Petroleum division not a moneymaker yet

By Collin Gallant on January 9, 2018.

cgallant@medicinehatnews.com @CollinGallant

Stalled commodity prices and a stalled drilling program in 2017 mean red ink continues to flow for the City of Medicine Hat’s petroleum division, which began a major makeover last year.

Administrators presented an updated business plan for the city’s natural gas and petroleum resource unit to council on Monday night, showing a major divestiture, plus low commodity prices will cut $45 million in income out of the new budget.

Reduced operating costs and lower capital spending picked up some of that, but planned production growth from an oil-drilling expansion is slower materializing than planned.

“(The budget is) steady on the course we’re on, but it’s a choppy sea and a difficult year in (energy) pricing,” petroleum resources general manager Brad Maynes told council.

As for slower progress on drilling, Maynes said arranging drilling crews, land and approvals took longer than expected for the first stages of a three-year, $45-million plan to add oil production.

“We had a lot of optimism going and we still have optimism,” he said. “We see in 2018 that drilling is steady.”

The division is expected to show an operating profit of about $2 million — not enough to produce a dividend after capital spending is factored in. The original growth strategy predicted a return to profitability in 2019 or 2020.

Maynes said two-thirds of the income drop difference is related to lower commodity prices than expected.

Council members received new projections that said due to delays in drilling — which is now underway — mean the strategy hasn’t really started in earnest.

“We’ve been pushed back and pushed back,” said utility committee chair Phil Turnbull. “They wanted to get those wells drilled. It’s not a matter of not finding what we wanted to … I’m optimistic that the wells are viable.”

Mayor Ted Clugston also said a warm winter, land negotiations and provincial regulators have slowed progress.

“It’s frustrating and it’s not our staff’s problem,” he said. “The fact there’s less drilling going on in the province (means that provincial) regulators are scrutinizing ours.”

The city only completed half of its goal of drilling 12 wells due to longer wait times. Maynes said he hopes to have seven finished by the late winter, and possibly bring a mid-year report to council this summer.

Last year the city divested nearly one third of its well portfolio in a move to get older, low-return properties off the books. At the same time, the unit launched into an oil exploration program in hopes of rebalancing the portfolio and getting more upside.

The sale of the wells to Canadian National Resources, removes only about $300,000 in annual profit, but removes about $50 million of abandonment liabilities, Maynes revealed on Monday.

Overall, city gas production will fall by nearly 10,600 gigajoules per day to about 27,400.

Daily oil production that had been projected to be 3,780 barrels in 2018, will only be 1,670 throughout the year, including about 250 barrels brought on line at the city’s recent Denzil discovery near Provost, but in Saskatchewan.

The division will also reduce its planned $59-million capital budget by about $10.6 million (about 17 per cent), mostly in pushed-off drilling.

At the same time the department is lowering its pricing forecasts for 2018 from those done last year.

The updated forecast is C$46.81, down from C$55.88. The first week of the year, the average was C$45.76.

Like most producers in Alberta, the city captures price at the Western Canada Select benchmark, rather than the more popularly quoted West Texas Intermediate benchmark.

Natural gas pricing estimate was also downgraded, falling 39 cents to $2.39 per gigajoule for the whole of 2018.