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The Lowlands are situated in Quebec, south of the St. Lawrence River between Montreal and Quebec City. The exploration potential of the Lowlands is complemented by proximity to one of the largest natural gas markets in North America and a well-established distribution network.
The area is prospective for natural gas in several horizons with the primary target being the Utica shale. Secondary targets include the shallower Lorraine silts and shale and the deeper Trenton Black-River carbonate. The majority of Questerre’s one million gross acres lies in the heart of the fairway between two major geological features — Logan’s Line, a subsurface thrust fault to the east and the Yamaska growth fault to the west.
Following a successful vertical test well program in 2008 and 2009, Questerre and its partner, Repsol Oil & Gas Canada Inc. (formerly Talisman Energy Inc.), began a pilot horizontal well program to assess commerciality of the Utica shale in 2010. In the fall of 2010, the pilot program was suspended while the provincial government initiated an environmental assessment of shale gas development in the province.
Following almost six years of extensive studies and public consultation, in December 2016, the Government of Quebec passed Bill 106, An Act to implement the 2030 Energy Policy and amend various legislative provisions. These amendments include the enactment of the Petroleum Resources Act to govern the future development of petroleum resources in Quebec.
In March 2017, the Quebec Government passed into law Bill 102, An Act to amend the Environment Quality Act to modernize the environmental authorization scheme and to amend other legislative provisions, in particular to reform the governance of the Green Fund. One of the key features of Bill 102 is to establish a simplified and modulated authorization process based on the environmental risks associated with a project. Bill 102 also includes changes to various provisions of Quebec’s Environmental Quality Act governing, in particular, contaminated lands, residual materials and hazardous materials. The majority of the changes introduced by Bill 102 entered into force on March 23, 2018. In February 2018, the Quebec Government published several draft regulations in the Gazette officielle du Québec to implement some of the changes introduced by Bill 102. The majority of such regulations will come into force by the end of 2018.
In September 2017, the Ministry of Natural Resources published the proposed regulations to govern oil and gas activities in the province. The draft regulations are required for the implementation of the Petroleum Resources Act.
The purpose of the Petroleum Resources Act is: (i) to replace the current oil & gas statutory framework set by the Quebec Mining Act; and (ii) to govern the development of petroleum resources while ensuring the safety of persons and property, environmental protection and optimal recovery of the resource, in compliance with the greenhouse gas emission reduction targets set by the Quebec Government. The Petroleum Resources Act will come into force on a date to be set by the Quebec Government, which is expected to be on or about the same time as the adoption of the final version of the draft regulations.
In December 2017, the Quebec Government published the “Draft regulation respecting the environmental impact assessment and review procedure of certain projects”. Following Bill 102, the new Regulation is consistent with the Sustainable Development Act and proposes further changes to the current environmental impact assessment and review regime of the Environment Quality Act. Such changes include increased public participation in the process, greater mandated disclosure on the part of project proponents, a longer list of projects subject to the environmental assessment process, and various revised thresholds for those projects’ compliance with the Act. This draft regulation entered into force on March 23, 2018.
Along with social acceptability, these hydrocarbon and environmental regulations are prerequisites to the resumption of field activities on the Company’s acreage to assess its Utica gas discovery in the province.
In early 2018, the Company engaged GLJ Petroleum Consultants Ltd. (“GLJ”) to update the resource assessment of its Utica acreage in Quebec effective December 31, 2017 with a report date of March 16, 2018 (the “Quebec Resource Assessment”). The Quebec Resource Assessment was prepared in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities of the Canadian Securities Administrators (“NI 51-101”) and the Canadian Oil and Gas Evaluation Handbook Volume I (“COGE Handbook”). The Quebec Resource Assessment assesses the Utica shale gas potential within the Company’s 735,910 gross acres in the St. Lawrence Lowlands of Quebec. The best estimate by GLJ of risked Prospective Resources net to Questerre is 0.94 trillion cubic feet ("Tcf") (157 million barrels of oil equivalent ("boe")). Additionally, the Quebec Resource Assessment details the best estimate of risked Contingent Resources net to Questerre is 313 Bcf (52 million boe). The net present value of the risked Contingent Resources, including the development on hold and development unclarified sub categories, discounted at 10% before tax is estimated at $409 million.
The updated Quebec Resource Assessment assigned Contingent Resources for approximately 16% of Questerre’s acreage based on the results from several vertical and horizontal wells on the Company’s acreage that have all encountered pay in the Utica as reported by the Company in 2008 to 2010. Test data from these wells, in conjunction with offset development and studies of the analogous US Utica, supports the prospective commercial development of these resources.
Contingent Resource volumes have been classified as development on hold or development unclarified. Those areas classified as development on hold are primarily contingent on the passage of applicable hydrocarbon and environmental legislation and regulations as well as local acceptability. Remaining areas classified as development unclarified have additional contingency or risk associated with securing social license to operate and are thereby a lower priority for development. Additional contingencies include firm development plans, detailed cost estimates and corporate approvals and sanctioning. There is no certainty that any portion of the Contingent Resources will be economic to develop. Though pilot horizontal development plans have been proposed, the project evaluation scenario for the Contingent Resources is not sufficiently defined to make an investment decision to proceed to development.
The Contingent Resources have been risked for the chance of commerciality, or commercial development, defined as the product of the chance of discovery and the chance of development. For Contingent Resources, the chance of discovery is equal to one. The chance of development is the estimated probability that once discovered, a known accumulation will be commercially developed. Prospective Resources were also risked for chance of discovery. There is no certainty that any portion of Prospective Resources will be discovered. If discovered there is no certainty that it will be economically viable to produce any portion of the Prospective Resource.
For more information, please refer to the Company’s 2017 Annual Information Form (“AIF”) and press release dated March 12, 2018 available on the Company’s website at www.questerre.com and on SEDAR at www.sedar.com.