Stikine Energy (TSXV:SKY): Proximity proppants for Northeast British Columbia

Apache rig on Patry Road.
Apache rig on Patry Road.

Unconventional drilling and fracturing has unlocked large-scale shale basins all over North America, with some of the best targets in Northeast British Columbia. Development of these basins requires vast quantities of proppants (man-made or natural frac sand). B.C.’s shale basins have no local proppant supply and the material is transported over great distances at high cost.

Stikine saw an opportunity in 2009 to identify, acquire, and develop new proppant supply near the province’s rapidly developing shale basins. Having focused on identifying raw material types, locations, and processes to generate frac sand, the company is now in a position to develop and dominate supply in the Montney basin, Horn River, and the Liard basins. Stikine’s lead projects are the Angus Project and the Nonda Project, with a combined NPV(8 per cent) of $2 billion and robust cash flow. The projects are commencing permitting in 2012 with target production in 2015.

High-pressure fluids are used in the shale basins to create a fracture network. That network is filled with a permeable proppant to allow oil, liquids, and gas to flow. Frac sand is a preferred natural proppant and different shale basins require different size sand grains and specifications depending on their characteristics.

Pilot plant.

Pilot plant.

B.C.’s Montney, Horn River, and Liard basins are world-class size, rapidly expanding resources that are being coupled to numerous LNG terminal proposals on the west coast of the province. Currently the liquids-rich Montney is driving development, but B.C.’s location and potential to sell LNG to Asia is a compelling driver. The bottom line for Stikine is that there is no local proppant supply and the transportation over large distances makes competitor’s prices very high.

The old perception that B.C.’s shale basins were located at the wrong end of the North American pipeline network, that completion costs were too high, and that Henry Hub gas prices don’t support current development costs are exacerbated by the many new shale basin discoveries suggesting a long-term gas glut in the U.S. and Canada. The reality is far from that perception; the gas in the Montney and Horn River Basins are world-class in size and the Liard basin may outshine them all. This alone is attracting Asian buyers, but it’s the geography and proximity to high-priced markets in Japan, Korea, and China that are making it interesting. There is the permitted Pacific Trail Pipeline and plans for multiple LNG terminals to connect B.C. shale gas to tide-water by 2015.

Low Henry Hub prices and a global LNG shortage by 2015 as Asian demand continues to rise are bringing the world’s largest industry participants: PetroChina > Shell ($1b), Mitsubishi > Encana ($2.9b), Petronas > Progress ($1b), SASOL > Talisman ($1b), Exxon Mobile, Royal Dutch Shell, Itochu, and British Gas.

truck

Angus and Nonda are conventional open pit mining projects and permitting will commence in early 2012. Proximity to the Montney Basin, Horn River Basin (HRB), and Liard Basin delivers strong cost advantage over competitors. Low cost structure ($70 per tonne) delivered for both projects at one million tons per year base case. Very large resources could supply an entire life cycle of all B.C. basins, expand to meet demand, and possibly supply other basins. Both projects have robust economics using approximately 50 per cent of current delivered frac sand prices.

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