Mackenzie Delta

Mackenzie Delta

History and Geology

The Mackenzie Delta lies at the end of the Mackenzie River where it enters the Beaufort Sea, approximately 2,200 kilometres northwest of Calgary, Alberta. The Mackenzie Delta basin consists of a Cretaceous to Tertiary rifted continental margin with more than 12 km of sedimentary rock. The basin extends from the head of the modern day Mackenzie Delta to the continental slope in the Beaufort Sea between 69° to 71° N latitude and 127° to 141°W longitude.

Exploration began in the late 1960’s and several major discoveries were made in the 1970's and again in the past 10 years. To date more than 250 million barrels of oil and 11 trillion cubic feet of natural gas have been discovered, covering 35 onshore SDL's. The majority of discoveries to date are found in Tertiary to Late Cretaceous sandstones of the Reindeer and Kamik formations. The largest of the natural gas discoveries to date are in the 2 to 3 Tcf range. Third party estimates filed with Canada's National Energy Board in connection with hearings into an application for the Mackenzie Valley pipeline estimate that there is 15.4 Tcf of undiscovered original gas in place (best estimate) in the onshore and shallow water portion of the Mackenzie Delta (which consists of approximately 2.2 million hectares). Undiscovered original gas in place is gas estimated on a given date to be contained in accumulations yet to be discovered. A best estimate is the best estimate of the quantity that will actually be recovered from the accumulation, which under probabilistic methodology reflects a P50 confidence level. There is no certainty that any portion of the resources will be discovered. If discovered, there can be no certainty that it will be commercially viable to produce any portion of the resource. There is no certainty that a pipeline will be built to transport discovered hydrocarbons.

Other than one field which provides natural gas to the town of Inuvik, there is currently no commercial oil or natural gas production in the Mackenzie Delta, as there is a lack of a pipeline or gathering system to transport hydrocarbons from the Mackenzie Delta to market. 

MGM Energy Assets

The map highlights the Mackenzie Delta region and the following MGM Energy interests in this operating area at May 31, 2013:

 

Mackenzie Delta Joint Venture


Chevron Canada and BP Canada Resources ("Chevron/BP") owned Exploration Licence #427 and #394 (since expired) in the Mackenzie Delta region. Chevron/BP drilled three successful wells known as Langley, Ellice and Olivier on these lands between 2003 and 2005. Paramount Resources Limited ("Paramount") entered into the Farmout agreement with Chevron/BP in the fall of 2006 and MGM Energy assumed the obligations under this agreement on Spinout from Paramount. Pursuant to this Farmout, MGM Energy had agreed to drill up to 11 wells in total, to spend $50 million on seismic data and to assume certain other costs. MGM Energy drilled two wells in the winter of 2006/07 and three wells in winter 2007/08. Of the five wells drilled, four were dry and one, Langley E-07, was a natural gas discovery. The Corporation drilled three wells on the Farmout Properties during the 2008/09 winter drilling season. The first well drilled during the 2008/09 winter drilling program, Ellice J-27, was a successful natural gas well. The second well, North Ellice J-17, encountered poor quality reservoir sections and no hydrocarbons were present. The third well, Ellice A-25 did not encounter commercial quantities of hydrocarbons and was to be abandoned.


On May 5, 2009, the Chevron/BP Farmout Agreement was restructured. The restructured agreement provided that MGM Energy would not be required to drill the final three wells or complete the additional seismic data acquisition required under the Farmout Agreement until after the decision to construct is made in connection with the Mackenzie Valley pipeline (DTC). MGM Energy immediately earned the interests available to it under the Farmout Agreement, consisting of a 50% interest in the Farmout lands as well as in the discoveries in the Mackenzie Delta previously made by Chevron Canada and BP Canada. 


