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THE DUVERNAY SHALETHE NEW MILLENNIUM GOLD IS CONDENSATE
BMO CAPITAL MARKETS OIL & GAS A&D ADVISORY
NOVEMBER, 2013
Wendy Smith Low, B.Sc.,Managing [email protected]
Joyce Kennedy, B.Sc., P.Geol.,Vice [email protected]
Gary Fisher, M.Sc.,Vice President+1-403-515-3674gary.fi [email protected]
Michael Greene, M.Sc., Geo.I.T.,[email protected]
1
Attribute Remarks Duvernay
Huge Rock Volumethick
porous
regionally extensive and predictable
Fracablequartz and calcite rich
clay-poor
brittle rocks, fracs easily, introduces permeability
High TOC
Organically Mature
organically rich, Type II Kerogen
self-sourced, thermally mature
extensive volatile-oil and liquid-rich gas windows
Overpressuredincreases storage of hydrocarbons
improves deliverability and well clean-up
provides drive in multi-phase hydrocarbon system
Duvernay Eagle Ford Montney Marcellus
Haynesville
(Cotton Valley)
Muskwa
(Horn River)
Depth (m) 2500-4000 2000-4000 1800-3000 1400-2200 3200-4200 2500-3000
Thickness (m) 20-70 10-70 200-350 30-90 50-100 150
Porosity (%) 4-10 6-14 3-7 3-9 8-12 3-7
TOC (weight %) 2-7 2-6 2-5 3-10 1-5 2-5
Fracability Moderate Moderate High Moderate Low Moderate
Gradient (psi/ft) 0.7-0.9 0.55-0.75 0.55-0.75 0.4-0.7 0.8-0.95 0.5-0.7
Liquid Yield (bbl/MMcf) up to 450 up to 600 up to 50 up to 50 up to 50 < 5
Producing
Phase Windows
Oil
Wet-Gas
Dry-Gas
Oil
Wet-Gas
Dry-Gas
Wet-Gas
Dry-Gas
Wet-Gas
Dry-Gas
Wet-Gas
Dry-GasDry-Gas
Source: BM O Capital M arkets, NETL 2011, EIA 2011, C. Hall 2010, M . Bustin 2010
The Duvernay Shale The New Millennium Gold is Condensate
North American Shale Plays
Shale Gas Resource Play - Report Card
Since our last publication on the Duvernay, “The New Millennium Gold
Rush” (March 2012), investment in the Duvernay has focused on land acquisition in the Edson and Pembina areas, land consolidation primarily at Kaybob and drilling and evaluation in all three areas
Drilling activity has exposed land positions previously held under broker’s names
and the significant land holdings of international oil companies and senior Canadian producers has become apparent
Drilling results over the last 18 months have confirmed the existence of multiple
phase windows (dry gas, liquid-rich gas, volatile oil and black oil), as well as confirming the ability of the reservoir to behave as a true, overpressured shale reservoir and, from most windows, deliver hydrocarbons economically
More recent drilling activity is now focused in the areas where free condensate
production is significant, resulting in enhanced economics given current commodity pricing
The Alberta Royalty Regime favours Duvernay gas wells over Duvernay oil wells
which suggests activity at least in the near term will be relegated to defining and drilling in the condensate and NGL-rich windows
It is with this continued investment that the Duvernay Shale has emerged as a
highly sought after, world-class unconventional shale play, with focus now on condensate - the new gold
Duvernay Fairway
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets
Under Mature
Black Oil
Volatile Oil
Rich Gas
Wet Gas
Dry Gas
Over Mature
Kaybob
Edson
Pembina
2
The Duvernay Characteristics of a World Class Resource
As indicated in the Shale Gas Report Card on the previous page, the
combination of several critical factors is necessary to create a world-class resource like the Duvernay
The Duvernay has substantial rock volume that is thick (> 30 m), porous and
regionally extensive covering an estimated 7,500 sq miles. In our last report, BMO estimated the gas in place to be as high as 750 Tcf
In October of 2012, the ERCB (AER) estimated that the Duvernay gas in place
(P50 case), was 443 Tcf with a further 73 billion bbl of NGLs and oil
The regional cross section shows the extent of the Duvernay from Kaybob down
through Edson, Pembina and finally into the East Shale Basin confirming the areal extent of the reservoir
BMO has had the opportunity to examine core across the fairway with the core
