Shell Canada Seeks JV Partner to Develop its Canadian Deep Basin Nikanassin Play in its Chinook Asset

Main Features

a.       Shell Canada is seeking a JV partner to develop its Nikanassin Play in its Chinook Asset and has engaged TD securities as its exclusive financial advisor.

b.      Offering 25 – 50% equity in its lands to JV partner.

c.       Seeking cash with a capital component.

d.      Level of carry is a function of term and working interest acquired.

e.      Term is anticipated to be 3-5 years.

Figure 1: Map location of the Chinook Asset. Source, TD Securities.

Chinook Asset Summary

a.       Located in Deep Basin of Western Canada (See Figure 1)

b.      Average Shell working interest is ~ 90%

c.       Area covers ~ 102,000 mostly undeveloped gross acres

d.      Resource potential is large with 12 Tcf OGIP with Shell estimated recoverable resource > 4Tcf

e.      Shell has invested in infrastructure and facilities  resulting in lower operating costs (as low as $0.55/Mcf)

f.        Currently producing ~ 35 MMcf/d with plans to ramp up to 150 MMcf/d by 2015 and possibly 250 MMcf/d or higher.

Nikanassin Formation Summary

a.       Present across the deep basin with gas trapped in stratigraphic and structural settings.

b.      Thick, stacked siltstone – sandstone reservoir sequence

c.       OGIP of 60 – 80 Bcf/ Section is higher than all other area formations 

Nikanassin compared to other North American shales by TD (Broker)

Figure 2: Comparison of various parameters between the Nikanassin and other similar unconventional plays. Source, TD Securities. 

Benefits for JV partner

a.       Shell is a major player with extensive capabilities and experience in unconventional plays.

b.      Reduced drilling costs by 50%

c.       50% reduction in drilling time

d.      40% reduction in completion costs

e.      Prior investment capital has already flowed into project.

Shells Current Activity at Chinook Asset

a.       Drilled three horizontal wells in Q4-2010, all tied in and initially producing > 5 mmcf/d

b.      Completed drilling first syncline well in Q1-2011 (Figure 3) which is awaiting completion and tie-in Q2-2011

c.       Plans to drill second syncline well and four development wells in remainder of 2011

Figure 3: Subdivision of the Nikanassin play according to Shell. Source, TD Securities. 

Recent activity by other operators

Source, TD Securities. 

Analyst Comments

Derrick estimates the value of this deal to be between $25 - $100 million assuming a 50% JV based on acreage metrics from the June 2011 activity land sales published by the Canadian government.