QEC moves on NR !!!

 

andrewTo read the full report, please visit www.questerre.com

Our investment to build Kakwa-Resthaven into a new core area was endorsed by the results of the independent Montney resource assessment.We believe our acreage lies in the sweet spot of the play or the ‘4% of the acreage’ that will be the most economic. Initial wells at the early part of the learning curve are already delivering promising results. There is a clear line of sight to exceptional results in this area.We plan to further derisk our land by participating in up to three additional joint venture wells in the second half of 2013. The first of these wells will be cored to provide critical data on rock properties. All three wells will be essential to advancing the learning curve.

We are also finalizing our strategy to develop our acreage in this condensate-rich resource. Market access is proving to be a critical path issue. Questerre has been in negotiations with third party processing and pipeline companies to provide both the capital and necessary infrastructure to establish this access. This is a cornerstone of our financing plan to ramp up production.

Highlights 
•        Liquids-rich Montney resource independently assessed at 130 million barrels of oil equivalent with over 40% condensate
•        Concluded fishing operations on 15-01 well at Kakwa-Resthaven with damage to the formation
•        Spring breakup suspended operations and shut-in production in Saskatchewan and Manitoba
•        Increased financial flexibility with $26.5 million credit facility with a Canadian chartered bank
•        Cash flow from operations of approximately $3 million for the quarter with average daily production of 820 boe/d

Kakwa-Resthaven, Alberta

With over 40% condensate and over 130 million boe, the McDaniel assessment confirmed the significant scale and value of the dense resource we have acquired in the last year.

The performance of our first three wells is consistent with the condensate assigned to the two evaluated Montney intervals. In its first seven months of production, wellhead condensate from our first well has averaged 140 bbls/MMcf. Our second and third wells have averaged 190 bbls/MMcf and 160 bbls/MMcf during the quarter.

Although our first three wells have only been completed in the middle interval of the Montney, offsetting industry wells have been completed in the upper interval with similar results. Early in the third quarter, our partners announced test rates of over 100 bbls/MMcf of condensate from the upper Montney interval in their well less than one mile away from our joint venture acreage. It is these relatively high condensate rates that contribute to the robust economics and a net present value, discounted at 10%, of approximately $9 per boe in the ground.

 

While condensate rates per MMcf have remained strong, our overall production continues to be impacted by a lack of field compression and liquids lifting. We are hopeful this will be partially resolved by year-end with the construction of a central compression and condensate stabilization facility with a capacity of 15 MMcf/d plus associated liquids.These facilities and other upgrades fit our short terms plans for the joint venture acreage. These include drilling additional wells to derisk this acreage. The joint venture has contracted one rig and we expect to keep this busy for the next year. More importantly, we intend to use these new wells to move our way up the learning curve of optimizing drilling and completion design to maximize recovery. During the early production phase, we are largely relying on interruptible access for processing, transportation and marketing.Our plans for the medium term are to scale up to full field development. A key component is access to infrastructure and liquids markets.

The infrastructure strategy is to secure access to all aspects of the value chain − processing facilities for the natural gas and associated liquids, pipelines to transport the gas to market and NGL mix to fractionators that produce spec product, fractionating and marketing arrangements for all products. We are in discussions with several midstream companies and are hopeful to conclude agreements before year-end.

Full field development will initially focus on our acreage in north Kakwa where we have the potential for almost 190 gross wells (90 net) based on eight wells per section. In the south, we are awaiting the results from our 15-01 well that was damaged by the fishing operations after the control of well incident. Based on these results, we will evaluate additional drilling to retain up to three sections which expire later this year. With the exception of this near term expiry, our remaining acreage is held and we have no other commitments for the next three to four years.

Antler, Saskatchewan

We will drill two wells this year to expand our oil pool south of the main pool in the Antler area.

The locations were identified on the 3-D survey we shot this winter. If successful, there are up to 20 other locations that could be drilled. We will modify drilling and completion techniques for these wells based on analysis of the best offsetting producers. Wet weather remains a challenge as we are working to drill, complete and tie-in these wells by the end of the third quarter.

Expanding our pilot waterflood at the main pool was also delayed by wet weather and spring breakup. Three additional producing wells are scheduled to be converted into injectors as soon as ground conditions improve. This takes our pilot from the existing one half section to one and half sections. We have another three and a half sections, or five sections in total that have the optimal well configuration for a waterflood.

The economics of the waterflood are compelling. The net cost for conversions is about $0.5 million net per section with the potential to increase recovery by 250,000 to 500,000 barrels per section. We have a further 4-6 sections that, with additional wells, could also be waterflooded.

 

Oil Shale MiningWe have been pleased with the progress made by Red Leaf since we made our original investment over a year ago.Together with Total S.A., Red Leaf is finalizing the engineering and design of the commercial scale capsule. We have been working closely with the Red Leaf technical team and have recently seconded our VP Engineering to this project half time. The key contract for engineering, procurement and construction management is being concluded and field work is scheduled to begin late this fall.

As we look forward to the results from the first large scale capsule, we have been assessing our acreage at Pasquia Hills, Saskatchewan, for its oil shale potential. With the data from our second core program analyzed, we expect results shortly.

We are expecting average yields of between 10-15 gallons/ton as compared to yields of 18-22 gallons/ton in Utah and Wyoming, which are among the richest surface minable shales in North America. Although the shale at Pasquia Hills is not as rich, our large land position of over 39,000 acres, easily accessible infrastructure and royalties of 1% (compared to 12% in Wyoming), could materially improve the economics of development.

Operational & Financial

Consistent with the first quarter, early production from the Kakwa-Resthaven area improved our results over the last year. The Company’s first two wells in the area contributed to average daily production of 820 boe/d up from 525 boe/d in the second quarter of last year. Production in 2012 was also affected by the shuts-ins in Antler of both single well batteries and the main battery due to municipal road bans that were strictly enforced during spring breakup.

The increased production volumes also benefitted from the narrowing differential between the benchmark WTI and Edmonton Light prices. The differential reduced from US$8.10/bbl in the second quarter of 2012 and US$4.79/bbl in the first quarter of 2013 to US$1.59/bbl in the second quarter. Coupled with lower operating costs in the quarter, we generated cash flow of $2.96 million for the quarter and $6.61 million for the first six months of 2013 (2012: $4.51 million).

Capital expenditures in the quarter were $3.85 million. Almost the entire amount related to the fishing costs associate with the 15-01 well and the tie-in of the third non-operated well at Kakwa. We plan to invest an additional $18 million over the remainder of this year, primarily split two thirds and one third between Kakwa and Antler.

Outlook

We are committed to building our light oil assets as a potential source of internally generate capital for full field development at Kakwa. In the interim, we are well positioned to fund our share of the joint venture program through existing cash, cash flow and the credit facility.

As we prove up the value of our Montney asset, we are also making progress on our high impact projects, including the shale gas discovery in Quebec.Acceptance of oil and gas development in Quebec appears to be changing for the better. The government recently introduced legislation that would permit hydraulic fracturing. Currently, the focus is for oil projects. However, the recent announcement by TransCanada Pipelines to convert existing pipelines from gas to oil highlights the importance of the Utica as a local supply of natural gas for Quebec.We have seen the debate shift in Quebec from if development should happen to how it could happen in small part due to the efforts of our communications team. We also helped organize the second annual tour of Alberta farms by Quebec farmers this summer and were pleased with the results. We are looking forward to the report this fall from the oversight committee for the strategic environmental assessment on shale gas development.

While Quebec remains an important asset for Questerre we are pleased with the new assets we have created over the last year and a half.



Michael Binnion
President and Chief Executive Officer

 

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