Mayor Norm Boucher speaks during a special City Council meeting held Monday night. The City of Medicine Hat has approved a $48.6 million dollar deal to buy oil producing properties in the Manyberries area.--NEWS PHOTO EMMA BENNETT

Council votes to buy properties near Manyberries from Chinook Energy
COLLIN GALLANT
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The Gas City is about to get more heavily invested in the oil business.
The City of Medicine Hat has approved a $48.6 million deal to buy oil producing properties from Chinook Energy and a minority private partner.
The deal, announced and approved after the stock markets closed on Monday in a special session of city council, would see the city-owned energy division acquire 68 working wells on a block of leases located east of Manyberries.
According to figures presented, the average current production is 450 barrels of mostly light oil per day, though officials feel that with proper management, and two new horizontal wells drilled in the next two years, that number could double by 2014.
It could translate to an extra $6 million to $8 million flowing into city coffers each year for the next three years and beyond, according to the projections by the City.
"I think it's a diamond in the rough,' said Ald. Ted Clugston, the chair of the Energy Committee.
Though several aldermen voiced their concern about the risks involve in expanding the energy division, the measure passed by an 8-1 count.
"You heard some alderman talk about the risks involved but I say the riskiest thing is to do nothing."
With natural gas prices at ten-year lows and the City projecting only a $4.5 million profit from natural gas production in 2012, staff were charged in the autumn with finding a suitable oilfield to help diversify the division.
A bid was made in mid-December for the Chinook properties — a block of clustered leases east of Manyberries.
The field includes 1.5 million barrels of proven reserves, another million barrels of probable reserves, and is expected to have an economical lifespan of 37 years, stated a city report.
By comparison Chinook Energy has proven reserves of 62.5 million barrels and a current production level of 15,000 barrels per day, according to its corporate website. That company has a variety of projects throughout mainly Alberta, British Columbia, and also Tunisia. They will use the proceeds from their three-quarter stake in the properties to pay down debt, stated a company release.
"This is not a significant purchase in relation to the size of our operation," said Gerry Labas, the energy division's Chief Operating Officer, who said oil would now account for about 10 per cent of the division's assets.
"(It's attractive) for an operation of our size and the fact that we operate in southeast Alberta and southwest Saskatchewan."
The purchase will also help the division's stated goal of reaching a 10 per cent return on investment.
Before the deal, the $198-million gas depletion fund accounted for 31 per cent of the total assets of the energy division. That money earns about 3.6 per cent interest while invested in institutional GIC bank accounts.
City staff says increased revenue will pay for the entire purchase price by 2016 and then account for the four years of lost interest on the $48.6 million about six months after that.
After that the city could expect up a 13 per cent annual return on investment.
Ald. John Hamill expressed concern about the number of abandoned and non-working wells — liabilities that the City is now responsible for either putting back into production or closing in and remediating.
There are 256 wells involved, only 68 of which are currently producing oil, and another 26 are used for water injection.
A market valuation of the field places the reserves at more than $70 million, said Murray Trollope, the manager of Natural Gas and Petroleum Resources for the City.
The $48.6 million accepted bid takes abandonment costs into account, said Clugston.
Ald. Phil Turnbull, who sits on the Energy Committee, argued against the purchase by saying that the city is expanding into unpredictable areas and it may not have the expertise needed to properly evaluate the risks of operating in the oil market.
"Here we are facing difficult times in a difficult economy, and (asking) what can we do to save the dividend," said Turnbull, who attended via conference call.
"I cannot support this acquisition. If we want to get into other businesses we should look at Enmax in Calgary and Epcor in Edmonton. Those (privately run municipal utilities) limit the risk to their citizens."
Mayor Norm Boucher responded that Medicine Hat is already in the oil business — the 2001 purchase of Allied Oil, accounts for two per cent of the City's energy assets today.
Also, said Boucher, that citizens said loud and clear when the Ernst & Young report was presented two years ago that they want the city to remain in the energy business rather that create an arm's-length management board.
The purchase will also require the hiring of four field operators, five geologists and engineers and one person in the city's finance department.