The
Utica Revisited
Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most
successful man in life is the man who has the best information
It was August of 2009 when I first wrote about
Quebec, Canada’s Utica shale gas play.
The Utica has a lot going for it:
- Shallow depth of the shale
- Proven fracturability
- High production rates, up to 1 million cubic feet a day (mmcf/d) in vertical
tests
- Rock properties are comparable to other more established shale plays, right
mineralogy, porosity and maturity
- High-quality natural gas with minimal impurities, 88% to 97% methane, less
than one per cent inert gases and 1,027-1,136 British Thermal Unit (Btu) content.
Gas is pipeline ready, no H2S, no CO2, no nitrogen extraction
- Infrastructure in place with nearby access to major pipelines
- Premium natural gas pricing to NYMEX helps make the economics compelling. New
York City Gate pricing typically averages US$1 above NYMEX Henry Hub, making
the pricing environment attractive for producers
- Low initial acreage costs with low carrying costs
- Quebec Canada is one of the best areas in the world to explore for and
develop a resource
- Utica gas is within 400 miles of the New York City Market. Unused export
capacity to the US on TransCanada Corp’s pipeline system is 200 - 400 mmcf a
day.
Quebec uses 500 billion cubic feet per year of
natural gas - all of it coming from Alberta, whose conventional reserves, according
to industry consultant Ziff Energy Group, are in steep decline. Ziff predicts
that total gas output in the Western Canada Sedimentary Basin will drop below
14 Bcf/d by 2020 from the current 16.2 Bcf/d.
The
National Energy Board (NEB) estimates deliverability of Canadian gas will
shrink by 9% a year over the next two years, this despite:
-
An increase in gas drilling investment from C$5.76 billion in 2009 to C$8.51
billion in 2011
-
An increase in gas-targeted wells from 4,170 to 6,495
Royal Dutch Shell stepped up its interest in U.S.
gas shale properties with a $4.7 billion purchase of privately-held East
Resources, Inc. The deal includes a 650,000 net acreage position in the
Marcellus shale, and 1.05 million net acres overall. Shell also acquired
250,000 net acres of mineral rights in the Eagle Ford shale play in South
Texas. This brings Shells total shale and tight gas acreage acquired just this
year in North America to 1.3 million acres.
Total SA, Europe’s third-largest oil company,
accelerated its expansion in unconventional energy by agreeing to buy a stake
in Chesapeake Energy Corp.’s assets in the biggest U.S. natural-gas field for
up to US$2.25 billion.
Exxon
Mobil Corp., the biggest U.S. oil company, is buying shale-gas producer XTO
Energy Inc. for $29.2 billion. “This is
really about value creation over the next many years. This is about the next
10, 20, 30 years.” ExxonMobil CEO Rex Tillerson
“We will
need a growing amount of electricity and natural gas is in an excellent
position to capture a significant amount of that market.” Larry Nichols, chairman
of Devon Energy and chairman of the American Petroleum Institute
A
Canaccord Adams equity research report said the participation of Talisman Energy
and Forest Oil in the Utica shale of the St. Lawrence Lowlands improves the
plays chances of becoming commercial in the next few years.
Netherland,
Sewell & Associates, a Texas-based consulting firm, estimated the Utica
deposit could hold 150 Bcf per square mile, 66% more than any previous
calculation.
The feature company in my first Utica article “The
Utica – An Emerging Canadian Shale Gas Play” was Canadian Quantum
Energy Corp. CQM - TSXv.
CQM has interests in four key permits comprising
approximately 170,000 gross acres / 35,000 net acres in the heart of the
identified Utica’s Fairway. At the time I featured the Company, its shares were
trading around the C$1.90 level, this was just prior to the Company
implementing a four for one forward split of its shares. Post split the shares
dropped briefly to the C$0.40 level and then climbed to a high of C$2.29.
This author believes a large part of CQM’s post
split share price increase (currently 29.5mm shares fully diluted >50% owned
by insiders), and the increased market attention all the Utica players
received, was because of flow results from the St. Edouard well (12 mmcf/d), a
joint venture horizontal well drilled by Talisman and Questerre. It’s also my
belief, because of 3D seismic and pipeline work currently being done,
development wells will be drilled and takeaway production will happen from the
St. Edouard well #1 in 2011.
