Sale poises city for the future: officials
With sale of 1,500 gas wells, Medicine Hat begins move to a more balanced portfolio
The Gas City is not immune to challenges in the natural gas sector, say members of Medicine Hat’s city council.
Elected representatives restated Thursday that a major divestiture of city-owned wells leaves the energy company in better shape for the future after years of low profits and rising estimates to abandon its aging network of well sites.
The division announced in December it was in advanced talks to dispose of about 1,500 wells — one-third the city’s active portfolio — in southwest Saskatchewan.
This week the News was first to reveal the likely, though unconfirmed, purchaser as Canadian Natural Resources, and the value of the deal at $53.5 million.
Much of that involves removing long-term liabilities, not new cash, administrators said Thursday. They described the sale as targeted to move low-return wells off the books about three years after the Hatton, Bigstick and Horsham fields in southwest Saskatchewan last returned notable profits to the city.
Gas prices have been depressed since the advent of shale gas exploration in 2008.
Facing low long-term price forecasts and rising abandonment estimates, council voted in December to divest about one-quarter the gas portfolio.
At the time, Coun. Robert Dumanowski said the move was “unprecedented” — a term he says still applies.
However, he said, the city unit has the same challenges as other conventional natural gas producers.
“It’s impacted a 100-yearold proven asset like the city of Medicine Hat (energy division),” he said.
“The landscape has morphed and we have to be able to change with the industry. With the staff we have, I believe that we’re well positioned.”
It’s part of a retooling of the portfolio away from natural gas toward oil and with a goal of shielding the city from future abandonment costs estimated recently at $265 million.
Utility committee chair Coun. Bill Cocks says it’s clear that simply harvesting gas is no longer viable.
“It’s done well for us over the years, and (the fields are) still generating cashflow, but we couldn’t see it turning around to be profitable in the future,” said Cocks of the specific wells. “We haven’t got out of the business completely, and we don’t intend to.”
The sale represents a major portion, but not all the city’s reserves in Saskatchewan. It will maintain operations at the city’s Freefight field and Leader, as well as its Saskatchewan office.
A current oil exploration program is focusing on western Saskatchewan, as well.
Mayor Ted Clugston characterized the sale as trimming down the city’s portfolio to focus on more profitable operations, specifically oil, where managers see more upside and better profit margins.
“We’re rebalancing the portfolio to where it’s more one-third gas, onethird oil, one-third power,” Clugston told the News.
The bulk of the fields sold were purchased in 1999 from Numac Energy for $35 million, but petroleum division general manager Brad Maynes says a large number of wells in the package were acquired in numerous purchases over the years.
That makes it difficult to discern original costs or profitability over the years.
“A lot of it predates the city records and (computerized) reporting systems,” said Maynes.
“These were certainly successful purchases in terms of getting money back and making a profit on the fields.
“There were some very good years for gas pricing while we owned the assets.”
In 2015, a city analysis of historic property performance states the Hatton and Bigstick fields brought 60 billion cubic feet of gas to the city’s reserves at an average purchase cost of 78 cents per gigajoule.
Over the next 14 years, the retail price of gas spiked over $10 per gigajoule four times and averaged $4.86 over the period.
Over the same time, the entire division paid $550 million in dividends directly to city coffers for tax abatement and capital building projects, as well as a rate subsidy to consumers.
“(Fiscal) 2014 was probably the last profitable year (in that field),” said Maynes.
“In aggregate, the (sold) properties are still cash-flow positive but not by very much … We don’t see gas prices coming up, or high enough to do any new drilling. That, along with abandonment costs was the driver.”