Below, the last president message, (full report) :
President’s Message
We started Questerre with the mission of ‘looking where others had looked; seeing what no one had seen.’ We believed that to find big gas fields in North America you had to look in a new kind of rock. In Quebec that new kind of rock turned out to be the Utica shale. Our resource discovery in the Utica is estimated to be 25 Tcf or more of recoverable gas making it one of the top ten natural gas discoveries in North America. By being very early with these ideas, our lands control the heart of the discovery.
However, with the pilot program to test commerciality deferred during the environmental assessment in Quebec, we once again began looking for a new project. We began the search for a high-impact project by keeping to our original mission. Our belief today is to find big oil fields in North America you have to look in a new kind of rock and see what no one has seen.
We believe that new kind of rock turns out to be an idea so old, few have heard of it. Mining of oil shales has been done for close to 1,000 years but, since discovering how to refine crude oil in the 19th century, it has been uneconomic. Conventional wisdom is unlocking oil shales, one of the world’s largest untapped resources, is not economic at today’s oil prices.
The US Geological Survey estimates that there is more than ten times the resource in oil shales than in oil sands. Rather than being measured in billions of barrels, oil shale resources are measured in trillions of barrels.
Late in the year, we assembled a portfolio of projects to participate in this emerging resource opportunity. For oil sands, shale oil and shale gas changes in pricing along with engineering innovations unlocked previously uneconomic resources. We believe the same is possible for mining of oil shales by discarding the traditional mining model. The Red Leaf EcoShale process does just that. Rock handling is the biggest expense in mining and is the key to economically mining oil shales today. By moving the process to the rocks instead of the rocks to the process, the EcoShale process reduces the biggest cost of mining dramatically.
Subsequent to our commitment to this project some of the largest resource companies in the world have also become interested to join our resource project.
Mindful of the challenges and time lines associated with developing large resource projects, we also continued to build our portfolio of conventional assets in 2011 as a reserve of capital and to underpin near-term value for our shareholders. This included expanding our light oil assets in Saskatchewan and a new project in the liquids-rich Montney shale gas in Alberta.
Highlights
- Executed on new oil shale strategy through Letter of Intent with Red Leaf Resources Inc., obtained an option to license the EcoShale process, and acquired 100,000 net acres for oil shale in Saskatchewan
- Grew conventional asset base with successful light oil drilling program in Antler, Saskatchewan
- Exploration licenses in St. Lawrence Lowlands, Quebec extended by up to three years to 2021 during strategic environmental assessment for shale gas development
- Increased oil production leveraged higher prices and generated cash flow from operations of $10.06 million with average daily production of 646 boe/d
- Maintained financial strength with over $104 million in positive working capital and no debt
We see oil shale today as the next major resource play - an early-stage opportunity to capture large resources that require innovative processes to be commercial.
Hosting oil resources that are orders of magnitude larger than the oil sands and shale oil, oil shale has significant potential. Oil shales are rich in organic material or kerogen that converts to oil through the application of heat. Oil has been produced for centuries from oil shale through retorting, a process that involves mining the shale, flash heating in the absence of oxygen and then disposing of the spent shale. Large-scale commercial production however has traditionally been challenged by costs and environmental concerns.
Relatively simple enhancements to existing processes that involve complex engineering were key to overcoming these hurdles in other resource plays like the oil sands and shale oil and gas. For example, allowing multiple fracture stimulations to be conducted in a horizontal well through advances in packer design, was key to producing oil and gas commercially from shale oil and gas formations like the Bakken and the Barnett. We believe the Red Leaf EcoShale process, that brings the process to the rock instead of the rocks to the process, is a simple yet dramatic improvement to retorting oil shales.
While the process is key, having the right rock is equally if not more important. Not unlike shale oil and gas, geology still matters. The oil shale must have the organic content to produce sufficient oil measured in gallons per ton of rock. Among other criteria, the shale also needs the right mineral content and be sufficiently close to surface to be mined economically. Of the estimated 2.8 trillion barrels of oil shale resources globally, approximately 1.5 trillion barrels are in the Green River formation in Utah, Wyoming and Colorado according to the US Geological Survey. Questerre has a direct and indirect interest in two projects in Wyoming and Utah with Red Leaf. Geography is important too. Both Utah and Wyoming are resource friendly jurisdictions with surface mineable oil shale deposits situated away from populated areas.
In addition to the minority interest in the projects with Red Leaf, we have also acquired 100,000 net acres in Saskatchewan where we potentially have a larger land position for a less studied oil shale deposit.
