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We are seeing the early results of our increased capital investment in Kakwa
this year. Production from this area has almost doubled since the first quarter
to 1,400 boe/d with four (0.92 net) wells brought on stream. Three (0.67 net)
more wells will be completed in the fourth quarter. If we drill a similar number
of wells next year, we could see another major increase in production by next
The draft regulations released this quarter are another milestone towards
developing our Utica shale discovery in Quebec. We expect to see the final
regulations early next year after taking into account public comments. The
regulations are workable but, in our opinion, can be improved to be more
efficient and competitive. Recent government comments on the need for social
acceptability are consistent with past comments from this government and
industry. Social license is a somewhat nebulous concept but has more and more
become a requirement in Western liberal democracies.
The last tranche of our investment in Red Leaf closed during the quarter. The
move to reusable capsules for their EcoShale process could be key to
commercializing our multi-billion barrel oil shale resource in Jordan. This
re-engineering has substantially reduced the estimated breakeven price for their
project to a range where Red Leaf believes it is economic at current prices. We
are studying if it could do the same for our Jordan project.
- Kakwa joint venture development continues with additional drilling and
- Government of Quebec releases draft oil and gas regulations
- Red Leaf begins feasibility study for Jordan oil shale project
- Private placement for gross proceeds of $31 million fully subscribed and
closed early in fourth quarter
- Average daily production of 1,643 boe/d for the quarter and adjusted funds
flow from operations of $1.94 million
Well results are benefitting from improving prices and supporting our continued
investment in the joint venture acreage this year.
Including one (0.25 net) well that spud last year, we will participate in eight
(1.86 net) wells this year. Subject to the operator's plans, we intend to
participate in a similar drilling program going forward, all else being equal.
With over 60 remaining locations identified on our joint venture acreage(1), we
anticipate this pace of development can continue for the foreseeable future.
To accommodate for the future growth in production, we have been investing in
infrastructure. The central water facility that came online in the fourth
quarter will be expanded next year to more than double the capacity. It will
store sufficient produced water for two back-to-back completions.
We have also committed to participate in the expansion of our central processing
facility. By this time next year, the operating capacity of the central facility
will have doubled from about 23 MMcf/d plus 6,000 barrels of liquids to about 43
MMcf/d plus 13,000 bbl/d of liquids. The operator is planning for a further
expansion to 60 MMcf/d plus liquids. We hold a 25% interest in this facility and
our share of the expansion is approximately $6 million.
We are looking at alternatives to develop our operated acreage that directly
offsets our joint venture acreage at Kakwa.
St. Lawrence Lowlands, Quebec
The importance of social acceptability in Quebec was highlighted in recent
comments by the Minister of Energy and Natural Resources.
As we await the final regulations that should detail the specific requirements
for social acceptability, our goal is to ensure local communities are supportive
of our pilot projects.
We are initially looking at municipalities that have supported us in the past or
have industrial activity that would benefit from local natural gas production.
We are advocating for revenue sharing with these municipalities so they
participate financially in the benefits of development.
We are also designing our clean gas initiative to specifically address their
concerns regarding emissions and water usage. This initiative aligns with the
province's 2030 energy strategy to reduce emissions and energy imports. More
importantly, local natural gas provides the feedstock for the development of
other industries in the province including fertilizer and methanol.
Oil Shale Mining
We are cautiously optimistic about the potential for the redesigned EcoShale
process to develop our project in Jordan.
For our project, the main advantages over other processes are improved heating
efficiency and capturing the significant volumes of produced water for use later
in the process. The use of large steel vessels as reusable capsules has reduced
estimated costs compared to the original in-ground capsule design. In the third
quarter, Red Leaf commissioned a feasibility study to assess the costs of this
reusable capsule design specifically for the Jordanian oil shale.
The cost to produce oil from shale is one of the four categories that make up
the overall cost of production. The other three categories are mining and feed
preparation, power and utilities and upgrading. We expect to have preliminary
estimates for all these costs in the first quarter of next year.
We are looking at increasing our netbacks by upgrading the crude oil to refined
products such as gasoline and diesel. We are also considering using the
by-products from the process to produce cement and fertilizer.
Operational & Financial
The increased capital investment in Kakwa this year resulted in higher
production volumes over the prior quarter and prior year.
Production averaged 1,643 boe/d for the quarter (2016: 1,275 boe/d) and 1,270
boe/d for the year to date (2016: 1,412 boe/d) with Kakwa accounting for almost
85% of production this quarter (2016: 75%).
Materially higher production volumes and marginally higher prices this quarter
resulted in an increase in revenue from $4.10 million in 2016 to $5.45 million
in 2017. This contributed to an increase in adjusted funds flow from operations
to $1.94 million from $1.45 million last year.
Capital investment, net of dispositions, was $12.77 million for the year to date
(2016: $8.96 million) with over 80% invested at Kakwa. We also invested $10.3
million to acquire our increased equity interest in Red Leaf.
Despite the increase in production and growth in producing reserves, access to
expanded credit facilities is proving challenging for companies of our size. To
ensure we maintained our balance sheet strength and had sufficient capital to
participate in the development of Kakwa, we completed an equity issue early in
the fourth quarter for gross proceeds of $31 million.
We remain committed to Quebec.
Our step by step approach over the last seven years has seen the new legislation
passed followed by draft regulations. Securing local acceptability is the next
step. Over the next 12 to 18 months, we plan to finalize our clean gas
initiative, permit with the government and seek the necessary local support.
This could see us return to the field sometime in late 2018 or early 2019.
The success of the Utica in the US, now approaching over 40% of total Canadian
gas production, the premium local gas market and a lack of local production
suggest the economics of this multi-Tcf discovery remain compelling.
We are diligently working to make the economics for our much larger project in
Jordan equally compelling at current oil prices.
Underpinning the potential of these projects is our base of production in Kakwa
and Antler. We are continuing to build this base as a source of future value
through additional drilling and acquisitions where prudent. We expect this will
also provide us with near term cash flow and production growth.
President and Chief Executive Officer
(1) Based on minimum well spacing of 200m for assignment of proved and proved
plus probable reserves and primarily infill and step-out locations at Kakwa in
the December 31, 2016 Reserves Assessment and Evaluation of its oil and gas
properties as evaluated by McDaniel & Associates.
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