photos confirming the Duvernay is an organically rich source rock. This is further supported by an ever-expanding set of geochemical analyses where TOC can be as high as 20% but is typically in the 2-7% range
Deliverability is dependent on rock brittleness and the effectiveness of
mechanically induced fractures. Duvernay rock components are dominated by quartz and calcite with very little clay, making the rock brittle – note the healed fracture systems observed in core photos
Other remaining reservoir characteristics that are key to a successful shale play
include reservoir pressure and specifically high pressure gradients as well as the thermal maturity of the fairway
Duvernay Shale Basin Lithofacies Map
Source: WCSB Atlas fig 12.17, GeoSCOUT, BMO Capital Markets
Calgary
Edmonton
Kaybob Edson Pembina East Shale Basin
Grande Prairie
Wild River Sub Basin
West Shale Basin
East Shale Basin
Line of Section
Kaybob
Edson
Pembina
Schematic adapted from Potma et al. 2001
Attribute Duvernay
Huge Rock Volume
Fracable
3
Regionally Extensive and Thick Significant Gas and Liquids in Place
Regional Stratigraphic Cross Section - 337 km of Duvernay from Kaybob to East Shale Basin
102/11-08-062-24W5/00 100/14-10-061-18W5/00 100/01-10-052-17W5/00 100/08-32-046-09W5/02 100/08-05-043-06W5/00 102/15-33-041-08W5/00 100/08-20-038-28W4/00
10 c
m
10 c
m
10 c
m
10 c
m
5 c
m
10 c
m
10 c
m
Pyrite
3,812 m
3,062 m
Lighter colour, some vertical
fracturing, finely laminated
3,696 m
Vertical fracture and very fine
laminae
3,110 m
Vertical and horizontal fracture
Lighter, larger scale
laminae
3,195 m
3,454 m
Slumping beds
Soft sediment
slump feature Pyrite
2,587 m
Fracture features largely
confined to lighter bands
Larger scale layers
Horizontal Oil
Horizontal Gas
Core Image
Beaverhill Lake
Waterways
Cooking Lake Majeau Lake
Swan Hills
Beaverhill Lake
Encana 100/16-05-062-24W5/00
CTD: 192 MMcf, 39 Mbbl (cnd) Rate: 1,571 Mcf/d
(June prd-day)
Sinopec Daylight 100/02-05-047-09W5/00 Confidential until Jan 2014 CTD: 11.9 Mbbl, 4.7 MMcf
Rate: 92 bbl/d, 2 Mcf/d (Sept cal-day)
Pin
e C
reek L
ed
uc
Reef
Co
mp
lex
Le
du
c R
imb
y M
ead
ow
bro
ok
Tre
nd
Datum: Top of Majeau Lake/Cooking Lake
Encana 100/16-05-042-08W5/02
CTD: 354 MMcf, 18 Mbbl (cnd) Rate: 679 Mcf/d 32 bbl/d
(Sept prd-day)
EOG 100/01-20-038-28W4/00 CTD: 28.4 Mbbl, 22.4 MMcf
Rate: 42 bbl/d, 32 Mcf/d (Sept prd-day)
Ireton
Duvernay
Edge of
Slave Point/
Swan Hills
Husky 100/11-25-060-18W5/00
CTD: 307 MMcf, 146 Mbbl (cnd) Rate: 1,005 Mcf/d
(Sept prd-day)
Canadian Natural 100/01-03-052-17W5/03 Tested Gas (DOB May 2012)
Encana 100/11-05-043-06W5/02
CTD: 114 MMcf, 13 Mbbl (cnd) Rate: 177 Mcf/d 93 bbl/d
(Aug prd-day)
Very dark heavily oil stained. Very fine grained
Very fine grained with
soft sediment deformation
features
East Shale Basin Pembina Edson Kaybob
Attribute Duvernay
Huge Rock Volume
Fracable
Source: GeoSCOUT, BMO Capital Markets, Core descriptors are from visual observations
4
0 2,500 5,000 7,500 10,000 12,500
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0
1,000
2,000
3,000
4,000
5,000
6,000
0 20,000 40,000 60,000 80,000 100,000
Pressure (psi)
De
pth
(fe
et)
De
pth
(m
etr
es)
Pressure (kPa)
Overpressured and Thermally Mature
Duvernay Thermal Maturity
Pressure data reveals significant overpressuring in the Duvernay. This is a
beneficial attribute to have in this permeability challenged, liquid-rich reservoir as it increases overall storage and deliverability
With few exceptions, pressure gradients are above 0.6 psi/ft, with the bulk
clustering at 0.8 psi/ft
With overpressuring, there is a longer period for single phase flow within the
reservoir which will assist with the overall capture of reserves
The Duvernay thermal maturity map uses historical and new geochemistry data,
supplemented with actual test and production results
Most of the wells drilled to date lie within the volatile-oil and liquid-rich gas
windows; these regions (pressure plus liquids) are the most sought after areas of the fairway
