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Part Two - Canada and the Montney on the Global Stage
- What makes the Montney so mighty

The Role of The Montney in the Energy Transition and the Pathway to Net Zero Greenhouse Gas Emissions

Dear Subscriber     
We are pleased to provide you with Part Two of our three-part series, as we focus on the role that Canada’s Montney Formation is playing in the global energy transition and our shared pathway to reach net zero emissions of greenhouse gases (GHG).

Part One, we put Canada and the Montney Formation in its global context. 

In this Part Two we will look at what makes the Montney so mighty and then in Part Three we will consider Calima’s situation in the Montney and our potential contribution to the shared net zero emissions pathway.
We already worked out in Part One that Canada, the fourth largest producer of both oil and gas in the world, ranks number one amongst the major oil and gas exporting countries on environmental, social and governance (ESG) rankings.   They don’t look like loosing their number one spot anytime soon as 90% of their heavy oil producers have committed to reach net zero emissions by 2050 and the new LNG plants being built and planned for the west coast are making the most of hydro-power to deliver the worlds lowest emission liquefaction facilities.  Both facts are relevant to our exploration of the Mighty Montney. 

Bearing in mind that Canada is the 4th largest producer of gas in the world it is remarkable that almost half of that production comes from the Montney which is estimated to contain up to 567 Tcf of gas reserves.  The Montney already has low CO2 content, and it is the Montney that will supply feedstock to the world’s lowest emission liquefaction facilities on the west coast. 

Wait up, hold the maple syrup, because there’s more!  The Montney is not just a gas story.  If you hit the sweet spots, it also delivers light oil or condensate in association with the gas.  This is the stuff that the heavy oil producers can’t get enough of because they mix it with their heavy crude to enable transportation and to meet product specs.  This ensures premium pricing for Montney condensate, and it means that in addition to playing a pivotal role in the world’s lowest emission LNG the Montney is also behind the growth of oil production committed to reach net zero by 2050.  The Montney couldn’t be better placed to play a role in delivering the global transition towards low emissions energy. 

So why is the Montney even more mighty than a Canadian Grizzly?  Firstly, although it is regarded as a shale play it is more typically a siltstone which means it has its own porosity.  Secondly as well as covering a huge geographic area (130,000 sq km) it is also relatively thick with most producers being able to drill multiple stacked horizontal wells at one location.  An analyst at investment bank Raymond James recently said it was possible to argue that the Montney has some of the best economics in the whole of North America and that only the Permian of the U.S. has more remaining reserves. 

There must be a catch.  There is always a catch.  The Montney was a victim of its own success.  Wells in the Montney are so prolific that growth in production outpaced growth in pipeline capacity which is a common problem in the big resource plays. 
The outlook for Canadian gas and condensate pricing is positive with gas prices on a sustained upward trend

Chart notes - 1) A flood of cheap coal and increasing production of unconventional gas across North America created price pressure but US and Canada remained in step 2)  A lack of pipeline capacity in Canada opened up price discounts against US  3)  Increased Canadian pipeline capacity closed price discount  4) Increasing coal to gas substitution and LNG exports underpins increasing gas prices 5)  Western Canadian gas storage at 5 year lows  6) Condensate prices recovering strongly
Producers who wanted to supply high value condensate to the oil sands producers had to find space on crowded pipeline networks.  This created a differential between the price of gas in the U.S. and the price of gas in Western Canada.  Good for the owners of the pipelines but bad for the producers or in our case prospective producers.  This meant that in a North American market already oversupplied with gas, Canadian producers had to take a discount against prices in the U.S.   This was the situation Calima faced when it drilled its play opening wells in the Montney in early 2019.  

Perhaps Calima missed the exuberance of the first wave of the Montney revolution, but we are now well placed for the second, which is better grounded in fundamentals.  As predicted in various of the previous Calima Newsletters, increased transportation capacity through new pipelines and upgrades to existing facilities has meant better market access for Montney gas and the price discount against the US has disappeared.  On top of that with increasing use of gas over coal, domestic demand growth and access to international markets through LNG North American gas prices in general have firmed up and gas futures are now looking encouraging.  Condensate prices have also recovered strongly from lows in early 2020 and all of this is happening before LNG on the west coast opens up Montney gas to world markets.  It is beginning to look a lot like a plan is coming together!

Do not take our word for it.  An upsurge in M&A activity across the Montney shows the smart money jumping into the consolidation game before prices head back to the heady days of 2015/16 when transactions were routinely being done at $4-5,000 per undeveloped acre.   In the middle of 2020 Conoco got the ball rolling with the purchase of a large portion of Kelt’s Montney holdings for C$550 million and CNRL followed close on their heels with the acquisition of Painted Pony for C$469 million.    Then along came Tourmaline buying Polar Star, Chinook and some of Painted Pony’s acreage in a mini-shopping spree that set them back C$85 million.  This was starting to get awfully close to Calima and they did not stop there because in April 2021 they paid C$205 million for half of our next-door neighbour Saguaro and then bought our other next-door neighbour Black Swan for C$1.1 billion.  

For producers running on fumes having maintained development spending programmes as best they could through a period of record low prices, there was perhaps little option but to accept the deals on the table.   Calima was never able to get to the point of having a development spending programme in the Montney and, as frustrating as that was at the time, and my word it was very frustrating indeed, the company is now in the fortunate position of being able to pick its moment to transact.  The recent merger with Blackspur gives Calima highly profitable production that is growing ahead of expectations so there is no pressure to take the first deal that comes along.

So just what is it that Calima has in the Montney and why are we so very excited?  Regrettably our two minutes are up so that will have to wait until Part 3 of our series.

Hannam & Partners have prepared an assessment of Calima's Montney Acreage and we will be releasing this tomorrow. Look out for a good read!

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