MEDICINE HAT- In the good times, Peter Pleskie would look at his empty industrial yard as a sign of success for his oilpatch company. These days, neat rows of excavators, trucks and other heavy construction equipment fill the CerPro Energy Services compound west of Medicine Hat, symbolizing his sudden reversal in fortunes. CerPro was once a rising business star, rapidly expanding to a workforce of more than 300 people in less than four years as Canada’s oilpatch flourished. An explosion of natural gas drilling earlier this decade drove demand for his construction business at well sites, gas plants and pipelines throughout southern Alberta and southeastern Saskatchewan. “It seemed like there was going to be no end to the boom,” says Pleskie, a welder by trade. This week, nearly $20 million worth of new CerPro equipment rolled off the lot for the last time, put on the auction block after the company was pushed into bankruptcy in late June. The equipment sold for just $8.2 million. “We powered through as hard as we could,” he says. Pleskie’s troubles stem from a dramatic slowdown in Alberta’s natural gas business, driven largely by an emerging new resource: shale gas. This “shale gale,” as renowned oilpatch author Daniel Yergin has termed it, is relentlessly moving across North America, driven by technology that has unlocked major stores of the fuel. And every Albertan, whether they know it or not, is caught in a downdraft, from out-of-work rig hands and rural hotel operators to white-collar executives in downtown office towers and ailing patients lined up in hospital emergency wards. The natural gas industry — long the bedrock of Alberta’s economy — faces major threats amid a fundamental shift south of the border. Massive stores of shale gas, once beyond the reach of engineers, are now being successfully squeezed out from under Texas and other U.S. states. Now Medicine Hat, the unofficial heart of Alberta’s natural gas industry for more than a century, is being battered by this shale storm, along with dozens of other Alberta communities. The abrupt slowdown in gas exploration is swelling unemployment rolls and bankruptcies, while choking off corporate profits and money flowing into government coffers. Lower production and weak prices have slashed the provincial government’s take from natural gas to $1.9 billion this year, compared to more than $6 billion a year ago. The Stelmach government now faces nearly a $9-billion shortfall over the next three years due to the sharp drop in royalty revenues, led downward by natural gas. The change underscores the fact that Alberta’s oilpatch is really about natural gas, which traditionally pumps more than two-thirds of the province’s resource revenues. But the gas windfall is evaporating faster than anyone could have imagined. “How quickly that geological advantage has turned into a disadvantage,” says Derek Burleton, chief economist with TD Bank, who authored a study this fall on pressures facing Alberta’s gas industry. “The concern, and rightly so, is that this could persist. This isn’t just a one or two year thing.”

The stakes are high for Alberta’s 3.6 million residents. The province’s natural gas fuels nearly $40 billion in annual production — more than one-tenth of the entire economy. The threat that Alberta’s key export could be quickly displaced by cheaper gas closer to U.S. markets is high on the minds of provincial politicians. “Seventy per cent of our royalties are in natural gas, so we’re exceptionally vulnerable when that’s down,” says Finance Minister Iris Evans. “It’s a concern . . . we’re strategizing and meeting with energy players.” The dominoes have already started to fall throughout Alberta’s petro-fuelled economy. A glut of gas in North America means prices are down for the resource. In turn, petroleum producers have slashed spending on gas, idling hundreds of drilling rigs, putting thousands of people out of work. Each well generates about 75 jobs, from rig hands and service crews to truck drivers who haul water to the site. Across Alberta’s rural communities, exploration companies are spending fewer dollars on hotels and restaurants. Capital budgets are being pruned, and head office jobs in Calgary and Edmonton have disappeared in the fallout — such as 220 positions cut this week at Talisman Energy because the company is refocusing on U.S. shale gas plays. The provincial government is feeling the blow on another front: falling tax revenues from unemployed citizens and weaker business profits. All these factors are coming to a head in Medicine Hat, which proudly bills itself as Canada’s “Gas City.” Like much