Although there are NGLs in the gas stream, it is the free-condensate that is
currently driving the enhanced play economics, with some operators reporting condensate yields up to 560 bbl/MMcf
The consequence is that operators are very focused on tracking the liquids which
results in detailed definition of the phase windows and expected yields, as is evident at Kaybob
The highest condensate yields are found in the volatile oil and rich gas phase
windows, indicated in the gold and green on the map
Overpressured Duvernay Across the Basin
West Shale Basin
East Shale Basin
Kaybob
Edson
Pembina
Source: AGS, GSC, Various corporate presentations and press releases, GeoSCOUT, BMO Capital Markets
02-08-044-27W4 East Shale Basin
Normally Pressured
16-05-062-24W5 Kaybob
Encana Horizontal
02-08-044-27W4 Normally Pressured
1955 DST
16-05-062-24W5 0.89 psi/ft
2012 AOF test
Under Mature
Black Oil
Volatile Oil
Rich Gas
Wet Gas
Dry Gas
Over Mature
01-20-038-28W4 0.59 psi/ft 2012 test
01-20-038-28W4 East Shale Basin EOG Horizontal
Attribute Duvernay
High TOC
Organically Mature
Attribute Duvernay
Overpressured
Source: GeoSCOUT, BMO Capital Markets
5
0.001
0.01
0.1
1
10
100
He & H2 N2 CO2 H2S C1 C2 C3 iC4 &nC4
iC5 &nC5
C6 C7+
Ga
s C
om
po
sit
ion
(M
ole
Fra
cti
on
%)
Hydrocarbon Gas-Liquid Ratio Liquid-Gas Ratio API Gravity Concentration C7+
System scf/bbl bbl/MMcf °API (Stock Tank Oil) mole percentBlack Oil ≤2,000 >500 < 45 > 20
Volatile Oil 2,000 - 3,300 500 - 300 > 40 12.5 - 20
Rich Gas 3,300 - >5,000 300 - < 200 40 - >60 < 12.5
Wet Gas >50,000 ≤20 40 - >60 ~ 0
Dry GasSource: M cCain, William D., Jr. (1990). Propert ies of Petroleum Fluids (2nd Edit ion). PennWell. GOR (scf/bbl) = 1 ÷ Cond. Yield (bbl/M M cf)x1,000,000
NO LIQUID PRODUCTION
0.001
0.01
0.1
1
10
100
He & H2 N2 CO2 H2S C1 C2 C3 iC4 &nC4
iC5 &nC5
C6 C7+
Ga
s C
om
po
sit
ion
(M
ole
Fra
cti
on
%)
Duvernay Free Condensate Yields The Gold Flows
Reservoir Gas Composition Chart 100 bbl/MMcf
Reservoir Gas Composition Chart 300 bbl/MMcf
Characterizations of phase windows are not subject to hard and fast rules and
can show a fair amount of overlap
Highest condensate yields come from gas streams with high C7+ component
ratios within the volatile oil and rich gas phase windows
Understanding and predicting the C7+ ends requires gas plus liquids
recombination analyses, which are rare in public data
The hypothetical gas compositions shown below model condensate gas ratios of
100 and 300 bbl/MMcf, reflecting C7+ compositions of 5% and 15% respectively
Wells with either of these condensate yields will be economic, but obviously the
300 bbl/MMcf well, combined with high pressure gradients provides superior deliverability and economics
Characteristics of Hydrocarbon Systems
C7+ 5%
C7+ 15%
Source: BMO Capital Markets
Recent industry activity has been focused on following the liquids and in turn
providing definition for the phase windows
Source: BMO Capital Markets
6
Drilled or
Drilling
Undrilled
Licenses
Exxon (XTO/Celtic) 400 169 Kaybob 16
Chevron (Alta Energy) 230 508 Kaybob 20 3
Shell 230 225 Kaybob, Pembina 46 40
Sinopec Daylight 2 105 203 Pembina 5 2
ConocoPhillips 89 n/a Pembina 5 1
EOG 48 155 Kaybob, East Shale Basin 3 1
Apache 39 n/a Kaybob 1 1
Canadian Natural 35 623 Edson 2
Husky 29 86 Kaybob 12
Encana - Phoenix JV 14 695 Kaybob, Pembina 29 8
Talisman 2 13 563 Kaybob, Pembina 8 2
Vermilion 6 321 Edson 3
Enerplus 4 133 Pembina 3 2
PennWest 2 4 156 Pembina, Edson 1
Trilogy 4 207 Kaybob 8
Athabasca Oil 2 3 550 Kaybob 12 2
Yoho 0.2 22 Kaybob 4 1
Others:Black Swan n/a 201 Pembina, Edson 2
Bounty 2 n/a 200 Kaybob, Pembina 12
Other Minor Players 14 1
Total Industry Activity 194 76
1. Market Cap as at Nov 7, 2013
2. Publicly announced as seeking some form of transaction
Active Players in Study Areas
(well count by operator)
Market Cap 1
(B$Cdn)
Disclosed
Land Position
(net sections)
Strike Areas
Duvernay Players
Duvernay Players World Class Play Needs World Class Dollars
Active players in the Duvernay are those with multi-billion dollar market caps.
