Council OKs financial plan for gas wells

By COLLIN GALLANT on April 21, 2020.

cgallant@medicinehatnews.com@CollinGallant

City council members unanimously approved a financial plan to close nearly 2,000 unproductive gas wells on Monday, calling $80 million in new borrowing “a horrendous sum of money” but the only way to exit a money losing industry.

Last fall, administrators and elected officials stated they could no longer weather commodity prices lower than production cost on 80 per cent of wells in the city’s inventory.

Cash losses in 2019 totalled $31 million, and on Monday officials laid out an accelerated plan to close 1,996 wells in large batches starting next month.

“(The $80 million) looks like a horrendous amount of money, but financially speaking, this is the only way out,” said Coun. Phil Turnbull, the chair of council’s energy and utility committee.

“We can’t sit by and watch all our revenue from our business units and reserves drain away.”

The total cost, now estimated to be $125 million, would be paid almost two-thirds by debentures to allow money set aside over time for abandonment liability to earn interest over the next five to 10 years.

Potentially, the difference between that return and historically low borrowing rates, could either cover unexpected costs or leave a nest egg from the city’s historic gas interests, often called the goose that laid golden eggs.

Over the years, the division built up cash in unrestricted internal funds and three years ago transferred $134 million to a “long-term” investment fund managed by the Alberta Investment Management Corp.

It is 40 per cent weighted to equities, and overall the fund has produced an average annual return of 6 per cent three years.

Pulling the money out now, after a major market correction this spring, would erode the city’s position, said Mayor Ted Clugston, who called the arrangement “creative financing,” stressing it is “above board.”

“We’re trying to conserve cash assets, and interest rates are so low, that we can borrow and keep invested,” he said.

“Hopefully, maybe, when this is all over, we won’t have depleted all our cash.”

The budget presented Monday states that the total of $125 million also includes $45 million in working capital from within the energy division.

The work is expected to be complete over several years, but the item is earmarked as a 10-year item as taxes and surface agreements on wells continue until they are certified reclaimed (a process that can take five to seven years after the well is permanently closed).

A lending structure would also see the city pay interest only for the first five years, then principal plus interest thereafter.

Moving ahead now, and with a large number of wells, will lower the overall cost, said energy commissioner Brad Maynes, who described the process as “doing in aggregate as fast as we can.”

He also said cost estimates are expected to drop with larger batches of closures and improving technology, and the city is still actively marketing the wells for sale, he stressed.

Since the city can’t declare bankruptcy, at which point the wells would be transferred to the Orphan Wells Association, it doesn’t directly benefit from federal and provincial programs to close wells of companies in receivership.

Coun. Julie Friesen said that she hoped stimulus and environmental programs being developed by other levels of government will be available to the city to defray costs.

“That’s my hope,” she said. “We have saved more than what’s needed.”

A more detailed explanation of the financing – the largest in the city’s history – would be made available by finance officials soon, Clugston said.

The money would be borrowed as needed, but the total would bring the city to near 70 per cent of its mandated debt-ceiling. Existing debt sat at $397.5 million at Dec. 31, 2019.

24
-23