News Story of the Year: Medicine Hat to abandon 2,000 gas wells

By Collin Gallant on December 31, 2019.

cgallant@medicinehatnews.com
@CollinGallant

A major shut-in program for City of Medicine Hat gas wells — both a case study for struggles in the sector and a blow to civic pride — is the top news story of 2019.

While hard times for shallow gas are not new, the scope of the problem and the decline of the industry earned new urgency over the last 12 months.

Negative pricing on Alberta trading markets, supreme court decisions on well liabilities, a new provincial government promising to stabilize the patch, and growing pain for rural municipalities dependent on tax revenue from wells all came into sharp focus this year.

And in it all, Medicine Hat’s near 120-year-old gas production company became the go-to for national media outlets as a sign of turmoil for both energy sector and rural Alberta.

Mayor Ted Clugston told a business breakfast in October that both the city and city hall needed to come to grips with the new reality.

“I don’t think it was a surprise to residents,” he told the News in a year-end interview.

“The citizens of Medicine Hat have either worked in the industry, or are familiar with it, or they know someone who has.”

“It’s not a shock to them that the price is low and something has to be done… but it’s a hard conversation, because we’re so dependent upon it.”

Clugston and the city’s economic development wing have consistently outlined that low-cost gas could be a boon for local industry, creating power and aiding refining interests in the “Gas City.”

They repeated that message as a line of national and international news outlets — the CBC, the Washington Post and Financial Post — sought comment about the move, or to find out what was happening at ground level in Alberta.

Stress in the petroleum sector was written large across provincial and federal election campaigns, but the city’s retreat from gas is not surprising or new. The price has been depressed for a decade.

A city budget plan implemented in 2017 began stripping out commodity revenue that once accounted for $24 million, about one-quarter of all revenue. Two years ago, the city sold 2,400 wells in a non-cash transaction meant to get liabilities off the books.

A oil-focused “growth strategy” didn’t return enough new production, and a cutback in the gas division will now intensify while the city budget is tightened and tax hikes are brought in to shrink the deficit.

“There have been some exemplary efforts to tame that,” said top administrator Bob Nicolay, referring to the budget gap that now requires about $15 million per year in reserve funding.

As for abandonment costs, as much as $230 million could remain, though that is a long-term estimate and the portion for the 2020-2022 closures is said to be at least $90 million.

More will be known in the spring when the first batch of well closures begins, as well as job losses in the city division and the impact on other municipal where the city operates.

Abandonment work is done relatively quickly, but tax and access payments will continue for years while the work is certified.

At that point tax and access payments cease, which will spell new hardship for the regional economy and rural governments.

That has been the worry of regional politicians who have written on bad debt from oil and gas companies for years.

This summer, the province announced that a property tax break for wells that provide major portions of revenue will continue next year ahead of a general overhaul.

Those specific shallow gas wells provide about $43 million in municipal tax revenue for a dozen counties and rural districts in southern and central Alberta.

The provincial government, which created a portfolio position for the natural gas sector, has promised to stabilize the industry, building off late 2018 plans by the previous government.

That plan’s roll-out and how regional governments and the economy react to the challenge could be the story of 2020.

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