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The Utica Shale Natural Gas Play Revisited

Companies / Natural Gas Jun 28, 2010 - 07:20 AM GMT

By: Richard_Mills

Companies

Best Financial Markets Analysis ArticleIt 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?

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

Copyright © 2010 Richard (Rick) Mills - All Rights Reserved

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.


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