Deep pockets and financial staying power are pre requisites for participation. The table on the right details the major players in the Canadian Duvernay play fairway with the top eight drillers having a market cap of more than $10B (CDN). These same operators account for 74% of the drilling undertaken to date in the play
Several of these players are new entrants (Sinopec/Exxon), having completed
corporate acquisitions (Daylight/Celtic) to gain their entry into this world-class shale play
All players noted have a significant land position in the play, with the table
detailing land positions that have been disclosed to the public. These land totals may still underestimate positions, as a considerable amount of land remains held on a confidential basis by brokers. Very little open Crown remains in the play, particularly in Kaybob, leading to ongoing consolidation activity through acquisition
Expect to see more drilling, especially in Kaybob, to retain lands. Recall that
much of the land was purchased as four year licenses, which by drilling will convert to leases with another five years of term. This will be critical for lands originally bought in 2009 and 2010
A number of companies have disclosed the intent to seek potential partners as a
way to develop the play more quickly, including Talisman and Sinopec-Daylight with Encana previously announcing a joint venture with PetroChina on their Duvernay acreage
Since 2010 Duvernay well activity has increased exponentially. In 2013 almost
130 wells have been licensed, with 57 wells drilled or drilling this year. Activity on undrilled licenses will likely pick up once the ground freezes in the fall and winter drilling can begin
Shell is the front runner when it comes to Duvernay drills and licenses,
accounting for more than 30% of the wells to date. Many wells drilled during last winter’s drilling season will come off confidential status in the coming months and that is likely to be a catalyst for additional activity
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
20
40
60
80
100
120
140
160
180
Pre 2011 2011 2012 2013 to date
Licensed
Drilled or Drilling
Percentage of wells from BIG-CAP* operators
Duvernay Activity
AER License data to November 15, 2013
* BIG-CAP operators have market cap >$10B
Source: BMO Capital Markets
Source: BMO Capital Markets
7
Duvernay Drilling History Honing in on the Free Condensate Fairway
Duvernay Fairway pre-2012
Duvernay Fairway Today
Prior to 2012, data on the Duvernay fairway was limited which resulted in broad
interpretation of thermal maturity boundaries. During the initial rush to acquire land, companies paid premium prices for large land licenses within the Ro boundaries
The majority of land licenses, including the most expensive, were contained in
the wet-gas fairway as defined by the data available at the time
The first Duvernay drills targeting this fairway at Kaybob and Pembina were
drilled by Celtic (XTO), Encana, Husky, Talisman and Trilogy
West Shale Basin
East Shale Basin
Kaybob
Edson
Pembina
West Shale Basin
East Shale Basin
Kaybob
Edson
Pembina
Under Mature
Black Oil
Volatile Oil
Rich Gas
Wet Gas
Dry Gas
Over Mature
Ro= 1
.0
Ro= 1.8 2011 Wet Gas Fairway
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets
One-off Duvernay drills are expensive ($15MM+) and many of the wells were
drilled by companies with deep pockets and large market caps. The Duvernay fairway has developed substantially as the knowledge base increased
The liquid-rich boundaries have been refined and are constantly being evaluated
as new wells are drilled and data is made available
More recently, Kaybob has seen an explosion of drilling activity, principally from
the large market cap companies
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets
8
Kaybob Moving from an Exploration Play to a Development Play
Kaybob Players Land Map
Source: Various corporate presentations and press releases, BMO Capital Markets
Duvernay lands at Kaybob are very tightly held
To gain a foothold in this prime area, several companies have made large
acquisitions. Exxon has purchased Celtic, creating XTO Energy Canada while Chevron has purchased Alta Energy
Major land holders at Kaybob include Athabasca, Chevron, Encana, Shell,
Talisman and Trilogy
There are currently 53 producing wells at Kaybob - 50 are horizontal
Length of the horizontal leg varies from ~1 km to just over 2 km and the number
and type of fracs vary as operators transition from evaluation wells into development wells
Shell, Husky and Encana are good examples of this as they transition from
single well licenses to multi-well pad licenses and drilling, with Shell leading the way
Publicly available free condensate production from these wells is reported to be
as high as 560 bbl/MMcf