The following table compares the principal obligations of MGM Energy under the Farmout Agreement to those under the restructured agreement:
 

 

Original Farmout Agreement
 
    Restructured Agreement
  • Drill final three wells by April, 2010 to earn 50% of existing Chevron/BP discoveries and joint venture lands (estimated remaining cost of $55 million - $60 million)
 
  • Drill three wells within three winter drilling seasons after the decision to construct the Mackenzie Valley pipeline is made (“DTC”);
  • Spend the remainder of the seismic commitment (approximately $26 million) on seismic acquisition by August 2012 or, if not spent, pay 50% of the unspent commitment as a cash penalty
 
  • Spend the remainder of the seismic commitment (approximately $26 million) on development costs after DTC occurs
  • Earn 50% interest in Inuvialuit Concessions 1 and 2 and make one-half of any penalty payments due to the Inuvialuit Land Corporation if no wells are drilled on those lands by August, 2010 (maximum payment by MGM Energy of $5 million )
  • Acquire 100% interest in Inuvialuit Concessions 1 and 2 and make all penalty payments due to the Inuvialuit Land Corporation if no wells are drilled on those lands by August, 2010 ($10 million payment made by MGM Energy in July 2010)

In addition:

 

  • MGM Energy became the operator of the joint venture with Chevron Canada and BP Canada;
  • The three wells to be drilled after DTC may be appraisal wells or development wells, at the option of MGM Energy.
  • MGM Energy will fund all of Chevron Canada and BP Canada’s annual costs to monitor existing wells in the Mackenzie Delta until DTC. These costs are estimated to be approximately $60,000 per year.


Umiak Assets


MGM Energy acquired the Umiak assets in May 2007. The Umiak assets consist of:

Umiak SDL
MGM Energy is the owner of a 40% working interest in, and is the operator of, the Umiak SDL 131 which comprises 8,500 hectares and includes both a gas and an oil discovery. Of the remainder, 40% interest is owned by ConocoPhillips and 20% by KOGAS Canada.


Other Exploration Land

MGM Energy is 100% owner of the following parcels of land in the Mackenzie Delta:

Inuvik Block 2 - Ogruknang
This parcel of land, owned by the Inuvialuit, and was renewed in August 2010 for a five year term.  The land encompasses approximately 45,000 hectares and surrounds the producing Ikhil gas field.  MGM Energy has a committment to drill at least one well on this property prior to July 2015 or pay a $5 million penalty.

 

Other SDLs


The Company is the owner of small interests in 14 SDLs, both onshore and offshore in the Mackenzie Delta. While these SDLs typically have discovered contingent resources associated with them, MGM Energy believes that they are equally important for the access to seismic data that is associated with this ownership, as well as the window they may provide on development throughout the Mackenzie Delta.

 

Seismic Database


In addition to land interests in this area, MGM Energy also owns or has access to substantial seismic data over much of it properties and the Mackenzie Delta, including 9,900 kilometres of 2D seismic and 470 square kilometres of 3D seismic, a large portion of which is proprietary. Access to seismic information in this area is critical for exploration and development due to low drilling density and the high cost of drilling. 

 


Estimate of Resources of Mackenzie Delta Assets


Umiak Discovery (40% owned by MGM Energy)


An evaluation of the potential resources for Umiak SDL 131 has been completed internally by a qualified reserves evaluator and audited by a qualified reserves auditor as at December 31, 2007. The table below summarizes the estimated resources attributable to Umiak SDL 131, net to MGM Energy. Estimates are shown before the deduction of royalties. The estimates presented are in accordance with the definitions and guidelines in the COGE Handbook and NI 51-101.

Resource Estimate of Sales Gas Resources(3)
Umiak SDL 131 - Net to MGM Energy (Bcf)
  Low Best High
Contingent Resources(1) 107 176 315
Prospective Resources(2) 9 21 51

The mean(3) estimate of contingent resources and prospective resources is 193 Bcf and 26 Bcf, respectively.

 

Ellice J-27 Well (50% owned by MGM Energy)


An evaluation of the potential resources for the Ellice J-27 well was completed internally by a Qualified Reserves Evaluator and audited by a Qualified Reserves Auditor dated and effective as at March 16, 2009. The table below summarizes the estimated resources attributable to the Ellice J-27 well net to MGM Energy. Estimates are shown before the deduction of royalties. The estimates presented are in accordance with the definitions and guidelines in the COGE Handbook and NI 51-101.

