Gething-Dunvegan Gas Production
Ellerslie Gas Production
Viking Oil Production
On July 31, 2017, TAPC completed the purchase of certain oil and gas producing assets in the Waskahigan area of Alberta (the “Waskahigan Assets”). The present value before tax of the Waskahigan Assets as prepared by GLJ Petroleum Consultants Ltd. (“GJL Consultants”) for proved producing assets was $2,114,000 with a discount rate of 10% and $3,503,000 for total proved plus probable with a discount rate of 10% effective December 31, 2016. The AER LLR was approximately 4.5 as of December 31, 2016. The acquisition included 8 wells and associated production of approximately 1,800 mcf/day and 20 barrels of natural gas liquids per day. TAPC acquired mineral rights to 22 gross sections (15.19 net sections) (14,080 gross acres 9,726 net acres). The majority of the mineral rights are above Bullhead Bullhead Group formation (primarily Dunvegan, Notikewin and Gething formation) near Fox Creek, Alberta.
Concurrent with closing, TAPC entered into a Loan and Participation Agreement with Smoky Oil & Gas Corp (“Smoky”) and Batoche Oil & Gas Exploration Ltd. (“Batoche”). Pursuant to the terms of the Loan and Participation Agreement (“LPA”), Smoky lent TAPC the sum of $1,326,593 to make the acquisition. The interest rate on the loan principal is 6% per annum. All obligations owing are secured by a general security agreement charging all of the assets of TAPC. Subject to an agreed upon general and administrative expense payment, Smoky shall be entitled to all net cash flow from the Waskahigan Assets until the loan is repaid. The LPA provided that while loans are outstanding, TAPC shall be restricted to charging general and administrative costs to a maximum of $75,000 per year for administration of the Waskahigan Assets and charging general and administrative costs to a maximum of $75,000 per year for administration of the Waskahigan Participation Assets (as defined below). The LPA was amended on September 30, 2017, to provide that TAPC shall be entitled to all net cash flow from operations until December 31, 2017.
TAPC has agreed to farmout to Batoche the Waskahigan Assets (other than existing wells and applicable spacing units)(“Waskahigan Participation Assets”) on the terms and conditions set out in the Batoche Farmout Agreement. If Batoche defaults under the terms of the Batoche Farmout Agreement, and if TAPC is unable to farmout to a third party, then TAPC has agreed to farmout the Waskahigan Participation Assets to Smoky (if Smoky chooses to farmin) on terms and conditions equivalent to the farmout terms set out in Batoche Farmout Agreement. The Batoche Farmout Agreement contains a 3 well requirement to earn a 70% working interest in all Waskahigan Participation Asset mineral rights. The Batoche Farmout Agreement requires Batoche to be drill ready (Well #1) by June 30, 2019. Terms are: Batoche is to pay 100% of all costs to drill, complete and equip Well #1 to earn 70% in spacing unit associated with Well #1 subject to payout. The working interest participants are required to pay their proportionate share of Well #2 and Well #3. If Batoche drills Well #2, Batoche will earn 70% in the spacing unit associated with Well #2. If Batoche drills Well #3, Batoche will earn 70% working interest in all Waskahigan Participation Assets and any other lands acquired by TAPC in Waskahigan area. Assuming Batoche earns 70% working interest in the Waskahigan Participation Assets, TAPC will have a 6% working interest and Smoky will have a 24% working interest in the 3 wells and future developments.
Pursuant to the LPA, as additional consideration, Smoky shall be entitled to receive: (a) 80% of net cash flow from the Waskahigan Assets (less agreed general and administrative expenses) from January 1, 2018 until December 31, 2021 (subject to farmout rights); (b) 80% of net sale proceeds of Waskahigan Assets (subject to farmout rights); (c) right to compel TAPC to buy Smoky’s right to 80% of the net cash flow from the Waskahigan Assets (subject to farmout rights) for 2.5 times net cash flow; and (d) right to compel TAPC to buy Smoky’s right to 24% of the net cash flow from the Waskahigan Participation Assets (subject to farmout rights) for 2.5 times net cash flow from the Waskahigan Participation Assets. TAPC shall have the right to: (a) right to compel Smoky to sell its right to 80% of the net cash flow from the Waskahigan Assets (subject to farmout rights) for 2.5 times net cash flow; and (d) right to compel Smoky to sell its right to 24% of the net cash flow from the Waskahigan Participation Assets for 2.5 times net cash flow from the Waskahigan Participation Assets.
