Oil and Gas Demand Down Now... Supply Destruction Underway

QEC+TLM =Shale Gas Bonanza

HOW TO GET THINGS MOVING
Slash taxes and interest rates, spend on infrastructure and training, feel free to run a deficit - and do it quickly. That's what Canada's pessimistic business leaders are telling Ottawa

RICHARD BLACKWELL

rblackwell@globeandmail.com

December 15, 2008

One company in that boat is Questerre Energy Corp., a Calgary oil and gas exploration firm that was fortunate to have completed a $75-million financing just before the market turned down. It now has no debt and positive cash flow, plus excess cash in the bank, said CEO Michael Binnion, so it is in a position to go shopping.

"We're actively thinking, analyzing and looking at ... where we would want to buy, and what we could buy," he said.

The problem, he said, is that Questerre will likely be spending its money on assets that are already drilled, rather than doing new drilling itself. "That doesn't create any employment, does it?"

Over the long term, Mr. Binnion hopes any weaker company his absorbs will eventually grow and contribute to job creation when the economy recovers.

Many companies are not in same enviable position as Questerre. Almost all executives surveyed said it is harder to get financing now than it was two years ago, and more than two-thirds said it was "significantly" harder.

...Recessions, he said, "happen because people think they're going to happen."

Natural Gas

December, 2008
Source: OIL & GAS INQUIRER
Shale Gas
Michael Binnion: Wildcatting in Quebec's St. Lawrence Lowlands

By Mike Byfield

[Figure 1]

Among Calgary's oil and gas professionals, Michael Binnion sees himself as an outsider. Maybe that's why the president and CEO of Questerre Energy Corp. moved before any of his rivals on a shale gas prospect in Quebec. "I'm a chartered accountant, not an engineer or geologist," he says. "Also, most junior producers here move step by step, looking for fairly safe base hits. Questerre is trying to bat the ball right out of the park." In other words, Binnion is a high-risk player whose speculative ventures have taken him as far afield as Georgia, a former Soviet republic.

In 1998-99, when natural gas production was starting to ramp up in the Barnett Shale of Texas, Binnion staked close to two million acres in Quebec's Utica and Lorraine Shales. Questerre's cheaply acquired acreage has attracted a pair of heavyweight partners, Talisman Energy Inc. and Forest Oil Corp. In fact, the St. Lawrence Lowlands is now Canada's most exciting shale gas prospect outside of British Columbia's Montney and Horn River Basin plays.

The Questerre CEO, 48, is a fifth-generation Albertan. His father Larry, also an accountant, worked in Imperial Oil's first computer data centre, then launched a software company that sold licence administration packages to American state governments. His equally entrepreneurial son came to the oil patch by an exceptionally roundabout route involving golf and movable office walls.

After graduating (B.Comm-University of Alberta), Binnion spent seven years as a Toronto-based specialist in tax-assisted corporate financings with a major accounting firm since. He then worked for Bruce Strongman, founder of the paint store chain Color Your World. "After Bruce semi-retired, he stayed active by buying Nevada Bob's and I managed it under his direction," Binnion says. "From 1988 to 1992, I looked after golf stores and strip plazas, and oversaw development of a couple golf courses. I sold franchises, handled import and export, dealt with warehousing-it was an amazing apprenticeship."

Coming to Calgary, Binnion began reorganizing publicly traded shell companies for sale to junior capital pools and other firms eager to raise funds on the stock market. He invested in one of those firms, LifeSpace Environmental Walls, which manufactured movable office walls. Cash-fuelled by its success, the entrepreneur gambled on CanArgo Energy Corp., a junior operating in Georgia.

CanArgo is an integrated company with drilling rigs, oilfields, a small refinery, service stations, and natural gas distribution. For investors, its major upside potential has always been a major success with the drill bit. Unfortunately, that discovery has yet to materialize. Through 1997-98, the firm's shares crashed from nearly US$15 each to as little as $0.25.

Binnion became CanArgo's president and CFO between 1998 and 2000 "because we couldn't afford anyone else." A global oil price collapse in 1999 didn't help. "We sold one cargo of crude for $9.60 [per barrel]," the Calgarian says. The company has continued to lose money year after year in Georgia. Last summer, Russia invaded the small mountainous nation on its southern flank. CanArgo reports that its operations have survived intact; its current share price is less than $0.15.

From 1996 to 2001, Binnion served as president of Flowing Energy Corp., which built up 2,100 bbl/d of heavy oil production in the Lloydminster area. Daylight Energy Trust purchased the Calgary-based junior in 2005. The accountant says his years under Strongman have served him well in the patch. "This industry doesn't have enough engineers with practical field experience," he comments. "No university can teach you how to recover some of your money when a service company is late in doing its job."

Questerre's Quebec initiative dates back to drilling spearheaded by Michael Pick, CEO of Terrenex. The Calgary geologist persuaded two majors, Bow Valley and Amerada Hess, to help pay for deep natural gas tests, in 1989 and 1993. The first wildcat hit CO2; the second found gas in tight reservoir rock. After the second attempt, Binnion acquired Terrenex as a shell company. "Although Pick failed to find a geological trap, his work showed that Quebec has a large volume of gas in place," he says.

Harvesting that gas may now prove economic thanks to modern horizontal drilling and hydraulic fracturing technology. On Sept. 2, Talisman Energy Inc. announced test results from its Gentilly #1 well. The probe sits about 100 kilometres south of Quebec City. The vertical well reportedly flowed at 800 Mcf/d from one completed interval on a sustained basis during the 18-day test period.

"We are encouraged by the initial results," says Talisman president John Manzoni. "We have additional testing to do on the well, including zones within the Basal Lorraine and Lorraine shale formation, but this is a very promising start to our unconventional program in Quebec." The Lorraine shale sits on top of the Utica and can be up to 6,500 ft thick. The Utica shale ranges between 300 and 1,000 ft. Early indications show that both the Lorraine and Utica rocks are thick, porous, and appear brittle and over pressured, all of which are considered conducive to fracture stimulation.

Its deal with Questerre gives Talisman the option to earn 760,000 net acres through drilling in Quebec. Talisman, a Calgary-based company, says it's still is in the early stage of evaluating rock properties and reservoirs. Its Quebec plans call for testing three to four more pilot areas over the next 18 months, including up to four more wells prior to year-end.

Meanwhile Forest Oil Corp. through its Canadian subsidiary has farmed into another block of Questerre's land. In April, the Denver-based unconventional gas company revealed results from two vertical pilot wells that had been drilled to a total depth of 4,800 ft in 2007. Production rates from the Utica Shale reportedly tested up to one MMcf/d. Forest can earn a 60 per cent WI in this project, with the remainder divided between Questerre and Gastem Inc., a Montreal junior.

Questerre has also farmed out 600,000 acres in the Gaspe Peninsula to another Quebec junior, Junex Inc., retaining a five per cent royalty interest in any future production. Junex now holds a total of six million shale-prospective acres in the province. Forest is in the process of drilling three more Utica wells in Quebec, two on the Questerre-Gastem block, and another on the Junex acreage, with results expected before year-end. Although Binnion is happy with results so far, the speculative oilman cautions, "We're still at a very early stage of development."