MEDICINE HAT — Alberta’s Gas City is getting into the oil business.
The City of Medicine Hat has approved a $48.6 million deal to buy oil producing properties from Chinook Energy (TSX:CKE).
The deal, announced and approved in a special session of city council on Monday, would see the city-owned energy division acquire a block of leases east of Manyberries, about 85 kilometres south of Medicine Hat.
According to figures presented, the average current production is 450 barrels of oil equivalent per day.
City officials feel that proper management and two new horizontal wells could see that number doubled by 2014.
Chinook currently manages the property and has a 74.55 per cent stake, with the remainder owned by WOGH Limited Partnership.
The deal is retroactive to January 1, 2012, and could close Feb. 14.
There is no financing on the deal. Medicine Hat will use cash on hand from its nearly $200 million gas depletion fund for the purchase.
The city of about 60,000 located 300 kilometres east of Calgary has run its own natural gas utility, exploration and production business for the last 100 years.
But lingering rock bottom prices for natural gas has some in the city government raising a call to diversify its portfolio.
Currently the gas-division is mandated to provide a $24.5 million yearly dividend to the city to keep property taxes low. The natural gas business unit is projected to only make $4.51 million in 2012, and in 2011 the dividend was supplemented greatly by exporting high-priced electricity into the rest of Alberta.
According to the Chinook Energy corporate website, the company’s current production is 15,000 barrels of oil equivalent, and has projects throughout mainly Alberta, British Columbia, and also Tunisia.