This map outlines locations of City of Medicine Hat natural gas and oil wells (in red) that are being opened for bidding in an exploratory sales process this month.--Supplied Image
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The Gas City has put its remaining well inventory up for bids, hoping to determine whether to sell off its last 600 wells or begin a large scale abandonment that could see the historic municipal energy company exit the oilpatch entirely.
A bid package appeared on industry websites this week comprising the entire portfolio, including hundreds of wells in city limits or the outskirts, as well as a smaller number of oil properties near Brooks.
Top administrators told the News on Wednesday that the move stems from a third-party recommendation last fall to expedite a shutdown or sale of the gas wells that are considered marginal economic producers attached to large environmental liabilities.
“It’s an exploration of a sale,” said director of energy, land and environmental Kevin Redden. “We’ll weigh potential interest (in a transaction) versus abandonment versus continued operation.
“What we see on the forward price curve, we’re not seeing a lot of optimism, and depending on what we get for interest depends on how bullish (buyers are on price forecasts).
“As with everything in this business, it will come down to risk analysis.”
City council members as well said the division is exploring a path laid out by business consultant KPMG in an energy business review, and the fate of the wells will be determined after bids are returned and examined in early July.
“It’s not a guaranteed sale, as we need to be satisfied with the terms,” said Coun. Darren Hirsch, chair of council’s energy committee. “This is part of our accelerated abandonment program.”
The city, which has operated a natural gas exploration company since 1904, was a top-20 natural gas producer in Canada in the early 2000s when spiking prices brought in millions in revenue for municipal use and tax-subsidizing dividends.
But production today is about one-quarter the level it was in the early 2010s, when the advent of shale drilling caused prices to collapse.
In 2017 a large swath of wells were sold for some cash but largely to eliminate long-term liabilities, then in 2019, council ordered most of the remainder to be abandoned and reclaimed.
Losses at that time were $30 million per year, with abandonment liabilities estimated above $250 million.
Work since then, coupled with lower cost estimates, have slashed liability to $138 million, according to recent financial statements, while the remaining wells have operated closer to a break-even point.
According to the sales listing, city gas wells operated at a loss of $725,000 in 2024, offset slightly by small profit from a few oil properties near Brooks, Queensland and Eyremore.
The remaining inventory offered up for interest this week consists of 600 to 700 wells that have a total proven and probable reserves of 55 million cubic feet of natural gas and 49,000 barrels of oil.
That would set a current asset value at about $32 million, according to the city, including a 10 per cent variance for uncertainty, while the recent estimated closure liability for all wells was $52 million.
The city will receive bids through the oilfield asset sales provider Sayers Energy Advisors by July 3, on whole or in part of the portfolio, then determine next steps, said Redden.
He stressed the current operating level is at a point where abandoning wells in small batches would cost more, compared to larger contracts, and lowering production would compound losses.
“We’re at a critical mass of 600 to 700 well count for those inputs and operational efficiencies we require, we couldn’t take 100 more wells off and continue to operate,” he said.
“It’s kind of all or nothing situation … we have to have a certain amount to operate and we’re at that minimal (level) with the current well count.”
Last December, KPMG recommended putting most of the city’s energy business, including the power plant and distribution networks for gas and power, into a municipal controlled corporation. A public hearing is set for this month.
Gas production however, it said, should remain a city department as it is wound down or sold to avoid burdening the new MCC with financial implications of operating or shutting down a relatively small, marginal gas producer.
“The natural gas production business has historically been highly profitable, it is now facing the high costs of (abandonment), and significantly declining production. It is not expected to return to profitability,” the report read.
It notes the city could continue to operate wells “for several decades” but costs will continue to outpace revenue over time.
“Some assets found in urban areas cannot be divested and the city will have to manage its ongoing environmental obligations associated with them.”
It recommends the city “expedite” an abandonment and reclamation program to remove those liabilities from the city’s balance sheet, or consider selling off low-production assets before they are due for permanent closure.
