Questerre Published Q3 2012 Operating & Financial Results

TO READ THE FULL REPORT, PLEASE VISIT WWW.QUESTERRE.COM
We made progress on both our conventional and non-conventional assets in the quarter.
We validated our discovery in the liquids-rich Montney in the Kakwa-Resthaven area of Alberta with our second well. It was completed in October and tested at gross rates of 1800 boe/d. Based on our results and industry activity nearby, our acreage lies in the heart of the fairway for this emerging resource play.
We plan to invest additional capital here over the remainder of this year as we await the results from our ongoing pilot waterflood in Antler. We expect both these areas will provide growth in reserves, production and cash flow in the near term.
Red Leaf is transitioning from a research and development to a project execution focused company. A new Chief Executive Officer was recently appointed and they are building the organization needed to commercially scale up the EcoShale process. They also began work in the field with Total S.A. in advance of constructing the first large scale capsule next year. During the quarter, we also completed our second core hole program in  Pasquia Hills, Saskatchewan, to further assess our oil shale acreage.
Highlights
  • Spud second horizontal well targeting liquids-rich natural gas in the Kakwa-Resthaven area of Alberta
  • Red Leaf and supermajor Total S.A. began in-field testing and engineering work to commercialize EcoShale In-Capsule process
  • Commenced second core hole program for oil shale acreage in Pasquia Hills, Saskatchewan
  • Cash flow from operations of $2.8 million for the quarter with average daily production of 696 boe/d
  • Over $40 million in positive working capital and no debt
Western Canada
The excellent results from our first two wells are proving up the value of our prime acreage in the Kakwa- Resthaven area.
Development of the Montney shale has historically focused on areas of dry gas or relatively low liquids of approximately 25 bbls/MMcf in British Columbia. Recent activity has targeted a sweet spot where natural gas liquids range between 50 to 100 bbls/MMcf and materially improve the economics. With test rates between 150 to over 200 bbls/MMcf, it appears our land lies in the sweet spot of this liquids-rich fairway. More importantly, liquids from our wells are mainly condensate which retain a premium to light oil and liquids prices as a diluent for heavy oil production in Alberta.
Published production data and reserve estimates from larger companies with surrounding acreage and wells support our preliminary estimates of between 3 to 5 Bcf of natural gas and 300,000 to 500,000 barrels of condensate and natural gas liquids per well per interval. Based on four wells per section and our existing four net sections, potential resources net to Questerre’s interest could range from 48 to 80 Bcf and 4.8 to 8 million barrels or 12.8 to 21.3 million boe.

Two additional intervals in the upper Montney have not been evaluated or tested on our acreage yet. They have however been tested by our competitors with flow rates consistent with our wells in the lower interval. With success on our acreage, these have the potential to triple our estimated resource.
These significant resources are driving record activity in the area and have made access to infrastructure a priority. We plan to commit to firm service at a third party processing plant upgrade that is scheduled for completion in early 2014. We also started engineering work on constructing our own processing facilities as part of a long-term development plan. In the interim, we have secured interruptible processing capacity for our existing wells. We expect these wells will come on production once third-party facility disruptions downstream are resolved.
While we prove up the resource potential of our acreage for the liquids-rich Montney with additional drilling, in the near term, we are planning to grow our light oil reserves at Antler with our proposed waterflood.
The reservoir at Antler has no water or gas drive making it an ideal candidate for a waterflood to increase recovery of the oil in place. We plan to mirror the waterflood that has been successfully implemented in a similar reservoir at the Sinclair field, approximately 5 miles away from our main pool in Antler.
The operator at Sinclair is projecting an increase in recovery from about 9% to between 16 to 24% of the oil in place. Using more conservative increases in projected recovery at Antler of approximately 8% to between 13 to17%, we estimate this could add as much as 250,000 to 540,000 of incremental barrels per section for very little additional capital.
We started our pilot waterflood in the third quarter by injecting water into one horizontal well. We are monitoring production and pressures in the adjacent wells and expect to see a response by year-end. With success, we plan to initially expand this to two and a half sections with an additional nine sections available for
waterflood in the future.
Oil Shale Mining
With the budget and work program approved at the end of June, Red Leaf’s focus is executing the Early Production System (“EPS”) phase of its joint venture with Total.
Under the EPS, Total and Red Leaf will invest US$200 million to scale up Red Leaf’s successful pilot capsule. The goal of the EPS is the construction of a large scale capsule. Capsule construction is planned for late 2013 with first oil expected in 2014. To achieve this goal, the joint venture recently set up the senior operations team with Total seconding three senior personnel including the deputy project manager.
As part of its front end engineering and design for the EPS, key derisking projects are planned in four main areas — blasting parameter testing to achieve the optimal size of shale for the capsule, mining horizon and geotechnical testing to identify and test the various intervals of oil shale used for building capsules and
processing, shale degradation testing to assess how much shale degrades as it is moved from the mine to the capsule and the capsule construction methodology. The last area will involve the construction of several small scale capsules to prove the design. Work on the first de-risking project began in the field in early October.
Concurrent with their engineering and field work in Utah, we have been working with Red Leaf to assess our joint oil shale acreage in Wyoming. We will manage this project for the joint venture. Our first phase is a core hole program to substantiate an existing resource assessment that estimates 800 million barrels of oil in place.
Subject to permitting, we expect to begin this program next summer.
We also continued assessing our 100,000 net acres in Pasquia Hills, Saskatchewan. A six well program was completed on our eastern block and encountered over 45m of the target Second White Specks shale in all the wells drilled. This follows a 10 well program conducted this winter on the western block with 30m of the shale encountered in all wells. We are analyzing this data along with the data from the first core hole program to develop a resource assessment and high grade our acreage.
Operational and Financial
The lifting of road bans and better ground conditions at Antler improved our results over the prior quarter. In late August, we finalized the completion and tie-in of wells drilled earlier in the year. This contributed to production of 696 boe/d up from 525 boe/d in the second quarter.
Production benefitted from the narrowing differential between the benchmark WTI and Edmonton light prices during the quarter. The differential decreased from US$10.87/bbl in July to a premium of US$0.35/bbl in September resulting in a realized oil price of $85.14/bbl. This improved cash flow from operations to $2.8 million in the third quarter compared to $1.22 million in the second quarter.
Our capital investment program in the third quarter was largely focused on Antler and our Kakwa-Resthaven discovery. Of the $9.39 million invested, approximately one third or $3.06 million was incurred in Kakwa drilling our second well and tying in our first well and $2.67 million was incurred completing and tying wells in at Antler. We also spent $1.92 million on our core hole program in Pasquia Hills and $1.2 million on an exploratory oil well in Southern Alberta.
Outlook
We are very excited about our new Montney asset.
It lies between our producing assets and our high impact oil shale and shale gas assets in terms of potential. Together with the waterflood at Antler, we believe it will provide near-term growth in production and cash flow. Both these assets are a reserve of value and a source of capital for future development of our larger assets.
These assets include our oil shale assets in Pasquia Hills and Wyoming with estimated resources in excess of several hundred million barrels. Assessing the size of these resources will be a priority for us next year. We are looking forward to continued derisking of the EcoShale process in 2013 and first production in 2014. We believe this process will be key to unlocking these significant resources.
Michael Binnion
President and Chief Executive Officer
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