of Alberta, the region’s jobless rate has doubled over the past year and sat at 6.6 per cent in October. The number of Medicine Hatters receiving employment insurance has tripled in 12 months, one of the biggest jumps in the country. Natural gas has long fed the city’s economic success, as Medicine Hat is located over one of Canada’s most prolific gas fields. The city-owned gas company, Prodco, controls some 4,000 wells and the utility has delivered a steady dividend to municipal coffers over the years, subsidizing civic spending and keeping property taxes among the lowest in Canada. Last year, the company took in $94 million, or more than $1,500 for every man, woman and child in the prairie centre. But this year, the city’s $24-million dividend takes up nearly all of Prodco’s total profits of $32 million. If gas prices continue to wane, something must give. “How do you sustain this, and how do you keep in business? That’s the million dollar question . . . particularly when the Americans have access to a lot of natural gas,” says Mayor Norm Boucher. Just west on the Trans-Canada Highway in Brooks, another hub for energy service companies, a similar story is unfolding. In the past year, Dave Zukowski laid off 35 employees — 70 per cent of his staff — at his fabrication shop, where they build drilling and oilfield equipment. Nearly all are still looking for work, he says, meaning there are fewer paycheques to support local shops, restaurants and bars.

His daughter has also been trying to land work at the local hospital, where there’s a hiring freeze. Instead, she can only volunteer and hope a job opens. Local drillers expect another brutal year in 2010. Three years ago at the zenith of Alberta’s frenetic energy boom, companies punched 5,850 gas wells into the ground in southeastern Alberta. Next year, that number is projected to reach just 1,120. “We created our own monster here and we do it every cycle,” says David Hemsing, of Quinterra Drilling, another Brooks-based operation. “We have too many drilling rigs right now — and there will be casualties.” In Medicine Hat, the downturn has already claimed Pleskie’s business. This spring, CerPro was nearly $22 million in debt and prospects for work were dwindling. Then the bank came calling. “We were highly leveraged, but we were doing well until the downturn. Then, there was just not enough work,” he says. Too young to retire at 53, Pleskie will probably try to start over again. He now spends his time doing chores around his home, and playing with his grandchildren. On a cold winter morning, he slowly manoeuvres his truck through the CerPro yard, watching auctioneer staff polish up equipment for the big bankruptcy sale. He points to a graveyard of spare parts, steel pipes and oil tanks filling the 18-acre property, carved out of cropland just a couple of years ago. Surveying the 16,000-square-foot shop, Pleskie sighs, recalling the hours he and others put in to construct the facility last year. Soon, the building will be all that’s left of CerPro once bargain-hunters scuttle off with their new auction prizes. “It’s sad to see where it is, but it’s Alberta,” Pleskie concludes. “It took four years to get here, there’s no reason why you can’t do it again.” * * * An effort to cut costs helped Nick Steinsberger unlock a century worth of natural gas trapped in Texas shale. In the mid-1990s, the petroleum engineer was working for Mitchell Energy, a mid-size U.S. independent producer looking for new supplies for its gas plant near Fort Worth. Steinsberger was hunting for a way to squeeze gas out of the Barnett, a formation long known to geologists, but few thought hydrocarbons could be pulled from the concrete-like formations buried more than two kilometres underground. The Texan experimented with several expensive oilpatch techniques to fracture the rock, a process that forces a mixture of fluids, sand and other particles underground to crack the formation — and help gas flow. But natural gas prices were low, so he floated a cheaper plan to switch to mostly water and sand, instead of foams, gels and other material. “My recommendation didn’t really go over very well,” he laughs. “They thought I was a moron or an idiot even for suggesting it.” He persisted and in late 1996 sunk some test wells into the stubborn shale. “They ended up giving me three and I screwed them all up,” Steinsberger says. The following spring, he tried again and one worked like a charm on the northeast Texas prairie. In short order, it produced more than a million cubic feet of gas a day, about eight times the total production of an Alberta shallow gas well.

