the duvernay shale the new millennium gold is condensate page document library/adlibrary... · the...

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


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



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


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


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


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


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


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


UNTIL 2014/08/06


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


*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


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



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


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

ABOUT BMO CAPITAL MARKETS

BMO Capital Markets is a leading, full-service North American fi nancial services provider, with more than 2,200 employees operating in 16 North American offi ces and 29 worldwide, offering corporate, institutional and government clients access to a complete range of investment and corporate banking products and services. BMO Capital Markets is a member of BMO Financial Group (NYSE, TSX: BMO), one of the largest diversifi ed fi nancial services providers in North America with US$535 billion total assets and more than 46,000 employees as at July 31, 2013.

BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member FDIC) ,Bank of Montreal Ireland Plc, and Bank of Montreal (China) Co. Ltd and the institutional broker dealer businesses of BMO Capital Markets Corp.(Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited (authorised and registered by the Financial Conduct Authority) in Europe and Australia and BMO Advisors Private Limited in India. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. “BMO (M-Bar roundel symbol)” is a registered trademark of Bank of Montreal, used under license.

BMO Capital Markets900, 525 - 8th Avenue SWCalgary, AB T2P 1G1

BMO Nesbitt Burns Inc. makes no representation or warranty, express or implied in respect thereof, takes no responsibility for any errors and omissions which may be contained herein, and accepts no liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on this Announcement or its contents. Information may be available to Nesbitt Burns Inc. which is not refl ected herein. This document is not to be construed as an offer or solicitation to buy or sell any security.

® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.

TM Trademark Bank of Montreal

©COPYRIGHT 2013 BMO CAPITAL MARKETS CORP.

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]

Jennifer Martens, B.F.A.,Desktop [email protected]

Britainy DagnallSenior Admin. [email protected]

BMO CAPITAL MARKETS OIL & GAS A&D ADVISORY

the duvernay shale the new millennium gold is condensate page document library/adlibrary... · the...

Documents