August 17th, 2018

Hedge more power, less oil and gas

By Collin Gallant on February 14, 2018.

The City of Medicine Hat’s business units may hedge more electricity production in 2018 as a result of having more power to sell, but generally less of the city’s oil, gas could be locked in.

Administrators spoke to the News following Tuesday’s meeting of the corporate services, where the now two-year-old hedge policy was brought up for yearly updates and clarification.

Oil and power prices are rising currently, but gas prices are heading downward, and both states of affairs make hedging less likely.

The city’s power plant suffered through low prices for most of 2017 as the Alberta economy continued to recover, but prices have doubled in early 2018 thanks to cold weather, the shutdown of two large coal plants and new emissions compliance costs.

The city’s production capacity is up as well since the new Unit 16 station came online in November, adding about 40 megawatts, or 20 per cent to the generating capacity.

“We were active in customer contracts (in 2017), but in terms of excess power sales we were not very active,” said Travis Tuchscherer, superintendent of business services at the power plant.

Some Unit 16 power is destined to be contracted out for export by the city’s new utility business support office.

“We’ve already done some hedges for the first quarter for the year,” said Tuchscherer. “The new generator gives us more production, plus market conditions will allow us to hedge more as well.”

Actual results of the 2017 hedging program and analysis will be released with the city’s annual report, likely later in March.

In late 2016, administrators created the policy to smooth out revenue based on highly volatile petroleum and power pool prices.

A preliminary discussion last fall outlined however, if a hedge contract price comes in above prevailing market price, that portion sees relative gain, but it also means the remainder is fetching lower than expected prices.

Since the city caps the amount to 25 per cent, three-quarters is exposed to market conditions.

Committee chair Coun. Robert Dumanowski said that practice is often viewed as win-lose based on eventual commodity prices, but the practice adds certainty to meet department needs.

“There’s always going to be upside and downside, but this adds stability to the prices we’re receiving,” he told the committee.

City policy allows blocks of 5 per cent of production to be hedged when certain cost and profit hurdles are met; when cost recovery or cost plus depreciation are met, for example.

Officials with natural gas and petroleum resources department said they hedged the maximum amount in 2017.

Looking ahead however, the forecast price of natural gas is so low that locking in current prices simply isn’t worthwhile.

“We did fairly well on gas in 2017, particularly later in the year when prices were lower,” said Murray Trollope, the department’s business manager. “It protected the bottom line, but it’s all based on our objectives … We did favourable with hedging, but did less on the other 75 per cent of our production.

“We paid a premium on some oil hedging, and earned some of that back.”

For example, the first hedge hurdle is $2.56 per gigajoule, required to meet bare costs. The Alberta spot price hasn’t risen above $2.25 since the beginning of 2018.

Internal city requirements for hedging oil production also involve not only regional price the city captures but its relation to the West Texas Intermediate price which trades as a premium over Western Canada Select grade.

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