Success in the Barnett would be fully realized a few years later, as Steinsberger and others pioneered techniques that combined horizontal drilling — moving sideways into the rock after hitting a certain depth — with multiple fractures, dramatically increasing production. It would set the stage for a transformation in the U.S. natural gas industry, as new technology tapped a geyser of supply. “Some call it a revolution,” oilpatch experts Daniel Yergin and Robert Ineson wrote last month. “It was not a single eureka moment, but rather the result of incremental experimentation and technical skill.” By 2002, a land rush was picking up in shale properties in Texas. The techniques quickly spread, and shale gas is now being developed from Louisiana to Pennsylvania and northeast British Columbia. Alberta holds some shale gas deposits, but they are difficult to reach and there’s been limited development. After years of falling American gas production — offset by rising Canadian imports — the U.S. now has a huge supply right under some of its biggest markets. U.S. natural gas resources have jumped 60 per cent in the past four years alone — mostly due to shale gas finds. “If anything, the trend suggests that’s likely to grow, not shrink,” says Sara Banaszak, senior economist for the American Petroleum Institute, the industry’s main lobbying organization in the U.S. “It really changes the outlook for the United States. Not just the size of the resource, but the variety of locations where the natural gas from shale can be found.” One massive shale formation in particular, the Marcellus, sits right on the doorstep of high-demand markets in the U.S. northeast. Canadian gas, which has fuelled about 20 per cent of U.S. demand, is now on the outside, displaced from the lucrative market. The U.S. Energy Information Administration estimates the shale resource could make the country self-sufficient in natural gas supply by 2030. While this may be good news for our southern neighbours, such a shift threatens the long-term viability of Alberta’s gas business. Yet, there are still many questions about the longevity of shale plays, which come on strong but taper off quickly. Production from a shale well can drop 65 to 90 per cent in the first year. “They assume shale is this big monster that’s growing out of control, and it’s not,” cautions Richard Moorman, manager of strategic analysis at Southwestern Energy Company, a Houston-based shale gas producer. U.S. shale producers also face growing environmental opposition amid concerns that rapid development could contaminate drinking water supplies due to the fracturing. Some jurisdictions, including New York State, are looking at halting drilling near watersheds and other regulations that may limit future development. Still, this explosion of supply is weighing heavily on gas prices, the main damper on drilling activity in Alberta. After completing nearly 6,700 gas wells in the entire province last year, crews will likely work on fewer than 3,100 in 2009, according to industry forecasts. So far this year, natural gas prices have averaged around $4 a gigajoule, only half of the way toward profitability for most Alberta wells.

Put simply, shale wells are far more economic than the conventional natural gas wells that make up the bulk of Alberta’s geology. “That’s where the threat to the Alberta industry is,” says Wilf Gobert, an independent energy analyst and chairman of Calgary Economic Development. Alberta gas pools are “small reservoirs, they are small targets and they tend to be high cost and need high price,” Gobert adds. Faced with such dollars-and-cents decisions, the province’s largest petroleum producers have cut Alberta spending and shut in gas. EnCana Corp., Canada’s largest natural gas producer, has shifted more money toward shale plays in Louisiana and Horn River, in northeastern B.C. The Calgary-based company drilled about 1,400 wells around Medicine Hat last year, down from 2,000 in 2007. “Alberta has lost some of its market share. It’s share of the pie has shrunk over the past couple of years,” says Richard Dunn, vice-president of regulatory and government affairs for the company’s Foothills Division. A well in southeast Alberta’s shallow gas may be cheap to drill — under $400,000 — but the production averages less than 150,000 cubic feet a day. Shale wells in the company’s Haynesville, La., play can cost $10 million, but pump out about eight million cubic feet a day. U.S. shale is the major competitor for Alberta’s natural gas industry, say provincial officials. “We have to accept the (shale) gas is there and it’s going to be found,” says Alberta’s Treasury Board president Lloyd Snelgrove. The shale explosion south