2010-09-10 clarus bakken research

INVESTMENT RESEARCH A Border Comparison of the Bakken

Please refer to the final page(s) of this report for required disclosures.

September 10, 2010 Victor Rodberg, CFA (403) 767-0821 David Phung, P.Eng., Associate (403) 767-0824

John O’Keane, Associate (403) 767-0825

Differences Apparent, but Attractive Nonetheless Across the Williston Basin that spans the Canadian/US border, the geology of the Bakken varies, resulting in regional differences in economic metrics. While we find the economics attractive in most areas today, there are both sweet spots in the play along with new emerging areas that look prospective for the formation. We also find the formation directly below the Bakken, the Three Forks or Sanish, to be attracting increased industry attention in tandem with the Bakken.

The Bakken formation is deeper in North Dakota relative to Saskatchewan,

resulting in higher pressures and flow rates, but is somewhat offset by higher drilling costs;

Well economics in Saskatchewan generate lower individual well NPV values but have higher IRR and efficiency metrics, relative to North Dakota;

Development for the Bakken and Three Forks formation, also known as the Sanish, has pushed into the emerging areas of Tableland Saskatchewan, as well as the counties of Divide and Burke in North Dakota;

The Sanish sand layer lies directly below the Bakken and may contain Bakken oil, depending on the amount of communication between the two formations;

In any case, the quality of Sanish oil is similar to the Bakken and looks to have similar type curves for both IP and EUR;

Sanish plays may complement or substitute for the Bakken in certain development areas, but the productive sand layer may not be present everywhere;

In ideal cases, the Bakken and Sanish are complementary, potentially doubling the drilling locations per section along with expected recoverable oil;

Land sale prices have escalated both north and south of the border;

Midstream pipeline expansion plans provide an indication of increased drilling activity in the near future;

All sub-areas within the Williston Basin in Saskatchewan and North Dakota appear to be economic.

A Border Comparison of the Bakken

September 10, 2010 / p.2 Victor Rodberg, CFA (403) 767-0821 David Phung, P. Eng., Associate (403) 767-0824


Table of Contents

WILLISTON BASIN.................................................................................................................... 3

SUB-AREAS................................................................................................................................... 3 GEOLOGY ..................................................................................................................................... 7 SASKATCHEWAN VERSUS NORTH DAKOTA ................................................................................... 7 FLOW RATES AND RESERVES ....................................................................................................... 8 ECONOMICS................................................................................................................................ 10

Saskatchewan Type Curves ..................................................................................................... 9 North Dakota Type Curves ...................................................................................................... 9 Bakken Economics - Saskatchewan vs. North Dakota .......................................................... 10

LAND SALES ACTIVITY .............................................................................................................. 10 Saskatchewan and North Dakota Recent Land Sales............................................................ 11

SUMMARY ................................................................................................................................. 13

APPENDIX A: TYPE CURVE EXHIBITS ............................................................................. 14

TYPE CURVE ASSUMPTIONS...................................................................................................... 16


Victor Rodberg, CFA (403) 767-0821 September 10, 2010/ p.3 David Phung, P. Eng., Associate (403) 767-0824 John O’Keane, Associate (403) 767-0825

WILLISTON BASIN

The Williston Basin covers an extensive area that includes parts of North Dakota, South Dakota and Montana in the United States, as well as southern Saskatchewan and southwest Manitoba in Canada, as shown in Exhibit 1.

Exhibit 1. Williston Basin

Source: Canadian Plains Research Center

In the past decade, the basin has experienced increased industry interest with the exploitation of the Bakken formation for light oil. Although originally discovered in 1951, the Bakken formation did not achieve prominence until horizontal drilling and completions technology was developed to economically unlock the oil resource. The strength in oil prices during this past decade has also helped to accelerate development of this resource.