Operators are exploring closer towards the volatile oil window in a search for
increased condensate yield
A larger number of wells are still confidential, with major operators routinely
trading confidential data amongst themselves to increase their competitive advantage
The definition of the phase boundaries continues to evolve as operators release
test and production data
Kaybob Activity Map
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets
Windfall
Bigstone
Simonette
Operator Well Count
Shell 78
Chevron 22
Encana-PetroChina 18
XTO Energy Cda 16
Athabasca 14
Husky 12
Trilogy 8
Bounty 8
Active Operator
9
Company Disclosure
Kaybob Drilling Results Striking Gold
Current Activity and Drilling Results
An increase in the quantity and
quality of production data leads to sweet spot identification and more accurate predictions of liquid and condensate yields
With more than 50 new licenses in
addition to the wells that will soon come off confidential, 2014 will be an interesting year for the Duvernay at Kaybob
Encana estimates it will spend
$250-$350MM ($500 to $600MM including JV) on Duvernay activity, including operating six to eight rigs, pad drilling at Kaybob and completing appraisal work at Willesden Green (DOB, Nov 5, 2013)
Chevron notes “…Near term plans
include transitioning to a two-rig drilling program” (DOB, Oct 25, 2013)
Trilogy is planning to spend
$150MM to drill approximately 11 net wells in the Duvernay (DOB, November 11, 2013)
Apache Corporation plans on a
winter 2013/2014 spud date for its first Duvernay well
Chevron 12 appraisal wells drilled
5 tied-in IP rates up to 7.5 MMcf/d
natural gas 1,300 bbl/d condensate
Trilogy 03-13-060-20W5
80 Bbl/MMcf 982 MMcf Gas
77.8 MBbl Cond 4 Bcf P+P Reserves
Source: Various corporate presentations and press releases, GeoEDGES, GeoSCOUT, BMO Capital Markets
Encana 08-05-062-24W5
IP at 1,400 bbl/d of field condensate and 4 MMcf/d of
natural gas 350 bbl/d and 2 MMcf/d after
four months
Under Mature
Black Oil
Volatile Oil
Rich Gas
Wet Gas
Dry Gas
Over Mature
Athabasca 08-18-064-17W5 IP30: 775 boe/d GOR 860 scf/bbl
Yoho 100-160 bbl/MMcf of
liquids average recoverable of 1 MMboe
per well
Shell/Trilogy 4 well pad tested at
1,940 boe/d (3.4 MMcf/d of gas and 1,366 bbl of
condensate)
Trilogy 04-15-064-21W5
292 Bbl/MMcf 119 MMcf Gas
34.8 MBbl Cond
10
Edson Development Appears Stalled
Edson Players Land Map
The least active of the three main Duvernay fairway areas, Edson has seen
some recent drilling but with no production results reported east of the Leduc trend
Several large long tenure licenses are held in the area by land brokers and until
wells are licensed on these blocks, it is difficult to know who owns them
Edson players include Bellatrix, Black Swan, Canadian Natural and Vermilion:
Bellatrix has increased their Duvernay position with the acquisition of Angle Energy
Source: Various corporate presentations and press releases, GeoSCOUT, BMO Capital Markets
Edson Activity Map
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets
Ledu
c Pla
tform
Edg
e
Operator Well Count
Vermilion 3
Canadian Natural 1
Bellatrix (Angle) 1
Black Swan 1
Active Operator
Canadian Natural 100/01-03-052-17W5/03
Testing shale gas
Bellatrix (old Angle well) 100/04-36-052-17W5/00
Drilled and cased
Vermilion 102/10-35-050-13W5/00 WELL CONFIDENTIAL
UNTIL 2013/12/16
Vermilion 100/15-18-049-13W5/00 WELL CONFIDENTIAL
UNTIL 2014/02/05
Black Swan 100/14-28-048-12W5/02 WELL CONFIDENTIAL
UNTIL 2014/03/13
10 c
m
3,696 m
The underlying Swan Hills Platform edge trends through the area, impacting
Duvernay thickness and possibly reservoir quality
BMO viewed core from the 01-10-052-17W5 Canadian Natural well located close
to the edge of the Swan Hills platform
While finely laminated, the rock itself was coarser than those cores viewed at
Pembina and Kaybob. As well, the core was very sticky and bituminous
The characteristics displayed by this core provide clues as to why development
has been slow at Edson. The release of new data from the three confidential wells (Vermilion and Black Swan) is eagerly anticipated and will help to fill in some of the blanks
Very bituminous core
Pyrite easily visible
Siltstone to VF sandstone
No fossils observed
Swan Hills
Platform
Edge
11
Pembina Kaybob’s Younger Sister
Pembina Players Land Map
Source: Various corporate presentations and press releases, GeoSCOUT, BMO Capital Markets
Pembina Activity Map
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets Land positions at Pembina were secured early, long before drilling began. PNG
rights are now largely held in the prime parts of the Duvernay fairway, and as a result future sale parcel size will be smaller
Large land positions are held by Encana, Enerplus, PennWest and Talisman.
