Canada: Oh Canada - Significant Developments In Canadian Energy, July 2012

Oil Sands News

1. According to the Alberta Energy Resources Conservation Board (ERCB), bitumen accounted for 78% of Alberta's total oil output in 2011. Production of light oil from tight rock is now up by 175,000 bpd relative to what would have been expected without the new completion technologies. Bitumen production in 2011 grew by 15% in the Athabasca region, 12% in the Cold Lake region and 2% in the Peace River region. The ERCB predicts bitumen output will more than double to reach 3.7 million bpd by 2021. The ERCB expects upgraded and non‐upgraded bitumen will make up about 90% of Alberta's total oil production by 2021.

1. Birchwood, a Calgary based private company founded in 2010, has filed a project summary with provincial regulators for a 5,000 bpd Steam Assisted Gravity Drainage (SAGD) oil sands project. If approved according to schedule, the project, located west of Cold Lake, will start up in the first quarter of 2015 at an estimated cost of $230 million. Simulations indicate that initial oil production rates will be around 400 or 500 bpd. The company intends to develop 12 hectares of land to drill for primarily heavy oil.

1. Nexen, a Calgary based oil and gas company, has agreed to be bought out by the state owned China National Offshore Oil Company (CNOOC), China's top offshore oil producer. The ambitious acquisition will cost $15.1 billion. The day after the deal was announced Nexen stock jumped 54% in value. The Nexen board has unanimously approved of the deal, however, the project must still undergo shareholder and regulatory approval. Nexen's second quarter production averaged 213,000 bpd of oil. If the takeover deal succeeds, CNOOC will base the headquarters for its North American and Caribbean operations in Calgary, Alberta.

1. PETRONAS, a Malaysian company, has agreed to buy all of Progress Energy's outstanding common shares at a cash price of $20.45 per share. Progress Energy is a Canadian exploration and production company focused on natural gas development in BC and Alberta. The transaction is valued at $5.5 billion, and received unanimous approval from the Progress' board of directors. The Canadian operations for the company will remain in Calgary and the company will have a commercial office in Vancouver for LNG development. The acquisition is part of PETRONAS' strategy to become a global leader in LNG. The development is expected to generate substantial economic benefits for the provinces and local communities due to the increased access to capital PETRONAS has.

1. Smart Sand, a leading supplier of industrial sand for the oil and gas industry, has partnered with Canadian Pacific Railway (CPR) to build a new frac sand transload facility to serve Bakken shale producers in the Williston Basin located in Southern Saskatchewan. The two companies will supply and ship precious frac sand to the unconventional oil and gas regions. CPR is the only North American railroad to serve the Bakken formation, the Alberta industrial heartland near Edmonton, and the Marcellus Shale located in the north‐eastern United States.

East Coast News

2. GRI Simulations, a Canadian company focused on providing simulation technology for offshore oil construction and production, has secured $250,000 funding from the Research and Development Corporation (RDC), a Newfoundland Crown Corporation, to develop a 3‐D software kit that will allow oil companies to simulate oil field design. The software provides numerous advantages to oil companies to improve efficiency in the design, fabrication and installation of fields and components in a variety of harsh environments. The provincial government allocated $19 million to RDC as part of the 2012 provincial budget.

West Coast News

3. The excellent results for the Liard Basin located in Northern British Columbia released last month by Apache will require development of export facilities. According to the Federal Energy Regulatory Commission, a key to developing LNG export facilities will be to send the gas to places where oil prices are higher, such as Korea and Japan. The resources in the Liard Basin will need to be harnessed properly to meet its tremendous productive potential. Edward Kallio, director and a gas consultant with Ziff Energy Group notes that "it's imperative that we continue to develop these LNG liquefaction proposals". To ensure that the Liard Basin comes onstream, Kallio believes export capacity will need to be applied for and built.

3. Spectra Energy has officially opened the Dawson processing plant in Bessborough, British Columbia. The 200 mmcfpd processing plant is being installed in two phases. Spectra is poised to invest an additional $4‐$6 billion in British Columbia beyond 2015. Accessing the natural gas in the Montney play enables critical processing and pipeline services to customers and sets the foundation for further investment in British Columbia.

Canadian Arctic News

4. MGM Energy, a Canadian oil and natural gas exploration company, has entered into a farmout agreement with Shell whereby Shell has agreed to fund the drilling and completion of two wells in the Northwest Territories. MGM's stock rose by 41% after the agreement was publically announced. The wells will be built in the Central Mackenzie Canol shale oil play. Shell will earn a 37.5 percent share in the licenses for the wells. The President of MGM Energy, Henry Sykes, stated "We are extremely excited about the Canol shale play, and this agreement provides us with the ability to assess its potential."

