May 26th, 2020

Medicine Hat to shut down 2,000 shallow gas wells

By Kuhl, Nick on September 18, 2019.

Collin Gallant

Southern Alberta Newspapers – Medicine Hat

Medicine Hat city councillors say it’s a sad day to approve shutting down 2,000 shallow gas wells – the symbol of bounty and the enterprising nature of the city – but insist the time is now to stem losses, and “do what’s right” by properly closing wells.

The three-year “accelerated” program to close in the city’s highest-cost, lowest-producing wells was discussed at council Monday for the first time since it was announced last week.

Commissioner Brad Maynes touched on the specifics of the plan, said to cost $90 million, but also the financial case and the state of the industry in which the city’s losses could reach $35 million this year.

“It’s a sad day, but it’s reality,” said Coun. Jim Turner, a member of the energy committee. “There are companies that don’t have money set aside. This will not be a burden to the taxpayer. If we delayed this for three years, that’s $100 million in losses. Let’s use that money to close these wells.”

The current budget suggests using reserve funds to pay for operations in the division hammered by low commodity prices and the advent of shale gas exploration.

Embarking on the shutdown plan now, said Maynes, will reduce operating costs sooner and reduce abandonment costs overall.

“The longer we wait the more it will cost,” said Maynes, who said the average cost to produce gas across the whole city portfolio is $2.68 per gigajoule, while prices dropped as low as 38 cents this summer.

“It’s not sustainable, though we wish that wasn’t true,” Maynes told council during a 30-minute presentation.

Mayor Ted Clugston said Medicine Hat’s putting a new focus on the troubles of conventional gas producers in the province, and he’s heard solidarity from others.

“For the ‘Gas City’ to be doing it now is a bit of a wake-up call,” he said

“The people I’m talking to and in business circles are saying that they applaud making this extremely tough choice, but nobody thinks we’re enjoying this.”

Coun. Julie Friesen said the division has created enormous wealth in Medicine Hat, offsetting taxes, funding public projects and bolstering cash reserves.

Now, a more-focused division with about 500 to 800 oil and still economic gas wells can become profitable again and seek out new opportunities with a “small” commercial group.

“It’s a sad thing for a 100-year-old asset, but it’s the right thing to do for the people we serve – the people who own it can’t stand to keep losing this staggering amount of money,” she said.

Coun. Jamie McIntosh told the News that Albertans are increasingly concerned about a growing spectre of oilfield liabilities.

“People are screaming for companies to take care of their responsibilities” rather than declaring bankruptcy and leaving them for the industry or potentially government to clean up, he said last week.

On Monday he queried administrators about costs of the local program and whether the $150 million in reserve funds earmarked for abandonment will be enough.

Maynes said the division will bring an item to the corporate services committee this fall in order to begin accessing the funds that are currently invested with AIMCo.

The city’s own accounting estimates its entire well retirement liability at $236 million if it were to proceed today.

Provincial energy regulators consider a well’s economic lifespan and that ongoing revenue offsets the end costs.

With a 10-year lifespan remaining, the city’s total future cost at that time is pegged at more than $300 million, but removing them sooner lowers that estimate.

“It makes it look like we’re underfunded,” said Maynes of the two systems.

He added some additional money may be needed, but not the entire difference. In his opinion costs will also continue to fall as technology increases and economies of scale are employed.

The work will proceed at 700 sites in the spring of 2020 in the Fox Valley area, said Maynes, following the winter heating season when prices are higher.

About 1,000 more wells would begin the process in early 2020, though it could take up to seven years before lease payments and local tax expenses are off the books.

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