SUB-AREAS OF THE WILLISTON BASIN North of the border in Canada, the primary area of industry activity has been in the Viewfield area of southeast Saskatchewan where Crescent Point Energy (CPG, NR) and Petrobakken (PBN, NR) are the largest companies currently exploiting the Bakken. Activity for the Bakken in the United States has been centered on areas such as Billings Nose, Sanish Parshall, Bailey and the Nesson Anticline regions, amongst others. Outside of these established production fields, development has pushed into such emerging areas as Tableland and Taylorton in Saskatchewan




and into the North Dakota counties of Divide and Burke. Exhibit 2 shows both the developed and emerging Williston Basin sub-areas in North Dakota while Exhibit 3 shows the sub-areas in Saskatchewan.

While our discussion on sub-areas focuses on North Dakota, another prominent oil field within the Williston Basin is the Elm Coulee field in Montana, which is northwest of the Billings Nose sub-area. Development began at Elm Coulee in 2000 and is one of the largest oil field in the United States. Oil recovery estimates ranges from 270 million barrels to 500 million barrels at Elm Coulee.



Exhibit 2. Williston Basin Sub-Areas of Development in North Dakota

Source: GeoScout, Bloomberg

Divide (emerging)

Burke

(emerging)

Nesson Anticline

Stanley

Bailey

Billings Nose

Sanish Parshall

Mkt. CapUS Operators Ticker ($mm) Exxon Mobil XOM-N 309,600ConocoPhillips COP-N 83,300EOG EOG-N 22,900Marathon MRO-N 22,600Hess HES-N 17,800Continental CLR-N 7,500Whiting WLL-N 4,700Enerplus ERF.UN-T 4,300Baytex BTE.UN-T 3,700Brigham BEXP-Q 1,900Oasis OAS-N 1,600Northern NOG-N 780Kodiak KOG-N 390Arsenal Energy AEI-T 110Samson Resources Private N/A




Exhibit 3. Williston Basin Sub-Areas of Development in Saskatchewan

Source: GeoScout, Bloomberg

Taylorton (emerging)

Viewfield

Tableland (emerging)

Mkt. CapCDN Operators Ticker ($mm) Crescent Point CPG-T 8,400Enerplus ERF.UN-T 4,300PetroBakken PBN-T 3,800NAL NAE.UN-T 1,600Legacy LEG-T 1,400Painted Pony PPY.A-V 340Renegade RPL-V 130NuLoch Resources NLR-V 120Tundra Private N/A



GEOLOGY- BAKKEN AND THREE FORKS While the Bakken play has received much of the attention recently, the Williston Basin has also had operators drilling for oil in the Sanish, also more commonly called the Three Forks formation in the United States. The Three Forks or Sanish lies directly below the Bakken formation, as displayed in Exhibit 4.

Exhibit 4. Stratigraphic Chart of Bakken and Three Forks (Sanish)

Source: Saskatchewan Government

The Bakken is classified into Upper, Middle and Lower Members where the Middle Member is typically the most prospective layer due to its higher mobility of oil relative to the upper and lower layers. This relative mobility is a result of a difference in reservoir properties as the Middle Bakken is closer to a silt (higher permeability/oil mobility) while the upper and lower layers are closer to a shale (lower permeability/oil mobility).

The Three Forks (Sanish) consists of dolomite and shale with an upper layer of sand. This sand layer may not be present everywhere but where it is present, it may contain economical amounts of Bakken oil that has migrated there over time. In these cases, the Sanish may be a substitute or a complement to the Bakken in an exploitation area, depending on the degree of communication with the Middle Bakken. The degree of communication is a function of the thickness of the Lower Bakken and the amount of fractures connecting the Middle Bakken with the Three Forks (Sanish). Areas where the Lower Bakken is greater than 25 feet thick with little vertical fracture communication, the probability of two separate reservoirs may be higher. An area having two separate independent reservoirs should reduce the exploration risk and enhance the magnitude of economic returns by potentially doubling the oil that is originally in place. Over time, operators can confirm or refute the presence of separate reservoirs by observing pressure differentials and correlations between wells drilled into each reservoir.