5. Kivalliq Energy, a uranium exploration and development company, is the first in Canada to sign an agreement with the Inuit to explore for uranium on their lands. The $20 million exploration program at the 252,830 acre Angilak Property in Nunavut. Three recently identified new zones include: the Western Extension Zone, which was extended to 365 vertical metres for radioactive intercept; the Southwest Zone, which was discovered at 300 metres and the Pulse zone intersected radioactivity; and the Pulse zone, which intersected radioactivity in 14 of 27 holes. Ongoing aggressive exploration will investigate multiple uranium targets discovered in 2010 and 2011 prospecting programs.

Alternative Energy

6. International Power Canada (IPC) has commenced construction on a $50 million project, called the Brockville Solar project. It is located in the Township of Elizabethtown‐Kitley, in Eastern Ontario. The project will have a capacity of 10 MW, sufficient to serve 1,700 Ontario homes annually. IPC and its affiliate companies operate 362 MW of wind farms in the Maritimes and Ontario, and have another 300 MW of wind farm projects under construction in Ontario and British Columbia. This is IPC's first solar powered project. The project is expected to begin operation early in 2013.

7. Northland Power, a green power generation company operating primarily in the provinces of Ontario, Quebec and Saskatchewan, has secured financing for the construction of six 10 MW projects in eastern and central Ontario. Each of the six projects will be built on 85 acres of land. Northland Power expects that the facilities will begin commercial operation in 2013. Northland also has seven additional projects, totalling 70 MW, currently in the permitting process. The facilities operated by Northland Power generate over 1000 MW of electricity.

7. NorthGrid Solar, an engineering, procurement and construction company based in Ontario, is nearing completion of the first phase of its 1.7MW rooftop solar agreement with The Valecon Group, a commercial property developer. The projects are located in Hamilton and Burlington, Ontario. The first phase to be completed in fall of 2012 consists of 564kW and the second phase to be completed in the spring of 2013 with 1.14 MW (DC). NorthGrid is a leading provider of turn‐key rooftop solar systems, with 60 years of photovoltaic experience in Ontario. The project uses a proprietary Elevated Truss System to address concerns with roof capacity, density, maintenance and thermal losses

On the Horizon

The President of Penn West Petroleum believes that industry can increase light oil recovery from the Cardium formation in central Alberta by between 1.1 and 2.6 bbbl. Alberta is developing a gas strategy focusing on expanded domestic uses for the fuel, including the potential use of natural gas vehicles. Sasol Limited has partnered with Talisman to research converting Western Canadian gases to fuels to enable more widespread use. It is expected that a 48,000 bpd gas‐to‐liquids plans would create 7,000 temporary construction jobs and nearly 500 permanent positions.

Laricina Energy has made progress in demonstrating that thermal extraction of bitumen from the Grosmont carbonate formation is commercially possible. The pilot has used SAGD well pairs with steam cycles in both the injector and producer wellbores. This pilot program is being closely watched because no one has managed commercial bitumen production from Alberta's carbonate formations, which are estimated to hold more oil that the oilsands. The results support that there could be a 10,700 bpd expansion with cyclic steam stimulation. Laricina is evaluating incorporating this into its regulatory application.

Operators of Cyclic Steam Stimulation (CSS) wells are required by ERCB to run periodic casing integrity tests. These tests costs about $50,000, mainly because the process requires that a day's production time be lost. Dale Kunz, an engineer, believes he has come up with a solution to the integrity test that eliminates the use of an inflatable packer used in the test for an annular eutectic salt plug. Once the test is done, nitrogen would be inserted dissolving the plug and allowing production to start back up again in 5‐6 hours. The installation of such a system would cost approximately $80,000; however, once the tests are complete, the cost is a low $4000, which over time can lead to significant savings as a result of the wells being brought back into production sooner.

Abbreviations

In this newsletter, all dollar amounts are Canadian dollars unless otherwise stated. We have also used the following abbreviations: bpd ‐ barrels per day; boepd ‐ barrels of oil equivalent per day; mmcfpd ‐ million cubic feet per day; bcfpd ‐ billion cubic feet per day; tcf ‐ trillion cubic feet; bbl ‐ barrel; mbbl ‐ thousand barrels; mmbbl ‐ million barrels; bbbl ‐ billion barrels; boe ‐ barrels of oil equivalent; MW ‐ megawatts; kV ‐ kilovolt; km ‐ kilometer; KW ‐ kilowatts; KWh ‐ kilowatt hours; cmpd ‐ cubic meters per day; GJ ‐ gigajoule.

About Fraser Milner Casgrain LLP (FMC)

FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit: www.fmc-law.com

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