 

Resource Estimate of Gross Sales Gas Resources(3)
Ellice J-27 Well - Net to MGM Energy (Bcf)

  Low Best High
Contingent Resources(1)      
  Aklak Zone 91 142 221
  Taglu Zone 7 13 24
Prospective Resources(2)      
  Aklak Lower Zone 20 41 84
  Mid Ellice Zone 4 11 28

The mean(3) estimate of total Contingent Resources and total Prospective Resources is 164 Bcf and 61 Bcf, respectively.


Existing Chevron/BP Discoveries (50% owned by MGM Energy)


An evaluation of the potential resources for the existing discoveries on the Chevron/BP Farm-in lands has been completed internally by a qualified reserves evaluator or audited by a qualified reserves auditor as at December 31, 2007. The table below summarizes the estimated resources attributable to the existing discoveries net to MGM. Estimates are shown before the deduction of royalties. The estimates presented are in accordance with the definitions and guidelines in the COGE Handbook and NI 51-101.

Resource Estimate of Sales Gas Resources(3)
Chevron/BP Existing Discoveries Net to MGM Energy(Bcf)
  Low Best High
Contingent Resources(1) 118 142 173
Prospective Resources(2) 25 63 164


The mean(3) estimate of contingent resources and prospective resources is 144 Bcf and 85 Bcf, respectively.


Notes:
(1) Contingent resources are those quantities of gas and oil estimated to be potentially recoverable from known accumulations but are classified as a resource rather than a reserve due to, in the case of these resources: lack of pipeline infrastructure, making the project uneconomic on a stand alone basis; potential regulatory issues with respect to the construction of the Mackenzie Valley Pipeline and facility infrastructure; and lack of demonstrated capability to bring any the volumes that may be produced to market within a specific time frame. The estimate has not been adjusted for risk based on the chance of development.

(2) Prospective resources are those quantities of oil and gas estimated, as of a given date, to be potentially recoverable from undiscovered or untested accumulations by application of future development projects. The resource estimate has not been adjusted for risk based on the chance of discovery or the chance of development.

(3) A low estimate is a conservative estimate of the quantity of sales gas that will actually be recovered from the accumulation, which under probabilistic methodology reflects a P90 confidence level; a best estimate is the best estimate of the quantity that will actually be recovered from the accumulation, which under probabilistic methodology reflects a P50 confidence level; a high estimate is an optimistic estimate of the quantity that will actually be recovered from the accumulation, which under probabilistic methodology reflects a P10 confidence level, and; a mean estimate is the average volume of sales gas from the probabilistic assessment that will recovered from the accumulation. Marketable gas estimates exclude gas used for fuel.

There is no certainty that it will be commercially viable to produce any portion of the contingent resources. There is no certainty that any portion of the prospective resources will be discovered or, if discovered, it will be commercial viable to produce any portion of the resources. There is no certainty that a pipeline will be built to transport the hydrocarbons from these discoveries.

The accuracy of resource estimates is in part a function of the quality and quantity of available data and of engineering and geological interpretation and judgement. These resource volumes are classified as a resource rather than a reserve primarily due to a lack of marketing infrastructure. Other factors in the classification as a resource include a requirement for more delineation wells, detailed design estimates and near term development plans. The size of the resource estimate could be positively impacted, potentially in a material amount, if additional delineation wells determine that the aerial extent, reservoir quality and/or the thickness of the reservoir is larger than what is currently estimated based on the interpretation of seismic and well control. The size of the resource estimate could be negatively impacted, potentially in a material amount, if additional delineation wells determine that the aerial extent, reservoir quality and/or the thickness of the reservoir are less than what is currently estimated based on the interpretation of the seismic and well control. Refer to MGM Energy’s 2008 Annual Information Form for additional information regarding the resource estimates.