After 100 years, Alberta’s Gas City is throwing in the towel on 2,000 money-losing natural gas wells
How precarious is the state of Alberta’s natural gas industry these days?
Just take a look at the City of Medicine Hat, proudly known as the Gas City, which has owned its own petroleum production arm for more than a century.
Today, it’s producing about 6,500 barrels of oil equivalent (boe) per day from shallow natural gas and oil fields in southern Alberta and Saskatchewan.
The average cost of its gas production is about $2.78 per thousand cubic feet (mcf). The spot price for gas at the AECO hub closed Thursday at 80 cents per mcf, about $2 below U.S. benchmark prices.
You don’t need a sophisticated computer model to understand this gap means the city-owned utility has been hemorrhaging money.
Facing such economics — and an expected cash loss of $35 million this year from its natural gas and petroleum resources division — the city is throwing in the towel on the lion’s share of its producing gas wells.
Medicine Hat officials announced Wednesday the division will abandon more than 2,000 of its 2,600 active wells over the next three years and accelerate abandonment and remediation work.
The city’s natural gas and petroleum resources division will eventually shrink from about 105 field and office employees to around 25 to 40 staff, although some may be redeployed by the city.
The decision wasn’t made lightly, said Brad Maynes, the city’s commissioner of energy and utilities.
“We are very proud of our gas history and our legacy . . . The city has benefited so much from gas over the years,” Maynes said in an interview.
“We said to our residents, you should be very, very proud of this history, but we have to evolve to a new reality.”
Natural gas has long provided energy, created jobs and generated wealth in Medicine Hat. Its petroleum assets have contributed more than $600 million to Medicine Hat’s treasury over the past four decades, the city said.
But part of the industry is facing a fiery test these days.
Following the failure of Trident Exploration Corp. last April, Medicine Hat’s decision should serve as a wake-up call to the acute issues facing the sector, particularly shallow gas producers.
By the time the 2,000 wells are abandoned, the city unit’s total production is expected to fall to about 2,500 boe per day, only a quarter of the level seen four years ago.
“We have been producing for over 100 years and we’ve had a great experience in the gas business, but the last three, four, five years have been very difficult for us,” said Maynes.
“We could just not see ourselves returning to profitability.”
The decision comes as larger trends are swirling about the industry. With the shale gas revolution in the United States in the past decade, production in North America continues to rise.
On Thursday, the U.S. Energy Information Administration reported natural gas production south of the border set a new monthly record in August of more than 91 billion cubic feet per day, up eight per cent from a year ago.
Production has risen even as benchmark U.S. gas prices have dropped this summer, averaging US$2.37 per million British thermal units in July.
In Canada, development of the massive Montney natural gas and liquids formation has also had an effect, bringing on large supplies of low-cost production.
With pipeline constraints and seasonal maintenance issues on the Nova Gas Transmission Ltd. (NGTL) system, Alberta gas prices at the AECO hub have been volatile in recent years, even dropping briefly into negative territory.
Industry veteran Hal Kvisle, who chaired the province’s natural gas advisory committee last year, said the situation in Medicine Hat underscores the fact shallow gas wells are challenged in today’s environment.
“It’s also symbolic, in a way, of the bigger issue of mature, lower productivity gas producers trying to compete in a world where shale gas is swamping the system,” he said.
Some producers have responded by shutting in production or abandoning wells. A report by Peters & Co. estimated natural gas production from Western Canada will fall this year for the first time in seven years.
While gas prices in Alberta have been improving recently, they are still below the break-even point for Medicine Hat.
Analyst Jeremy McCrea of Raymond James expects AECO gas prices will average $1.80 per thousand cubic feet in the fourth quarter — as the winter weather kicks in — and then $1.50 per mcf next year.
But that is still too low for some producers to make money.
“It’s just bit by bit, you are going to have keep shutting them in,” McCrea said.
The provincial government has taken steps to improve the environment for these producers. In July, it announced interim changes to relieve some of the municipal tax burden on shallow gas producers.
Last month, the province, gas producers and TC Energy announced an agreement to temporarily reverse changes made two years ago by the pipeline operator that have been blamed for making AECO prices more volatile during periods of summer maintenance work.
TC Energy has applied to the Canadian Energy Regulator to reverse the changes for 2019 and 2020. A decision is pending.
Phil Hodge, CEO of Pine Cliff Energy, said all these changes are constructive, and the pricing outlook for AECO gas has been strengthening in recent weeks.
“There is hopefully some sunlight on the horizon, but it’s still tough sledding,” Hodge said.
“As we saw by the announcement in Medicine Hat, it may be too little too late (for some). There are a lot of companies struggling at current prices and each one is different . . . but if they’re losing money, they are only going to be able to do that for so long.”
For Medicine Hat, three years of low prices and big losses were too much to ignore.
It’s still Gas City, but unless something changes dramatically, it’s going to be producing a lot less gas in the coming years.