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Investors Pile Into Quebec Shale Gas Plays

By Andrew Burger
29 Jun 2008 at 04:32 PM GMT-04:00

PUERTO DE SANTA MARIA, Spain (ResourceInvestor.com) -- It doesn’t take long for hot money to flow into shares of junior explorers with stakes in sizable, prospective energy resources - and $140 a barrel oil has expanded that definition considerably.

Rising oil and gas prices, along with ongoing technological advances, have made what have long been considered unfeasible, unconventional oil and gas resources less unconventional and more feasible.

Denver’s Forest Oil [NYSE:FST] triggered an investor feeding frenzy with the early April announcement that it had struck what it believes to be extensive, commercially viable quantities of high-quality natural gas in the Utica Shale of Quebec’s St. Lawrence Lowlands.

Investment banks and analysts are participating and have been prime movers in the speculative run-up, initiating research coverage of juniors in the field while raising capital for them via equity and warrant issues. Research analysts’ per share valuation estimates are flying, and flying high, as underwriting desks are filling their plates with share and warrants offerings and taking down green-shoe options for themselves.

A word of caution may be in order as these are pioneering, relatively risky and potentially costly efforts that are in the midst of a radical re-evaluation based on the application of new methods and technology in an area where much exploration and further testing remains to be done.

How High Is the Sky?

With interest centred around Trois Rivieres and stretching south to Montreal and north to Quebec City, the shares of junior exploration companies with landholdings in the area have soared with nary a break to catch some air. That is, up until recently.

After skyrocketing for some two months, it looks like the shares of TSX Venture Exchange-listed juniors such as Questerre [TSX-V:QEC], Gastem [TSX-V:GMR] and Junex [TSX-V:JNX], have run out of steam, at least temporarily. Now, it’s wait-and-see to find out just how sizable, and feasible, prospects are, and if the host of players involved can meet investors’ expectations.

Resource estimates from Forest Oil and Encana [NYSE:ECA; TSX:ECA] say that a 4.9 - 9.7 thousand square kilometre area of the St. Lawrence Lowlands basin may contain some 24-30 trillion cubic feet (Tcf) (4-5 billion barrels of oil equivalent) of natural gas. Activity is focused on the Utica Shale, as well as the Lorraine Shale and Trenton Black River and Beekmantown carbonates.

In a June 2007, exploration report based on 300 samples taken from penetrations of the Utica Shale across three large sections of the Lowlands – Ile D’Orelans, Villeroy and South Central – Encana concluded that additional testing would be required to assess the mechanical properties and ability to successfully fracture prospective shale gas horizons.

Besides analysts’ three favorites – Gastem, Junex and Questerre - shares of Altai Resources [TSX-V:ATI], Petrolympic [TSX-V:PCQ] and Epsilon Energy [TSX-V:ESX], have likewise comealive, hitting record highs and recording record volumes recently. Shares of Les Mines J.A.G. LTEE [TSX-V:JML] and its Olitra subsidiary, something of a dark horse as a corporate restructuring is under way, have also moved up sharply given the company’s landholdings in the Lowlands and surrounding Gaspe region to the north.

X-Terra Resources [TSX-V:XT] on June 2 jumped on the Quebec shale gas rocket ride, adding to the speculative wave that has built up around St. Lawrence Lowlands shale gas prospects.

Coincidentally, June 2 marked the intra-day highs, in both price and volume, for Questerre, Gastem, Junex and Altai’s shares.

On June 9, X-Terra management announced that the Quebec Ministry of Natural Resources had approved its permit applications covering approximately 150,000 hectares (1,500 square kilometres) of prospective shale gas acreage in the Quebec Lowlands. X-Terra’s parcels lie in close proximity to those of Junex and Intragaz Exploration near Shawinigan, Quebec, and Squatex Resources and Gastem in the area of Rimouski.

