A sign denotes an abandoned gas well near the eastern end of Balmoral Street in Medicine Hat in this file photo. Record low natural gas prices are causing headaches within the city's energy division.--NEWS PHOTO COLLIN GALLANT
cgallant@medicinehatnews.com@CollinGallant
With prices reaching shocking new lows, officials with Medicine Hat’s struggling natural gas production company have been told to draw up a new strategy to gird the bottom line, and it could include options to completely the exit option.
City councillors remarked on the price – just 29 cents per gigajoule for local utility users this month – during Tuesday’s council meeting as the city’s financial statements from early 2019 were received.
They show expected losses at the gas production unit, known as Prodco, will be about $36.4 million this year, roughly 10 per cent higher than expected.
After long-term, locked-in price contracts expired last year, the unit will begin using reserve funds to pay for operations.
“You can’t overestimate how difficult it is right now (in the pricing market),” Brad Maynes, the commissioner of the energy division, told the News this week.
“Prices are great for consumers, but they are so far below our production cost. It’s absolutely brutal … and just not sustainable.”
Natural gas prices have been depressed for a decade, but new lows and few observers predicting a recovery are causing concern at the provincial government level. This week, Alberta announced some property tax relief specifically aimed at shallow dry gas producers, with two ministers implying the sector could be verging on collapse.
Elected officials with the city are stressing the 100-year-old publicly-owned exploration company in the Hat isn’t in danger of going belly up, but action is needed.
“It’s not a serious crunch, but it’s not sustainable … we’re bleeding for sure,” said Coun. Phil Turnbull, chair of the energy committee, who said administrators are putting together a strategy update for the fall.
“We’re pushing for it, and (have) given some time to come up with what a detailed plan will be.”
The natural gas depletion fund, which topped out near $200 million in 2011, will be $4 million in arrears by year end. Money once earmarked for long-term well abandonment will be accessed to pay for operations.
“We’re very aware of where we’re at, and we do have a large amount of money in reserves,” said Turnbull.
The city’s break-even point on pricing is a trade secret, but several years ago the utility department began offering a “fixed-rate option” to customers that considered bare cost, amortization, future abandonment liabilities and a then-council-mandated 10 per cent return on investment. That rate is set at $5.80, or roughly 20 times greater than this month’s price.
Prices are higher in the winter, and the Natural Gas and Petroleum Resource unit earns wholesale rates, not the consumer price, but those prices are not much better.
Audit committee chair Coun. Darren Hirsch said the problem is well known to council members.
“There are some long-term questions there; is NPGR going to be part of the city’s operations going forward,” he said.
“I think everything is on the table, but the fact we’re diversified (with electricity production) could be our saving grace.”
Several council members, including Hirsch and Turnbull are advocating to change to the city’s dividend policy that splits currently high power plant profits between tax abatement and a heritage savings account that has strict rules about access.
After just two years, the savings fund balance will approach $40 million by year end, making it the second largest fund held by the city.
Mayor Ted Clugston, a long-time promoter of creating the heritage fund, also said a reexamination may be needed.
“Nobody expected it would grow that quickly,” said Clugston. “There’s a move to perhaps recognize a consolidated approach to business utility funds is better than on an individual basis.”
As for an operational review, Maynes said costs and operations will be examined thoroughly.
Two years ago Prodco sold about one-third of its well inventory to Canadian Natural Resources for little cash but to lower operating and long-term abandonment costs.
Similar deals may be hard to broker in today’s market, said Maynes.
“There are not a lot of buyers for shallow natural gas assets right now,” he said, adding that shutting in production involves new spending to close wells, reclaim land and some years of continuing lease and access agreements.
“And it’s not like we can shut down tomorrow and there will be no more costs going out the door.”