Although there are fewer players, they have larger land positions
Access to this play is largely limited to acquisition of another company,
farm-in or joint venture. Encana entered into a joint venture with Phoenix, a wholly owned subsidiary of PetroChina, to explore and develop their extensive Duvernay holdings here and at Kaybob
The second most active area for drilling in the Duvernay, Pembina currently has
13 producing horizontal wells and 10 horizontal standing wells
Shell, Encana/PetroChina and Talisman are the most active drillers at Pembina
with a combined 38 wells
Pembina Duvernay is overpressured like Kaybob, typically greater than 0.7 psi/ft
Early results show free condensate ranges from 8 to 130 bbl/MMcf
Many wells will be coming off confidential in the next few months which will
provide much needed data and clarity towards phase window definition and especially condensate yield
Operator Well Count
Encana-PetroChina 24
Shell 8
Talisman 6
Enerplus 5
Sinopec-Daylight 5
Active Operators
Talisman 100/03-28-038-06W5/02 WELL CONFIDENTIAL
UNTIL 2014/04/07
Talisman 102/04-33-041-05W5/00 WELL CONFIDENTIAL
UNTIL 2014/08/06
Talisman 100/03-06-042-05W5/02 WELL CONFIDENTIAL
UNTIL 2013/12/07 CTD 1 mos prod
838 bbl cond 8 MMcf
Encana 100/02-35-041-07W5/02 WELL CONFIDENTIAL
UNTIL 2014/01/07 CTD 4 mos prod 19,546 bbl cond
148 MMcf
Encana 100/06-27-041-08W5/00 WELL CONFIDENTIAL
UNTIL 2014/03/12 CTD 3 mos prod 11,533 bbl cond
154 MMcf
Bellatrix 100/09-24-044-10W5/02
CTD 17 mos prod 220 bbl cond
741 MMcf
Shell 100/03-21-040-07W5/02 WELL CONFIDENTIAL
UNTIL 2014/04/16
Shell 100/04-21-040-07W5/00 WELL CONFIDENTIAL
UNTIL 2014/05/26
Talisman 102/10-03-041-05W5/03
7 day IP 733 bbl/d 2.78 MMcf/d
12
100
1,000
10,000
0 12 24 36 48 60
Da
ily G
as
Ra
te (
Mc
f/d
)
Normalized Production Month
Trilogy 03-13
Fitted Type Well
Developing a Type Well Forecast
Producing Wells Map
More than 70 Duvernay wells have reported production to September 2013 with
the vast majority being in the Kaybob area, with many of these wells reporting production as confidential (volumes only) making it more difficult to create an average type well
However Trilogy has published a type well in Kaybob based on the producer at
03-13-060-20W5. This well is one of the longest producing with 29 months of production, an IP of 4 MMcf/d and forecasted recoverable reserves of 4 Bcf of gas with BMO estimating condensate capture based on the average 80 bbl/MMcf observed in the 03-13 well
The 03-13 well had 12 fracture treatments (slickwater 200 ton/stage hybrid).