Our transaction with Red Leaf is expected to close imminently and we look forward to beginning work on all three of these projects.
Western Canada
While we were assembling our oil shale assets and evaluating new opportunities, we were also developing our Torquay/Bakken oil assets in Antler into a new core area for the Company. The goal is to grow this base of production and other conventional assets to over 1,500 boe/d by the end of the assessment in Quebec in 2013.
Building on our experience over the last two years with new drilling, completion and production practices, we drilled 13 wells to develop the existing pool in 2011. This included a number of step-out locations to delineate the edges of the pool. We expanded our asset base with a tuck-in acquisition that added approximately 100 bbl/d with several follow-on locations.
For 2012, our focus will be increasing recovery from the main pool. Along with infill drilling, we will begin preliminary field work on a secondary recovery scheme, subject to partner approvals and landowner consents. Based on analogous pools and a reservoir simulation study, the modeling indicates recoveries could materially increase to about 240,000 incremental barrels per section. Though our economic returns were very strong in 2011, we are monitoring domestic oil prices and will adjust our program accordingly to ensure this continues in 2012.
In addition to Antler, our early stage projects in Wawota and Pierson, Manitoba will be important in meeting our production target in 2013. We plan to complete an exploration well in Wawota this summer after breakup. In Pierson, we are continuing to evaluate offsetting wells to determine the optimal drilling and completion practices.
We also looked, opportunistically, at several acquisition and farm-in prospects in other areas during the year. We closed late in the year on a 16 (4 net) section farm-in in the liquids-rich window of the Montney shale in Alberta. With strong liquids prices and favorable fiscal terms, this area has seen considerable activity recently. Our first well is currently drilling and we expect to test it this summer.
St. Lawrence Lowlands, Quebec
The recommendations of the BAPE report in early 2011 highlighted the lack of oil and gas expertise in Quebec and the growing importance of social acceptability for large-scale resource projects.
We view the mandate of the oversight committee for this assessment as too ambitious given the timeframe and resources available. We had hoped that successful shale gas projects in North America would have served as a valuable precedent for the BAPE to narrow its scope to the unique aspects of Quebec. Moreover there is increasing independent research that established industry practices, particularly in Western Canada, are safely developing non-conventional natural gas.
To the extent we are allowed, we will work with the government to deepen their understanding of our industry during the assessment. While the committee has not called for demonstration projects, we expect they will at some point. Accordingly we do not expect any field activity in 2012. We were pleased that they recognized the impact of the assessment on our plans by extending the term of our exploration licenses by up to three years.
In the interim, we are expanding our public relations efforts to gain our social license to operate. We retained Mr. Andre Boisclair, a former Minister of the Environment in Quebec to advise us on socio-political and energy issues in Quebec. We also sponsored the creation of the Oil & Gas Services Association of Quebec to develop the local service sector that will be essential for commercial development. In less than three months, the association has grown to over 50 members representing over 5,000 individuals. Although much work remains, we are optimistic that this support builds and Quebecers realize that the significant local economic benefits of natural gas development outweigh the manageable impacts.
Operational & Financial
Record flooding in Saskatchewan and completion equipment availability delayed the planned growth in our production volumes in Antler during the year. Fourth quarter volumes grew to 743 boe/d from 605 boe/d in 2010.
We invested over $34 million in Antler which included the drilling of 15 (10.27 net) wells and a $13.25 million asset acquisition. This largely contributed to improving our oil weighting to 76% from 53% in the prior year. With netbacks of almost $80 per barrel in Antler, these volumes leveraged higher oil prices and generated cash flow from operations of $10.06 million for the year. We saw an increase in the NPV-10 of proven and probable reserves from $67 million to $102 million.
Outlook
We plan to continue investing in our conventional assets in 2012. Success this year will put us on track to achieve our production goal in 2013. These assets and our strong financial position will provide a source of capital for future development of our entire portfolio.
Our assets in Quebec remain an important part of our portfolio. We plan to invest limited capital in 2012; however, our investment in management effort will increase as we work on our social license to operate in the province.
Advancing our oil shale assets will be our main priority this year. We expect to conclude our letter of intent with Red Leaf shortly as they begin field work on the Utah project this summer. Work will also begin this summer to update the existing resource assessment for Wyoming. In Saskatchewan, we plan to commence a program to evaluate the oil shale potential on our 100,000 acre block.
Through our Utica shale discovery, Questerre participated early in the shale gas revolution. Oil shale and the new process to unlock these resources could create a similar, if not larger, impact than shale oil and shale gas. We believe our oil shale assets will allow us, once again, to capitalize on another paradigm shift in energy markets.
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