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 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.
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.
The Government of Quebec enacted the Petroleum Resources Act in the third quarter of 2018 to govern the development of hydrocarbons in the province. It also enacted the associated regulations (the “Regulations”)which include restrictions on oil and gas activities, specifically the prohibition of hydraulic fracturing of shale. Questerre believes that the remaining Regulations, while stricter than other jurisdictions, are generally workable. Questerre filed a legal brief with the Superior Court of Quebec challenging the validity of the specific Regulations relating to the restrictions. The brief also requested a stay and ultimately a judicial hearing to have them set aside.The Company’s motion was made on the basis that the specific Regulations are ultra vires, or beyond the legal power and authority granted to the government by the Petroleum Resources Act, contrary to the independent scientific studies, and moreover they do not meet the consultation requirements detailed in Quebec legislation with respect to the enactment of regulations.
The Attorney General requested an extension for the hearing date on the motion to stay, in order to receive clear instructions from the newly elected government on this matter. Questerre consented to the request. Given the high importance of the issues, the Company has been granted a fast track hearing on judicial review in the first quarter of 2019 that will decide on setting the fracking ban regulations aside.
The enactment of the Regulations also satisfies one of the prerequisites for the Company to close its previously announced Letter of Intent with a senior exploration and production company (the “LOI”) to consolidate its assets in Quebec and regain operatorship. Subject to the conditions precedent, Questerre anticipates entering into a purchase and sale agreement in the fourth quarter and closing the acquisition early in 2019.
Pursuant to the LOI, Questerre will acquire the exploration rights to 753,000 net acres in the Lowlands,associated wells and equipment, geological and geophysical data and other miscellaneous assets. Upon closing of the transaction, both parties will release each other from all claims related to the outstanding litigation. Other consideration including cash and the security required for the assumption of abandonment and reclamation liabilities (“A&R Liabilities”) is approximately $16.10 million in aggregate. Questerre may post a letter of creditas security for the A&R Liabilities.