However, as drilling transitions from evaluation to development, the horizontal legs will increase in length and will have a higher fracture treatment density
Production Legend
0.01 Mboe
BOE Ratio 6.0:1 Cumulative Production (API)
Oil
Gas
241.4 Mboe
Cnd
Kaybob
Edson
Pembina 0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Da
ily G
as
Ra
te (
Mc
f/d
)
Normalized Production Month
Arithmetic Average of All Wells
Trilogy 3-13 Public Typewell
Type Well Scaled to 16 fracs
Trilogy 03-13-060-20W5 Type Well
Normalized Kaybob Production
IP 4 MMcf/d Cond 80 bbl/MMcf
NGLs 53 bbl/MMcf*
EUR 4 Bcf
Type Well IP 5 MMcf/d
Cond 80 bbl/MMcf NGLs 53 bbl/MMcf*
The Trilogy type well was then scaled to 16 fracs (to better reflect the current
drilling), creating a 30 day IP of 5.1 MMcf/d and an EUR of 5.3 Bcf with 429 Mbbl of condensate. This is still considered conservative when compared with reported results from operators
Source: GeoEDGES, GeoSCOUT, BMO Capital Markets
*Calculated deep-cut yields
13
Type Well Rate of
Condensate Gas NGLs Total @10% @15% @20% Return
(Mbbl) (MMcf) (Mbbl) (Mboe) ($MM) ($MM) ($MM) (%)
Duvernay Type-Well 429 4,706 286 1,498 $15.3 $11.6 $9.2 79%
Economics run on $4/GJ (Gas) and $100/bbl (Cond) Price Forecast. Effect ive date of Jan 1, 2014
Net Present Value (BTax)Company Interest Total Production
50 bbl/MMcf
4.1 MMcf/d
80 $/bbl
14.4 $MM
3 $/GJ
33 bbl/MMcf
4.3 Bcf
110 bbl/MMcf
6.2 MMcf/d
120 $/bbl
9.6 $MM
5 $/GJ
73 bbl/MMcf
6.4 Bcf
4 8 12 16 20 24 28
Free Cond Yield (bbl/MMcf)
30 Day IP (MMcf/d raw)
Condensate Price ($/bbl)
Capital ($MM)
Gas Price ($/GJ)
Plant NGL Yield (bbl/MMcf)
EUR (Bcf raw)
Change in NPV@10% from base value of ($15.3MM)
NPV@10% = $15.3MM, RoR = 79%
80 bbl/MMcf
5.1 MMcf/d
100 $/bbl
12 $MM
4 $/GJ
53 bbl/MMcf
5.3 Bcf
-$15
-$10
-$5
$0
$5
$10
$15
0
2,000
4,000
6,000
8,000
10,000
12,000
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120
Cu
mu
lati
ve
NP
V@
10%
Bta
x ($
MM
)
Da
ily G
as
Eq
uiv
ale
nt R
ate
(Mc
fe/d
)
Production Month
Cumulative NPV@10% BTax Total Mcfe/d rate
Robust Returns Driven by Condensate
The type well (based on the Trilogy 03-13) reaches 10% discounted payout in
16 months and reaches 60% of NPV@10% in 58 months as shown on the graph above (with an estimated capital spend of $12MM)
The well has a value of $15.3MM (NPV@10%) and a 79% rate of return
Although extremely economic, a full field development of a large land base will
require significant capital. Expect evaluation wells to be more expensive and economies of scale to kick in only when the development phase begins
Production Rate and NPV
Type Well Sensitivities
Economics Summary
10% Discounted
Payout
60% of Total
NPV@10%
End of Royalty Program
Sensitivities were run on several factors which cover production, reserves, costs
and pricing scenarios. NPV is most sensitive to variations in free condensate yield and the least sensitive to changes in ultimate recovery
As plant NGLs have lesser value than free condensate, varying NGLs in the
same proportion as condensate has far less impact on the value of the well
The hunt continues in each area to maximize condensate deliverability with the
expectation that as condensate and liquid ratios increase, corresponding gas deliverability will decrease
Given that there is growing demand for condensate in Western Canada, as it is
used primarily as diluent for the growing oil sands industry, the relatively high pricing (~7% premium to Edmonton Light Oil) should remain robust for the foreseeable future
EUR 5.3 Bcf (raw) Cond 429 Mbbl
NGLs (deep-cut) 286 Mbbl
IP 5.1 MMcf/d Cond 80 bbl/MMcf NGLs 53 bbl/MMcf
Source: BMO Capital Markets
Economic parameters were evaluated using Value Navigator
Source: BMO Capital Markets
Economic parameters were evaluated using Value Navigator
14
Type Well Rate of
@10% @15% @20% Return
($MM) ($MM) ($MM) (%)
Duvernay Gas Well $15.3 $11.6 $9.2 79%
Duvernay Oil Well $11.1 $7.6 $5.4 50%
Difference from Gas -$4.2 -$4.0 -$3.8 -29%
Economics run on $4/GJ (Gas) and $100/bbl (Cond) Price Forecast. Effect ive date of Jan 1, 2014
Net Present Value (BTax)
Royalties Condensate Rich Gas Wells Take the Advantage on Royalties
Gas vs. Oil Economics
Combined NPV Chart
End of Royalty Holiday Payout at 10% D.F. 60% of Total NPV
The type well economics show that liquid-rich Duvernay gas wells are profitable
and that the condensate has the greatest impact on value
This has led to operators pushing the play boundaries further into the oily phase
window on their quest for higher condensate yields
Are the ultra high condensate yields from true gas wells?