SASKATCHEWAN VERSUS NORTH DAKOTA A cross sectional view of the geology from Viewfield in the north to Billings Nose in the south shows a down-dip trend where the Bakken and Sanish are deeper in the United States, as shown in Exhibit 5. The approximate depths of the Bakken in southeast Saskatchewan and North Dakota are 1,600 meters and 3,000 meters, respectively. As a result of greater depth, wells drilled further south will typically exhibit greater pressures and contribute to higher flow rates. However, this advantage is somewhat offset by higher drilling and completion costs.

Sanish

Bakken




Exhibit 5. Bakken and Sanish Depth Trend

Source: Clarus Securities, NuLoch Resources Inc. corporate presentation (June 29, 2010)

FLOW RATES AND RESERVES Exhibits 6 and 7 display the rate versus cumulative production graphs for the different areas, based on an average type curve. It should be noted that we have only taken the oil production for comparison purposes. Natural gas and natural gas liquids production would provide additional upside if gas conservation is available. To reflect the most recent technological developments and well results, each type curve was generated based on a sample of wells from the beginning of 2009 onward. Some areas had a larger sample, such Viewfield with 474 wells, while other areas, such as Tableland, had limited information and we have had to make educated assumptions. Comparing Exhibits 6 and 7, we see higher IP rates and higher EUR values in North Dakota, as expected, because of greater depth and pressures. To note, because of a lack of sufficient data points, the Tableland, Burke and Divide type curves were generated using assumptions and recent industry announcements on well results. For Tableland, one industry player has recently achieved a 30-day IP rate of 142 bbl/d across five Sanish wells and it was assumed that a similar rate of 140 bbl/d may be reasonable moving forward. The decline profile was assumed to be similar to wells in Viewfield with an initial hyperbolic decline in the first year followed by a low-decline harmonic profile thereafter. For Burke, because the Bakken begins to pinch out when approaching this region, we have assumed a lower IP rate when compared to both the neighboring Nesson Anticline and Stanley. For the Divide type curve, the IP rate was assumed to be slightly lower than Burke since it is further north and may have shallower depths with lower reservoir pressure. However, without a large number of data points, the decline rates assumed may be aggressive, leading to a lower and more conservative EUR value. Appendix A summarizes type curve assumptions and also compares the type curves to the available data for sub-areas where it was available.

Viewfield, Saskatchewan North Dakota

US

CA

N

Upper Bakken

Middle Bakken

Lower Bakken

Sanish



Exhibit 6. Saskatchewan Sub-Area Type Curves

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0 20 40 60 80 100 120

EUR (mbbls)

Prod

uctio

n (b

bls/d

)

Viewfield - 474 Wells

Tableland - Limited Data

Taylorton - 17 Wells

Source: Company reports, GeoScout, Clarus Securities

Exhibit 7. North Dakota Sub-Area Type Curves

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0 100 200 300 400 500 600 700

EUR (mbbls)

Prod

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Sanish Parshall - 126 WellsNesson Anticline - 112 WellsStanley - 70 WellsBurke - Limited DataDivide - Limited DataBailey - 62 Wells


(organized by IP rate)

(organized by IP rate)




A LOOK AT ECONOMICS Using the area type curves generated in Exhibits 6 and 7, economics were estimated using a 30-year productive life and a flat $75/bbl oil price. The economics have been summarized in Exhibit 8 for comparison. Different sub-areas within Saskatchewan and North Dakota generate a range of different economics, primarily dependent upon geology and drilling and completions techniques. For example, when comparing Viewfield to Taylorton and Tableland, Viewfield economics have benefited from cost efficiencies with higher drilling density and intensity of development, as well as refined drilling and completions techniques developed in the past few years, which all culminates in a lower capital cost per well and more attractive economics. For emerging areas such as Tableland, Divide and Burke, if history repeats itself with companies moving up the learning curve, we may see the economics improving in the future.

