Seven Generations Energy Ltd. began in May 2008. Funded by management and private investors, 7G acquired its first lands in three locations, the Kakwa region of northwest Alberta, North Dakota’s Bakken tight oil play and an emerging shale gas play at Horn River, in northeast British Columbia.
Focusing on Kakwa
The initial Kakwa holdings, located about 100 kilometres south of Grande Prairie, Alberta, were acquired through the acquisition of Samson Canada, the Canadian subsidiary of a U.S. independent petroleum producer. The acquisition included a small production operation including the first phases of the Lator natural gas liquids extraction plant and the Karr booster compressor station (now the Karr Super Pad and condensate plant). The acquired production was from various Cretaceous-era geological formations, mainly the Cadotte formation.
Exploring New Formations
In evaluating the land and project for acquisition, Seven Generations saw potential in several formations, known at that time to be so tight that if commercial development could be achieved it would require horizontal wells with multiple stages of hydraulic fractures. The co-existence of tighter conventional reservoirs that would assure a cash flow stream with a base reserve value coincident with a, potentially, huge upside value from unconventional, tight oil and natural gas plays made Samson’s offering extremely attractive to Seven Generations in its early days. Tight gas development pioneers such as ARC Resources and Encana had already established commercial production from the Montney formation approximately 160 kilometres (100 miles) to the northwest at fields called Dawson and Swan.
Exploring Beyond Conventional Geological Thinking
At the time there was considerable industry debate on the degree of porosity (the pore space in dense, tight rock where petroleum can reside) required to enable commercial rates of production. Based on the cursory examination of petrophysical well logs and records, the porosity in the Kakwa River region appeared too be low to harvest petroleum. The cause of the deceptive porosity readings was largely not the porosity itself. Rather it was the density of the dolomite rich Montney rock in the region.
Seven Generations believed that the ability of natural gas to flow in the Montney had more to do with the size of the pore throats than with the porosity. The company’s geologists and engineers pushed past the orthodox oil and gas evaluation practice of arbitrarily declaring a porosity cut off below which production was not deemed possible, they discounted conventional thinking based on the age of shale and tight unconventional reservoirs. Vertical test wells drilled in the winter of 2008-09 yielded encouraging production of liquids-rich natural gas from several zones, including the Montney.
Narrowing a Focus on Value Creation from Kakwa
During the period from 2008 to 2010, Seven Generations Energy Ltd. tested and delineated various tight, gas-bearing formations – Cadotte, Gething, Cadomin, Charlie Lake, Falher and Upper and Middle Montney, and quietly added to its Kakwa land holdings. Early drilling results suggested that the Upper and Middle Montney could support a large-scale, liquids-rich natural gas project, and that this formation potentially had high enough quality to enable wells that could compete in the over-supplied North American natural gas market.
When senior management viewed production results from the earliest test wells, there was a sense of disbelief. Geologists Glen Nevokshonoff and Steve Haysom thought the rig instruments were reading volumes of water, not condensate.
“I was almost numb; it was such a game changer. It was more than any of us could have imagined,” Glen recalls seeing condensate volume reports that were 200 times conventional expectations. “I remember thinking, wow, this changes everything.”
7G monitored offsetting activity in the regions surrounding its Horn River and North Dakota Bakken holdings, and shot a seismic program at Horn River to more closely define the shale deposit edge. By the summer of 2010 it was clear that Kakwa offered the best economics, as measured by the commodity price required to earn an internal rate of return that would be sufficient to attract financing for a commercial development. Potentially, they were among the best in North America. Seven Generations sold its Horn River lands in 2010 and North Dakota Bakken assets in 2011, redeploying the proceeds, including a significant gain on the initial investment, to buy more land and expand drilling of the Upper and Middle Montney formations. The Kakwa River Project was born.
An Attractive Investment, Accelerated Activity
With a large injection of capital from the Canada Pension Plan Investment Board and other financiers willing to invest during the private phase, Seven Generations crafted a large-scale, multi-year development plan and began ramping up land acquisitions and facilities construction in late 2012, then accelerated deep, long-reach horizontal development drilling in mid-2013.
In the first half of 2014, the founding investors determined that to fully develop Kakwa significant new capital was required, and Seven Generations completed a highly-successful initial public offering of common shares in early November, raising $931.5 million, selling 51.75 million shares at $18 each.
Rapid Production Growth, Expanded Pipeline Sales Capacity
With sufficient growth capital in hand, and an investment opportunity that the company believed would generate attractive returns – even in the depressed prices of the over-supplied natural gas market, Seven Generations moved forward in 2014 and 2015, increasing the pace of drilling and expanding its liquids-rich natural gas processing and transportation capacity to align with its large-scale, multi-year development strategy. Seven Generations reached agreements with Alliance Pipeline and Aux Sable, a processing company with natural gas liquids extraction and fractionation plant in Illinois, securing transportation arrangements to the U.S. Midwest, one of the largest energy markets in North America. Seven Generations’ bold move saw it increase pipeline capacity arrangements well in advance of having the production in place – for up to 500 million cubic feet per day of liquids-rich natural gas on Alliance, ramping up from 250 million cubic feet per day over a three-year period that started in late 2015. In mid-2015, 7G added about 100 million cubic feet per day of lean natural gas transportation capacity starting in 2018 on TransCanada’s NGTL system. 7G also contracted transportation for approximately 46,000 barrels of liquids per day on Pembina Pipeline’s Peace Pipeline to markets in Alberta starting in 2017. In late 2016, 7G added about 100 million cubic feet (MMcf) of pipeline capacity from Chicago to the Gulf of Mexico, and secured roughly 80 MMcf/d of additional pipeline capacity to Dawn, Ontario, commencing in November 2018, pending National Energy Board approval.
In the second quarter of 2017, 7G added natural gas pipeline transportation capacity to further diversify market access. The company contracted delivery capacity to the Pacific Northwest and northern California on TransCanada’s Foothills and Gas Transmission Northwest pipelines starting with modest volumes in November 2019, ramping up to almost 90 MMcf/d in 2020. This solidifies 7G’s market access to new customers in Washington, Oregon and California, adding to its established markets in the U.S. Midwest, Alberta, Eastern Canada and the U.S. Gulf Coast. In addition to this delivery commitment, 7G is adding TransCanada NGTL receipt capacity, taking contracted NGTL receipt capacity to about 680 MMcf/d. These market access arrangements phase in over a period of time and support 7G’s future production growth.
7G's diversified natural gas market access now totals more than 1 Bcf/d of firm service transportation capacity to Alberta (AECO), Eastern Canada (Dawn), the US Mid-West (Chicago Citygate), the Gulf Coast (Henry Hub), and US West (Malin).
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