The government has broad definitions on what differentiates a gas well from an
oil well where the true classification requires a PVT analysis of the produced fluids. Ultimately, the government will designate the final status
Oil wells may be subject to maximum rate limitations or GOR penalties which do
not apply to gas wells. Further, oil wells do not have the same level of royalty relief as deep gas wells
To explore this effect, the type gas well was evaluated as an oil well (using the
same rates and costs)
Somewhat surprisingly, the gas well has much better economics, valued at
$15.3MM (NPV@10%) to the oil well’s $11.1MM (NPV@10%)
The oil well uses up its royalty benefit in less than six months compared to
60 months for the gas well. Further, the gas well pays out in less than 18 months compared to over two years for the oil well
Even with current commodity prices, the type well is better off being designated
as a gas well
This will become much more important as the play expands into the oilier areas
Economic parameters were evaluated using Value Navigator
Economic parameters were evaluated using Value Navigator
15
Move to Consolidate into the Sweet Spots
Since 2010, operators have rushed to secure land positions in the Duvernay
fairway, spending billions at Crown Land Sales, and leasing in on freehold owners. All coloured blocks on the map reflect held Duvernay rights and emphasize that the lands are very tightly held. The only option for new players is to acquire or joint venture
Several major property transactions have occurred as the main players seek to
consolidate and expand their acreage position
Shell, the most active Duvernay operator, expanded its position with corporate
acquisition of B&G, and property transactions with Sonde and Petrobakken. Shell’s acreage spans the entire Duvernay liquid-rich fairway
Encana announced a $2.2B joint venture with PetroChina to explore and
develop its Duvernay assets in late 2012. Encana has re-stated their commitment to the liquid-rich Duvernay, after the recent company shake-up
Exxon acquired Celtic Exploration for $2.6B in late 2012. XTO Canada Ltd., a
wholly owned Exxon subsidiary, is very actively developing the assets at Kaybob
Chevron greatly expanded their Duvernay position at Kaybob with the corporate
acquisition of Alta Energy Partners in August 2013 for a rumoured $1.0B
Bellatrix Exploration, a Cardium player with Duvernay assets, recently acquired
Angle Energy for $576MM. Angle’s Duvernay acreage at Edson compliments the Bellatrix existing acreage at Pembina
Duvernay Fairway
Source: Various corporate presentations and press releases, GeoSCOUT, BMO Capital Markets
Kaybob
Edson
Pembina
16
16
At Kaybob
The move from exploration to development in the high condensate area of the
liquid-rich fairway
Infrastructure and gas processing developments as more liquid-rich gas comes
on stream
Continued consolidation in the sweet spots (condensate rich areas) and in particular
the results of the Athabasca offering and Talisman’s joint venture
Release of confidential data from last winter’s drilling season, particularly wells
testing the condensate limits by Shell (04-25-064-20W5, 12-04-064-17W5) ConocoPhillips (16-24-063-17W5) and Chevron (01-11-063-24W5)
Watch for consistent condensate ratios as the wells produce over time
Land retention drilling
At Edson
Release of confidential data from drilling by Vermilion (10-35-050-13W5,
15-18-049-13W5) and Black Swan (14-28-048-12W5) – key will be which phase windows are present
Note that drilling licenses here have long tenure and we do not expect any land
retention drilling
At Pembina
Release of confidential data, particularly wells drilled by Talisman (03-06-042-5W5),
Encana (02-35-041-07W5) and Shell (03-21-040-07W5), which will reduce uncertainty related to positioning of the phase windows
Exposure of Shell’s true land position
Consolidation of lands in the preferred phase windows and in particular the results
of Talisman’s joint venture and PennWest’s offering
What to Watch for
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Ian van Staalduinen, P.Eng.,Managing DirectorHead A&D Advisory [email protected]
Wendy Smith Low, B.Sc.,Managing [email protected]
Engineering
Steve Hunter, P.Eng., M.B.A.,[email protected]
Ryan Twa, M.Eng., P.Eng.,Vice [email protected]
Steven Kehoe, M.E.Sc, P.Eng.,Vice [email protected]
Scott Johnston, P.Eng.,[email protected]
Kieran Courtright,Intern Analyst [email protected]
Geology
Joyce Kennedy, B.Sc., P.Geol.,Vice [email protected]
Kathleen Dixon, M.B.A., P.Geol.,Vice [email protected]
Michael Greene, M.Sc., Geo.I.T.,[email protected]
Commercial
Gary Fisher, M.Sc.,Vice President+1-403-515.3674gary.fi [email protected]
Mandy Edwards, B.A.,[email protected]
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BMO CAPITAL MARKETS OIL & GAS A&D ADVISORY