In 1883, a railroad crew was drilling for water near Medicine Hat, Alberta, to supply their steam engines. Instead of water, they discovered shallow pools of natural gas. More than a hundred years and thousands of gas well discoveries later, Medicine Hat now has more than 4,000 operated wells after having acquired through the years oil and gas mineral rights in the area.
Now this town, with a population of around 60,000, is emulating the idea of oil and gas rich Qatar, and is setting up a kind of “sovereign wealth fund” to pool its natural gas-generated income.
Qatar is the country with the world’s highest GDP per capita thanks to its massive gas reserves and the investments it has made on the road to becoming the world’s biggest LNG exporter. The Qatar Investment Authority is currently invested in US$335 billion worth of assets around the world, including stakes in Shell, Rosneft, Glencore, Volkswagen, Barclays, and Tiffany & Co, to name a few. Last year, the Qatar Investment Authority even bought an almost 10-percent stake in the company owning and operating the Empire State Building.
The ambitions of Medicine Hat, Alberta, are to be like Qatar, but not by buying into the world’s most renowned companies and brands. ‘The Gas City’ – as it calls itself – wants to be self-sufficient and put gas money into a fund for its community.
“We could separate from the world, and we’d be totally self-sufficient,” Medicine Hat’s mayor Ted Clugston told the New York Times. “We’d be a very, very wealthy little country, except we have no military.”
At the end of 2015, Medicine Hat joined the cities of Edmonton and Calgary in Alberta Province’s Major Cities Investment Regulation, which gives cities the independence and flexibility to invest money in their reserves. Back then, Mayor Clugston said: “The goal here is, of course, [to] create a heritage fund going forward.” The city has over C$500 million (US$382 million) in reserves and savings from commodity revenue.
Medicine Hat had amassed those savings when oil prices were high, while having the lowest property taxes of all major municipalities in Canada. But the oil price bust did not spare the town’s finances – as it did not spare Qatar or other major oil and gas producing countries. Medicine Hat had a budget deficit for the first time on record, and was looking to save costs and plug its budget gap this time last year.
With prices now partially recovered from last year’s lows, Medicine Hat’s Natural Gas & Petroleum Resources has drafted a two-year business plan to maximize the value of existing oil and gas assets and invest in exploration for deeper wells.
The Gas City currently plans to invest up to C$45 million (US$34.4 million) between 2017 and 2019 in exploration and drilling to further evaluate the deeper potential in the area. It will also evaluate disposition and acquisitions markets for potential divestment of assets or accretive acquisitions. Under the plan, Medicine Hat’s production of oil and liquids is expected to grow from 1,775 barrels per day set in the 2016 budget to a forecast of 5,172 barrels per day for 2020.
Part of Medicine Hat’s commodity revenues and reserve money will be invested though the Alberta Investment Management Corporation (AIMCo), after the Gas City’s council approved the plans at the end of January. Medicine Hat will be transferring C$10 million (US$7.6 million) out of its C$500-million reserves to AIMCo each month this year. According to mayor Clugston, the province is now allowing Medicine Hat to invest in equities with a 6-8 percent rate of return, compared to investments so far in guaranteed investment certificates (GICs) and bonds, which yielded returns of only 1-2 percent.
In a world of volatile oil prices, Medicine Hat’s push to monetize its depleting assets may set it apart from other nations and towns that have been hit hard by the bust.
By Tsvetana Paraskova for Oilprice.com