In for a Penny

Understanding the geology of shale gas and getting the technology right remains a tricky, inexact and evolving science, however. Pioneers in the field have employed horizontal drilling and multi-stage fracturing while cutting their teeth and investing much capital in researching, developing and proving them, in the case of Forest Oil in the Fort Worth Basin’s Barnett shale. Forest Oil is planning for two years of further exploration and test drilling before it expects to move its St. Lawrence Lowlands project into full production.

There are two primary variables involved when it comes to recent technological advancements in prospecting for and extracting shale gas, according to Chad Hartmann, chief technical advisor for TICORA Geosciences, Weatherford Laboratories: “an increased understanding of the complexities of the rock (i.e. storage mechanisms, bulk rock properties, tremendous heterogeneity, complex rock fabrics etc) and the development of completions strategies. Of the two, novel completions strategies are by far the most important.

“Assuming you have made the discovery and there is infrastructure in place (roads, power, compressing station and pipeline), I would estimate drilling, coring, core analysis, core to log calibrations, completions, and putting gas to sales could take six months, maybe longer ... Depending on where you are I would estimate you should count on dropping a cool US$1.5-2 million U.S. to perform the procedures,” Hartmann told Resource Investor.

Encana and Talisman Energy [NYSE:TLM; TSX:TLM] are two other bigger players that bear watching, as both have interests in and re-vitalized plans to develop both unconventional and unconventional gas and oil resources in the area. Gaz Metro LP’s privately held Intragaz subsidiary also has sizable landholdings, some of which it has farmed out to Gastem for exploration.

With energy companies having wide-ranging options to invest in new, less risky conventional gas and oil plays, as well as a growing range of unconventional gas, oil, coal and alternative energy resource development projects, individuals investing for the longer term face even greater challenges than those jumping in, joining the speculative fervour and getting out with profits intact.

Altai Resources: New Vision of the Future

Altai Resources has been involved in oil and gas prospecting in Quebec’s St. Lawrence Lowlands for some 21 years. “Our primary emphasis was to develop shallow (less than 150 meters deep) gas deposits in recent sediments to develop them into gas storage reservoirs. Only in the last seven years we did some seismic work orientated to deep targets,” recounted Niyazi Kacira, Altai’s president.

“In 2006, Talisman [as part of an option agreement] drilled one well aimed at Trenton-Black River (carbonate) gas. he well had good gas showings in shale but Talisman was not interested in it. Altai had no knowledge of shale gas, hence Forest Oil's announcement was a nice surprise. We believe that besides shale, our original targets (shallow gas, gas in carbonates) retain their validity.”

Altai’s management and board has been busy trying to move up the shale gas learning curve in the past 2-1/2 months or so since Forest Oil’s announcement. “It appears that to develop a shale gas deposit, the trick lies in completion -horizontal drilling, fracking, etc. Only a handful of drilling contractors appear to have expertise in it,” Kacira told Resource Investor.

New investor interest has enabled Altai - along with every junior with landholdings in the area – to tap the capital markets. “We have C$6 million in working capital. We will decide in the near future how to deploy some of it in this and other projects,” Kacira commented.

Consolidating Interests

One of the steps the company has taken is to consolidate and secure its prospective acreage. Management on June 16 announced that it was acquiring 100% of the shares of Petro St.-Pierre Inc. (PSP), a private Quebec company and joint venture partner in the Sorel-Trois Rivieres gas property, which lies about 2 kilometres west of Forest Oil’s discovery wells.

PSP has agreed to the acquisition, which includes its 37.6% interest in the property and a 7% gross royalty in the Talisman gas permits contiguous to Altai/PSP’s property, in return for

8.20 million Altai shares, C$350,000 in cash and Altai assuming approximately C$250,000 of PSP debt.

“Combining the joint venture interests under the roof of Altai is a win-win situation for the shareholders of both Altai and PSP. With a 100% interest in a large land package in a strategic location, Altai will be in a better position to further evaluate the various options available to us to develop our gas property,” Kacira stated.