Historical production Performance of Assets 2015, 2016 and 6 months 2017:
The table below sets out the estimates sales prices for the vendor of the Waskahigan Assets for the stated period.
Caution should be used when relying on these figures as an indicator of future performance of the assets.
1.) The pricing and gross revenue was based on an audit of the vendors books (and may have included a blended rate of hedged pricing (above AECO and Alliance Chicago City Gate pricing). The average AECO 5A price was $2.02Cdn/GJ for 2016 and $2.59 Cdn/GJ for the first six months of 2017 The sales figure are a combination of natural gas, liquids and oil. It is estimated that the vendors average sale price was $3.05Cdn/mcf for the first 6 months of 2017 and $2.56Cdn/mcf for 2016.
2.) At the time of acquisition the existing Paramount compression and processing agreement provided that the vendor would be responsible for a base charge of approx $38/e3m3 and an equalization through put charge. On October 1, 2017, TAPC terminated the Paramount Compression and Processing Agreement. Effective January 1, 2018, TAPC renegotiated a Paramount Gas Handling Agreement at competitive compression and processing charges and without the equalization/throughput requirement.
3.) TCPL has constricted NOVA Pipeline access in September, October and November 2017 due to construction and other upgrades. The AECO price has been artificially and negatively affected by construction and the limited takeaway pipeline capacity in Western Canada. The Corporation has shut in its wells from September 25, 2017 to the end of November 2017. TAPC has recommenced production from 1 Waskahigan well and 1 Crossfield well in December 2017 which are producing approximately 1,050 mcf/d. TAPC recommenced production from an additional Waskahigan well in mid January 2018 and the well has produced approx. 750 mcf/d (net).
4.) The 15-24-63-24-W5th well produced approximately 150 mcf/d of natural gas (net to TAPC – 75% WI). The gas from the 15-24-63-24-W5th well was delivered to the Waskahigan gas processing plant of CNRL. The vendor assigned its mineral rights, wells, pipelines and three operating contracts to TAPC (well contracting, effluent handling and transportation, compression and processing). CNRL will not recognize the assignment. As such, production of the 15-24-63-24-W5th well will likely be shut in until the assignment issue can be resolved.
The major constraints of TAPC to development of this property in the immediate future are: (a) historically high spread between NYMEX and AECO; (b) NOVA Pipeline takeaway capacity; and (c) access to reasonably prices compression and processing charges. The positives are: (a) NYMEX (Henry Hub) price has remained at 2016 levels; (b) TCPL is in process of doubling the NOVA Pipeline takeaway capacity by 2020; (c) Alliance is increasing its takeaway capacity by 50% by 2020; and (d) with the development of the Duvernay formation by Encana, Chevron, Murphy and Shell), midstream companies (Keyera and Pembina) have agreed to spend significant capital to increase the area capacity within next two years. It is expected that within 2 years lower compression and processing costs will be available because of the excess midstream capacity in the area.
In August 2008, Jadela entered into a farm-in agreement for lands located in the Crossfield, Alberta area to tie in an existing gas well located at 10-29-030-03W5. The pipeline tie-in project was completed in early April 2009 and the well commenced production from the Ellerslie on April 9, 2009.
Jadela has a 35% working interest in the well, subject to a 12.5% lessor’s royalty and 6% farmor royalty. Production from this well represents the majority of the Jadela’s production. Jadela’s 35% working interest in such well includes all rights from the base of the Cardium zone to the base of the Manville zone, including the petroleum and natural gas rights in the Viking zone.
In November 2010, Jadela entered into a farmout agreement with another industry partner (“WLE”) to develop Jadela’s 35% working interest in the Viking formation. Under the terms of such farmout agreement, WLE was to have paid 100% of Jadela’s capital obligations to drill and complete the well in exchange will earn 60% of Jadela’s 35% working interest. Well site preparations were made. The well was not drilled because WLE did not contribute funds upon being ach called. In November 2011, Jadela elected to participate in the drilling of a 3,500 foot lateral well into the Viking formation completed with open hole propane frac fluid and the services of GasFrac Energy Services Inc. In December 2011, Jadela farmed out its working interest to a different industry partner (“AEL”). AEL drilled and completed the well by April 3, 2012.
In November 2006, Jadela entered into a farm-in arrangement for interests located in the Wapiti area to drill a Dunvegan test well (01-22-065-08W6) which was completed and placed on stream. Jadela participated in the drilling of the well and earned a 9.75% working interest therein. In 2008, Jadela acquired a further 6.5% working interest.