Talisman Energy has drilled, or will drill this
summer, four more wells in the Utica Shale in Quebec.
The success
of all wells drilled in the area are important but especially important to CQM
are (in the above map CQM’s interests are outlined in red):
-
Leclercville is being stimulated with a
multi-stage frac as I write this article
-
Fortierville is very close to one of CQM’s
permits. This well is currently being drilled
-
Gentilly was drilled in February of 2010
and is scheduled to be fraced as soon as the equipment is released at
Leclercville.
-
Ste-Gertude will be spudded after drilling
is complete on Fortierville
Two of the next four wells to be drilled are on ground
CQM has an interest in with a third well being very close to the permit
boundary, much closer than the St. Edouard. Also of note is Forest Oil has announced
plans to drill a 1,000 meter horizontal well in the second half of 2010 on its
deeper North Richelieu acreage - closer to CQM’s Nicolet acreage than the St.
Edouard.
80%
of CQM’s Utica acreage is located on the Nicolet permit with 87% of the total Nicolet
land package lying between the Yamaska Growth Fault and the Logan’s Line – this
area is deeper & over-pressured and past activity indicates the highest
probability of success.
Canadian
Quantum and Junex entered into a farm-out agreement whereby Junex earned a 50%
working interest in CQM’s Nicolet Utica and Lorraine shale intervals by
drilling and subsequently coring two exploration wells (St.Gregoire #2 and St.Gregoire
#3)
The
St.Gregoire #2 well was drilled into the deeper acreage south of the Yamaska
growth fault encountering over-pressured zones. It is worth noting that the
St.Edouard, a horizontal well, was drilled into a similar area of greater
structural influence and over-pressuring.
Canadian
Quantum and Junex plan on shooting 2D seismic and based on results from this seismic
shoot will initiate a horizontal drilling program, likely in early 2011.
The
other 20% of CQM’s holdings in the Utica are partnered with Talisman and
Questerre Energy where CQM has a 3.75% working interest. This interest, while
small, is extremely important to the Company as it gives them access to Talisman
- the most active and most experienced shale player in the region.
That
small working interest is going to, in this authors opinion, drastically
shorten the learning curve for CQM when/if it comes time to develop the
Nicolet. CQM is learning as much as they can from the progression of these
early wells - figuring out a successful formula and how to keep costs down.
An
NI 51-101 compliant resource study was recently conducted covering the Nicolet
Permit by Netherland, Sewell & Associates (NS&A). The report concluded
8.7 tcf of original gas is in place on the permit of which 10% could be
recovered. Net to CQM this equates to 436 bcf of recoverable reserves on this
permit alone.
With significant news flow expected through the rest
of 2010 the Utica could again become one of the hottest resource plays in North
America.
CQM is currently trading around C$1.00, has recently
closed a C$2.09mm financing, is fully capitalized to meet its 2010 capital
expenditure program, has a significant land base with third party resource
calculations and, possibly, numerous positive
share price catalysts coming in the short to medium term.
The Utica Shale gas play in Quebec, Canada and
Canadian Quantum Energy Corp. TSXv - CQM should be on every investors radar
screen.
Is it on yours?
Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com
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please come and visit us at aheadoftheherd.com
***
Richard is host of aheadoftheherd.com and invests in the junior resource
sector. His articles have been published on over 200 websites, including: Wall
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***
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the
solicitation of an offer to purchase or subscribe for any investment. Richard
Mills has based this document on information obtained from sources he believes
to be reliable but which has not been independently verified; Richard Mills
makes no guarantee, representation or warranty and accepts no responsibility or
liability as to its accuracy or completeness. Expressions of opinion are those
of Richard Mills only and are subject to change without notice. Richard Mills
assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report and
will not be held liable for the consequence of reliance upon any opinion or
statement contained herein or any omission. Furthermore, I, Richard Mills,
assume no liability for any direct or indirect loss or damage or, in
particular, for lost profit, which you may incur as a result of the use and
existence of the information provided within this Report.
Richard Mills does not own shares in any company mentioned in this article.
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