April 17th, 2024

City’s remaining gas wells will make money

By COLLIN GALLANT on December 29, 2021.

After a lengthy process to shut in about 80 per cent of the city's shallow gas wells, those that remain are expected to turn a decent profit over the next several years as natural gas prices are predicted to stay high.--NEWS FILE PHOTO

cgallant@medicinehatnews.com@CollinGallant

Stronger prices and supply concerns are providing a merry Christmas for Alberta’s beleaguered natural gas producers, who say happy days will likely continue into 2022.

That includes the City of Medicine Hat, where officials say after a painful, years-long process to shut down 80 per cent of its once mighty shallow gas portfolio, what remains is expected to make money in the mid-term.

“We have had a run-up on gas … and we haven’t seen pricing (sustained) above $5 for the better part of seven or eight years,” division head Brad Maynes told the city’s utility and infrastructure committee on Dec. 16. “We do expect that to modulate, but the majority of our production is economic and will continue to be at this forecast.”

High prices for natural gas in North America – above $5 per gigajoule in November – were caused largely by speculation after an energy crisis in Europe. Forecasters now peg the fuel that crashed in the early 2010s above $3 for the next several years.

That’s a shadow of bonanza prices in the decade before, but could provide a base for remaining junior companies to reset their footing and profit in years ahead, said Phil Hodge, head of Pine Cliff Energy.

“It’s a huge reversal of fortune from 2019 and 2020, which was the worst prices in 20 years,” said Hodge, whose company has major holdings in the southeast of the province. “Generally (the sector) is in a much better position entering 2022 … it’s a good zone for us and probably most of the industry.”

In November, Pine Cliff announced its cash flow through nine months as $32 million, compared to just breaking even in the fall of 2020 as its revenue rose 50 per cent year over year. It announced it would explore creating a dividend model in 2022, even as it increased capital spending and cut corporate debt by one third in the recent quarter.

That comes after extremely hard times and low pricing over several years, which included headlines outlining hundreds of millions of dollars in unpaid tax bills across Alberta by junior oil and gas companies.

Pine Cliff, itself, was forced into talks with Cypress County to move to a instalment option payment plan to cover its tax obligations along with several others. That arrangement is now standard going forward to help with cash flow.

A number of others are simply out of business.

Medicine Hat city utility committee member, Coun. Robert Dumanowski, said the reversal in the city commodity business was remarkable.

“Who’d have thought,” he told the committee this month. “We’re coming out of a complete commodity collapse in 2020, and to come back? It shows the complexity of the business we’re in.”

In 2016, the city sold about 2,000 wells in one block to essentially avoid the cost of abandoning the low-volume wells in Saskatchewan, then in 2019 announced it would permanently close in another 2,000 wells itself.

That leaves about 500 gas wells closest to Medicine Hat, with the highest production in a region that’s been worked extensively at shallow depth. The proximity also comes with lower operating costs for the city.

The city is still liable to pay taxes and surface agreements until the wells are officially reclaimed, but the program has slashed operating costs of the portfolio from the mid $4-per-gigajoule range several years ago to the high-$1.20 range today.

Essentially, wells that are shut down would still be losing money, even at the higher prices, said Maynes, who previously said upswing in gas prices wouldn’t slow the abandonment program in the natural gas petroleum resource unit.

“If you exclude the wells under reclamation, we have a profitable gas business,” he said.

Hodge, too, said companies that survived the extended downturn have reasons to be positive about the future.

“There’s still good money to be made in natural gas,” he said, citing increased use, export potential and a move to shore up finances rather than spend new cash on exploration.

Within Alberta, more gas is being used to fuel the power-production sector as coal plants are phased out or changed over to burn gas or a mixture of coal or gas.

The province is driving hard to incentivize near petrochemical production in Alberta that would use methane.

Hodge also says substantial LNG exports from the West Coast are only two years away – an avenue already in operation in the United States.

Subsequent to the interview, Hodge’s company closed a $22-million debt-financed acquisition of a private company adjacent to its assets northeast of Drumheller. That will add 1,900 barrels of oil equivalent per day weighted two-thirds to gas.

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