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By Scott Roblin

Abandoned Wells

City on path to borrow $80 million for well abandonment project

Apr 20, 2020 | 8:33 PM

MEDICINE HAT, AB – The City of Medicine Hat is one step closer towards financing its plan to abandon just under 2,000 natural gas wells over the coming years.

At Monday’s City Council meeting, first reading was passed on a bylaw that would see the City borrow $80 million from the Alberta Capital Finance Authority to help fund the project.

The total cost of the abandonment has been estimated at $125 million and the City had originally planned to cover the vast majority of the project through reserves.

However, low interest rates have swayed the City to look at a loan that would keep more of that reserve money in their pocket.

“Hopefully maybe when this is all over we’ll perhaps even have enough money in the bank that with the investments… it won’t deplete our cash,” said Mayor Ted Clugston. “So, it’s a bit of a creative financing model. But, because we can borrow at such low rates right now that’s what we’re going to try to do.”

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The City will still be shelling out roughly $45 million for the project, while paying off the loan over the next 10 years through interest and principal payments.

Last fall, the City voted to shut down the vast majority of its natural gas wells due to falling commodity prices and a $30 million shortfall per year in the Natural Gas and Petroleum Resources department.

Many councillors including Darren Hirsch, Phil Turnbull and Julie Friesen spoke about how this was a necessary step to stop the bleeding with Turnbull stating, “Financially speaking, this is the only way out at this point.”

Clugston added there’s no sense in waiting around anymore knowing the wells aren’t bringing in any more money to Medicine Hat.

“If we were to delay this for three more years, that would be $80 to $90 million of losses in the next few years and we’d still be no further along in the abandonment process,” said Clugston. “So, this is an attempt to accelerate this and get out of that losing asset.”

It’s estimated that each well will cost $62,500 to close and will cover 1,996 of the roughly 2,500 shallow gas wells in the city.

The City of Medicine Hat is planning to close large amounts of these wells in a short span, which they are hoping will present some cost savings down the road.

“Rather than 10 here, 10 there, get five different bids for different geographical locations, why not put out 1,000 wells at once and see if we can get a contractor that’s willing to give us a price that’s more favourable?” said Clugston.

Late last week, the federal government announced $1.7 billion in funding to clean up orphan gas wells across the prairie provinces.

However, the City of Medicine Hat will be unable to access that funding for the most part as they are still a solvent company and do not qualify.

The dive in commodity prices over the last few weeks has also forced the City to look at their assets in the oil buisness.

“The price of oil was zero to negative today and we will be looking at the oil assets as well,” said Clugston. “We are shutting them in for now, basically turning the tap off and then see what happens.”

The City is still well within the provincial debt limit set by Alberta Municipal Affairs, with the municipality’s debt expected to reach between 58 and 61 percent of the outlined 100 percent limit.

Discussions with commercial businesses will continue to see if there’s any appetite for private industry to take the wells over, however Clugston said it’s time for the City to move on and make the prudent financial choice.

“The gas prices may come up and they may be more valuable in the future,” he said. “But, the City of Medicine Hat can’t go bankrupt frankly and we just can’t gamble with the taxpayers’ money.”

Following Monday’s meeting, Clugston told reporters that a ‘comprehensive package’ regarding supports for tax and rate payers will be announced at the next City Council meeting on May 4 calling it a ‘Made in Medicine Hat’ solution.