association québécoise de lutte contre la pollution atmosphérique, a provincial environmental group, wants Quebec to halt shale gas exploration, not expand it, until the impact on the environment can be assessed.

André Bélisle, the group’s president, said his association’s concerns include the possibility of hydrogen sulfide, a toxic chemical compound contained in natural gas, being released into the air.

“The government is telling us to trust them, but we have real reasons to be worried by shale gas,” Bélisle said in a telephone interview.

Under Quebec’s mining act, oil and gas resources are owned by the province. Gas producers would pay royalties of 10 percent to 12.5 percent, depending on the size of the production.

Companies that want to pull water from the ground or drill on Quebec farmland must get permission from government bodies such as the provincial Environment Ministry and the Commission for the Protection of Agricultural Lands.

‘Enormous’ Potential

Jean-Yves Lavoie, chief executive officer of Quebec City- based energy explorer Junex Inc., said he and his industry counterparts welcome the government’s efforts to tailor a law for oil and gas production.

“Quebec’s natural-gas potential is enormous, and having a clear regulatory environment can only help,” Lavoie said in a telephone interview.

Junex, citing an assessment by Texas-based consultants Netherland, Sewell & Associates Inc., said April 19 that it may be able to produce 3.7 trillion cubic feet of gas from its Quebec properties. The total resource may be as high as 48.3 trillion cubic feet, the company said.

“There is plenty of gas in the ground in Quebec,” Lavoie said. “The question now is whether we are going to be able to produce it in a way that makes economic sense. It’s all about the production costs.”