In general, Saskatchewan wells may generate lower NPV values but higher IRR and capital efficiency metrics, relative to North Dakota. Royalties in Saskatchewan are generally lower on crown lands, as operators benefit from a royalty holiday of 2.5% up to the first 100,640 mbbl, depending on well depth (in North Dakota the average freehold royalty rate is 18.5% with an additional state severance tax of 11.5%). Despite differences, the economics remain attractive across the basin, both north and south of the border.

Exhibit 8. Comparison of Bakken Economics in Saskatchewan and North Dakota 30-Day IP EUR Capex NPV10 BT IRR

Area (bbls/d) (mbbls) ($mm) ($mm) (%)Saskatchewan

Tableland 140 110 3.2 1.3 29%Taylorton 150 110 2.2 2.3 77%Viewfield 170 120 1.6 3.3 180%

North DakotaDivide 240 190 4.5 2.6 36%Burke 300 240 4.5 4.4 59%Nesson Anticline 360 330 4.5 4.8 54%Stanley 350 290 4.5 6.1 87%Sanish Parshall 630 580 5.5 15.2 156%Bailey 220 230 4.0 3.8 47%


LAND SALES ACTIVITY Recent land sales pricing information for southern Saskatchewan and North Dakota within the Williston Basin is presented in Exhibit 9. Prices have been escalating both north and south of the border as exploration and development has pushed into the emerging areas of Tableland, Taylorton, Divide and Burke. As additional wells are drilled and adjacent lands are de-risked, prices will likely escalate even further in these emerging areas. However, the top tier land prices



Exhibit 9. Southern Saskatchewan and North Dakota 2010 Land Sales

Williams $3,400/acre

Divide $1,300 /acre

McLean $100/acre

McKenzie $3,100/acre

Billings $850/acre

Burke $670/acre

Dunn $5,500/acre

Mountrail $5,300/acre Ward

$200/acre

Renville $170/acre

Slope $100/acre

Stark $1,289/acre

Hettinger $70/acre

Regional Permeability Barrier

Source: North Dakota Department of Mineral Resources, August 30, 2010, US$

Southern Saskatchewan

North Dakota Source: Geoscout Source: GeoScout

Source: North Dakota Department of Mineral Resources, August 30, 2010, US$




are found currently in the more established areas of Viewfield, Sanish Parshall (Mountrail County) and the Nesson Anticline (Mountrail, Williams, McKenzie and Dunn Counties). Price inflation reflects the economic attractiveness of the areas as well as the relative scarcity of remaining land. Some of the lower land prices paid have been to the east of the regional permeability barrier where the prospectively for oil is lower, as the Bakken formation thins and pinches out at this line.

ENBRIDGE BAKKEN EGRESS EXPANSION Having sufficient egress capacity is essential to getting production to market and ensuring cash flow. In the past, especially during the last run-up in oil prices this past decade, operators in the Bakken plays were faced with limited oil egress options as pipelines were running at or near full capacity.

After a pipeline expansion of 51,000 bbls/d in January, 2010, Enbridge’s current pipeline capacity in Southern Saskatchewan and North Dakota is 161,500 bbls/d. This previous capacity expansion was immediately utilized and a further expansion was recently announced. This new expansion is depicted in Exhibit 10 and is planned for a commissioning timeframe of Q1/13. The egress expansion is a result of an expected increase in Bakken and Sanish oil production in southern Saskatchewan and North Dakota. Take away capacity in the region will increase by 145,000 bbls/d and can be further expanded by 325,000 bbls/d with relatively low incremental cost. Enbridge has also incorporated further increases in area production into their construction plans. The plans call for an expansion originating at Beaver Lodge Station at Tioga, North Dakota and will terminate at Cromer, Manitoba. In addition, a separate pipeline connection will be made to the Beaver Lodge Station that will connect the Bakken pipeline system to pipelines south of the Missouri River. This would effectively open additional markets for the area.

