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on two regulations in Quebec.
The successful farmout wells at Kakwa North contributed to a more than 60%
increase in our year-end reserves. These wells were drilled with longer
horizontal legs and more completions intervals than our existing wells. Initial
results point to another step change in production rates and future wells will
likely continue to use the longer laterals with more intervals. We also doubled
our land position at Kakwa and now have a meaningful core area in the
condensate-rich fairway.
Although disappointed by the last-minute changes to the regulations in Quebec,
we are continuing to make progress on social license. We are building a
coalition of industry leaders for our clean tech energy pilot and support is
growing. To advance this pilot, which would be a world first, we signed an
agreement to regain operatorship and consolidate our ownership in Quebec.
Through this agreement we will add over 753,000 net acres and expect to
materially increase our net resources.
We advanced the engineering for our oil shale project in Jordan. A feasibility
study completed by Hatch estimates we would receive premium pricing to Brent for
our oil and total capital and operating costs of between US$38-$40/bbl, which is
competitive with similar scale projects. As we prepare for the concession
negotiations later this year, we have begun the next round of engineering to
further reduce these costs and improve returns.
Highlights
o Total proved and probable reserves increased by 63% to 30 MMBoe with a before
income tax NPV-10% of $229 million
o Kakwa North farm-in wells test at average rates of 2,800 boe/d including over
1,000 bbl/d of condensate
o Concludes agreement to acquire 753,000 net acres and regain operatorship in
Quebec
o Feasibility study for Jordan oil shale project supports concession application
o Production averages 1,869 boe/d with adjusted funds flow from operations of
$15 million during the year
Kakwa, Alberta
With the farmout of Kakwa North, we are now developing our Montney acreage with
two partners.
Our new partner is an experienced operator and previously operated the Kakwa
Central acreage. In the last year, they have drilled three wells and built the
pipeline infrastructure, including a tie-in to a third-party processing plant.
This pipeline tie-in also runs through our recently acquired joint acreage at
Kakwa West, reducing future infrastructure costs. They have the option of
drilling one additional well to complete their earning for a joint interest in
both Kakwa North and Kakwa South. Once earning is completed, a joint drilling
program could begin in the last quarter of this year.
Their wells are designed with laterals approximately 25% longer and nearly three
times as many completion intervals as our other Kakwa wells. Their first well at
Kakwa North set a new record for the number of completion intervals run on
coiled tubing at a measured depth of 6,900m. Based on the early results, this
could lead to another step change in improving recoveries.
We also continued development of our Kakwa Central acreage and participated in
the operator’s program during the year. In addition to the drilling and
completion activity, there was an investment in infrastructure including a
central water and processing facility expansion to double capacity for future
growth. Subject to commodity prices, we plan to participate in a similar
drilling program in 2019.
St. Lawrence Lowlands, Quebec
Social license remains the key to moving forward in Quebec.
Based on the growing interest in our clean tech energy pilot and its benefits,
it could help both solve our regulatory challenges and secure the social
acceptability we need to move forward. We are developing a detailed proposal
with a leading Quebec engineering firm and plan to submit this formal
application for approval later this year.
While elements of this clean tech energy pilot have been implemented in oil and
gas development globally, integrating existing and new technologies will be a
first under this pilot project. In addition to the jobs and other economic
benefits of developing local natural gas, this pilot is targeting near zero
emissions, no drinking water usage and no toxic fluids below ground. It could
promote the development of related clean tech industries that use natural gas as
feedstock such as methanol, fertilizers and other value-added products. To
ensure communities directly benefit, we also introduced a plan to share revenues
from the pilot with the local towns and municipalities.
Regaining operatorship of this project will be essential to implementing the
clean tech energy pilot and the revenue sharing proposal. We expect to become
the operator later this year when we close the acquisition and consolidate our
assets in Quebec. In addition to the cash and other consideration of
approximately $11 million, including contingent payments, we will release each
other from all claims associated with the outstanding litigation.
Oil Shale Mining
The Hatch feasibility study validated our assessment of commercially developing
our multi-billion barrel oil shale resource in Jordan with Red Leaf’s EcoShale
process.
This year we are moving to the next phase of engineering to improve the accuracy
of our estimates. We are leveraging the ongoing engineering work by Hatch and
our partner, Red Leaf, to optimize the engineering work for EcoShale. We are
particularly focused on reducing capital costs. Given the large upfront
investment in developing a 50,000 bbl/d retort refinery to processes oil shale
and produce low sulphur diesel and gasoline, any material reductions in capital
can substantially improve project returns.
We expect these capital costs and the fiscal terms we intend to finalize during
our concession negotiations this year will be critical to attracting the
partners and financing needed to advance this project to the next stage.
Operational & Financial
As a result of the significant investment in Kakwa over the last two years, our
production grew by 40% over the prior year to average 1,869 boe/d. With over two
thirds of our production as oil and liquids, specifically condensate, we
realized an average sales price of $48/boe. This contributed to adjusted funds
flow from operations of $15.1 million for year compared to $6.8 million last
year.
This funded one half of our capital expenditures with the remainder financed by
our cash on hand. Consistent with prior years, almost 90% of our capital
investment of $31 million in the year was at Kakwa. Drilling, completions and
facilities spending account for the majority of this amount with land
acquisitions accounting for the balance.
Outlook
With stronger oil prices, and, more importantly, differentials in the first
quarter of this year, we expect to participate in the proposed drilling program
at Kakwa Central with the goal to turn our reserve growth into production
growth. This investment may increase in the second half of the year with
additional drilling at Kakwa North.
In Quebec, our goals for this year are to close the acquisition and work with
the Government, local communities and other stakeholders on social license.
Based on the feedback on our pilot and revenue sharing plan, we are optimistic
we can make substantial progress this year.
We are also optimistic about the prospects for our oil shale project given the
activity in Jordan. The first oil shale fired power plant with capacity of 400MW
is under construction and we believe a second project with a capacity of 25,000
bbl/d could be sanctioned by the end of this year. Our project is considerably
larger that both of these projects and, with success on optimizing costs and
improving returns, we could see it ultimately developed.
Michael Binnion, President and Chief Executive Officer
http://www.netfonds.no/quotes/release.php?id=20190329.OBI.20190329S4
