City rigs still seek oil

By Collin Gallant on November 20, 2018.

cgallant@medicinehatnews.com @CollinGallant

A steep discount on Alberta oil has many companies in the sector re-evaluating drilling plans and current production levels.

Officials with the City of Medicine Hat petroleum division say it is continuing with its relatively small oil drilling program, but elected officials say that while they expect the current price to rise, the leash is very short on future exploration.

“At this point in time, we’re still moving ahead with our growth strategy,” said energy and utilities commissioner Cal Lenz following Monday’s council meeting.

“We haven’t looked at a reconfiguration of our assets at this point. It’s business as usual.

“If you’re in a commodity-based business, and you’re reacting to very short-term things, it can get you in trouble,” said Lenz.

The price of oil over the entire year has actually been a major positive for the city’s production company.

It expects to lose about $33 million this year, mostly due to a lower than expected price for natural gas, not oil, which, over the course of 2018, has beaten city price forecasts.

Adding oil production and reducing the weight of long-depressed gas on the portfolio is a key pillar of the city’s strategy.

Two years the city announced plans to spend $15 million per year over three years to add oil production.

That plan will need to be renewed after council is updated with drilling and production results in the first quarter of 2019.

Energy committee Chair Phil Turnbull said the options are limited — the city needs revenue to account for gas well liabilities — and the council agreed to greenlight money for drilling on a year-by year basis.

“We’ll make a decision on whether to stop it or keep it going,” said Turnbull of the drilling program. “We’ll get the results, and we’ll shut it down if it’s not going to solve our problems.”

He expects the price earned for Alberta crude to rise again, and notes the current discount — which Premier Rachel Notley called a national emergency — has been this steep only recently.

The price of Western Canada Select sat at about C$21 on Friday, up $5 from earlier last week. That’s still C$50 per barrel less than the price for West Texas Intermediate, the benchmark in the U.S., where most Alberta oil production is sold.

For the entire year, however, the Alberta benchmark has averaged C$52, about 10 per cent higher than the city petroleum division forecast at the beginning of 2018.

With the ground work done on drilling targets and investment made already, Mayor Ted Clugston said he felt it was important to see the current phase through.

“Let’s hope this (pricing) is short term, but when you’re drilling you don’t see the results for six months to a year later,” said Clugston.

“I would say it’s a crisis in a way. We’re an established company, but I don’t see why any new company would move to Alberta and drill under these conditions.”

On Monday, city council approved service rig contracts totalling $1 million for work at a variety of properties To Ensign and Spirit West Drilling. That includes work in the Denzil field, where oil was found in the first leg of the growth strategy. Exploratory drilling is contracted separately, but so far, only about one-tenth the approved budget for drilling and completions in 2018 has been spent.

Most of the ongoing budget is still coming from money approved for work in 2017.

Last January, council heard in an update of the growth strategy that variety of delays pushed most that program into this year.

Officials said about six more wells are will be completed as part of that first round of drilling.

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