Typically, midstream companies work closely with E&P operators to produce realistic production forecasts and egress capacity needs. In fact, Enbridge announced that there was sufficient long term shipping commitments from a number of large operators to enable this expansion to proceed. The expectation of an acceleration of drilling activity is clear.

Exhibit 10. Enbridge Bakken Pipeline Expansion

Source: Enbridge Inc.



SUMMARY Differences across the border include a deeper formation in North Dakota relative to Saskatchewan, resulting in higher pressures and flow rates. These geological and reservoir differences drive the play economics. Although North Dakota Bakken and Three Forks (Sanish) wells have higher pressures and production rates, the economics are somewhat offset by higher capital costs. In general, wells in Saskatchewan generate lower NPV values but higher IRR and efficiency metrics. Larger operators, with more cash flow and access to capital, that desire greater magnitudes of growth may prefer development in North Dakota while smaller operators might view higher efficiency metrics in Saskatchewan to be more attractive. Recently, both small and large operators have pushed development of the Bakken and Sanish into the emerging areas of Tableland, Divide County and Burke County. Development of these areas has pushed land sale prices upwards accordingly.

The Sanish lies immediately beneath the Bakken, but not all areas have the productive Sanish sand layer. Where the productive Sanish sand layer exists, it may contain Bakken oil that has migrated there over time. The quality of Bakken and Sanish oil are effectively identical, with Bakken and Sanish wells also appearing to have similar IP rates and EUR values. As such, the Sanish can be a substitute or a complement to the Bakken in certain areas. However, should there be a significant degree of communication between the Bakken and Sanish via vertical fractures, the complement scenario may not be proven to be true over time and can be observed or inferred from reservoir pressure measurements. With similarly attractive economics, there has been an increase in industry focus on exploiting the Sanish in addition to the Bakken.

As a clear signal that industry expects an increased level of drilling activity in the southern Saskatchewan and North Dakota area targeting the Bakken and Sanish, midstream egress pipelines look to be expanded in the near future to accommodate additional volumes. The capacity associated with the last pipeline expansion in January, 2010, was utilized immediately.

The large oil resource in place in the Williston Basin has effectively been unlocked by the development of horizontal drilling and completions technology. The ascension of higher oil prices this past decade helped to further increase the Bakken’s spotlight. After a period of uncertainty associated with the recent recession, commodity prices appears to have stabilized, lending confidence to operators to once again push forward their development plans for the Bakken and Sanish. Today’s commodity price environment results in attractive economic returns from all of these plays.




APPENDIX A: TYPE CURVE EXHIBITS

Taylorton, 2009/10 - 17 wells

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Viewfield, Yr. 2009/10 - 145 wells

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Nesson Anticline, 2009/10 - 112 wells

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Source: GeoScout, Clarus Securities



Stanley, 2009/10 - 70 wells

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Sanish Parshall , 2009/10 - 126 wells

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Bailey, 2009/10 - 62 wells

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Source: GeoScout, Clarus Securities




TABLELAND, BURKE AND DIVIDE TYPE CURVE ASSUMPTIONS

IP LifeArea (bbls/d) Exponent Di Exponent Di (Yrs)Tableland 150 0.75 18% 1.0 5% 30Burke 320 0.75 17% 1.0 5% 30Divide 260 0.75 17% 1.0 5% 30

First Year Decline Parameters After Year 1

Source: Clarus Securities


Victor Rodberg, CFA (403) 767-0821 September 10, 2010 / p.17 David Phung, P. Eng., Associate (403) 767-0824 John O’Keane, Associate (403) 767-0825

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Victor Rodberg, CFA (403) 767-0821 September 10, 2010 / p.19 David Phung, P. Eng., Associate (403) 767-0824 John O’Keane, Associate (403) 767-0825


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2010-09-10 clarus bakken research

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