of the border also ripples through Alberta’s vast pipeline network, built to transport the province’s gas resources to U.S. markets. Falling Alberta production now means less gas is moving through those pipes. Operators like TransCanada Corp., the country’s largest shipper, are musing about seeking a nearly 50 per cent increase in shipping costs on its main pipeline. Higher tolls could ultimately lead to even less gas production. Those tolling costs will likely come back down as volumes return — in part due to rising shale production in B.C., say pipeline officials, although that might take three to five years. But don’t expect activity to return to its frantic pace of the past few boom years, says TransCanada CEO Hal Kvisle. “The structural shift that’s occurring in Alberta is deteriorating geological prospectivity, rather than the impact of U.S. shale gas. That’s the real problem here,” he says. “The chance of finding a big gas pool in Alberta are getting more remote all the time. The geology is wearing out, it’s getting to be a tired basin, and this isn’t really unexpected. It’s just what happens after places are largely drilled up.” * * * Larry Campbell feels the repercussions of the shale gas revolution on two fronts. Last fall, the Innisfail resident was laid off after a two-decade career selling drill bits. He’s also been dealing with Alberta’s crowded hospitals as he helps care for his adult daughter Devie, who is struggling with complications from Chron’s disease. Navigating through the province’s cash-strapped medical system to find a room hasn’t been easy.

“We’re keeping our fingers crossed that her kidneys don’t fail,” says Campbell, getting some fresh air in front the Medicine Hat Regional Hospital. “We still don’t have a complete diagnosis. We’ve had quite a few doctors in Calgary and Medicine Hat.” Devie started having trouble two months ago and was admitted to hospital in Medicine Hat, where she lives. She had to be transferred to Calgary Foothills, but they waited three weeks to see a specialist. Then she was moved back to Medicine Hat, where it seems just as busy. The Gas City has long lobbied for an expansion of the health care facility, with about 325 hospital beds serving a growing regional population of about 120,000. No one questions the need. The hospital hasn’t been renovated in more than 25 years and one wing has been mothballed. Only one operating room is big enough to accommodate necessary modern equipment for some key procedures. “I know Alberta is hurting medically,” says Campbell. “Medicine Hat hospital covers a large area — southern Alberta into Saskatchewan — and they sure could use a bigger hospital. “It’s a busy, busy place.” Twenty-two months ago, as the clock ticked down on a provincial election call, the Stelmach government gave the green light to the badly needed expansion, delighting Medicine Hatters who had been waiting years for the news. It was part of a string of spending announcements that included a half dozen new schools in Calgary and seven new long-term care facilities throughout Alberta. At that time, the government was staring at an $8-billion surplus thanks to an energy bonanza that seemed to overwhelm the province’s plans. Now, it’s wrestling with the biggest deficit in Alberta history as natural gas revenues collapse. The pressure is on. The $280-million hospital expansion in Medicine Hat was postponed this year due to the province’s money squeeze, along with funding for seniors’ homes and other facilities throughout Alberta. In Grande Prairie, previously announced plans for a new $250-million hospital have bogged down due to the cash crunch. In Fort Macleod, plans for a multimillion dollar police college have also been delayed. And the province’s health board deficit could grow next year by as much as $1 billion as it continues to axe staff and trim costs. Still, the workload grows at Medicine Hat’s hospital. Nearby Brooks had to close its maternity ward recently, sending expectant moms an hour-drive down the highway to give birth. Carol Secondiak, former chairwoman of Palliser Health Board who pushed for the expansion of Medicine Hat’s hospital, said the building was already out of space. Now, it’s fielding more patients from a wider area. Without more cash, though, the province says it can’t afford to start building. “What has been an overtaxed, overused facility has another 25,000 people thrown at it,” laments Secondiak, a nurse who runs her own Brooks-based medical business. “The hospital is in dire need of expansion.” It’s not just Alberta’s health care feeling the crunch. Every provincial department is under the microscope, as the government tries to slash $2 billion in spending next year.