Questerre Energy Corporation

The Shale Gas Learning Curve

Association Pétrolière et Gazière du QuébecQuébec Oil & Gas Association Conference

October 19, 2009

Outline

• Introduction

• Shale is different

• New strategies are needed

• The learning curve is the solution

• Case study Liard shale

• What does it mean for Québec

Company overview

• Founded on the idea that biggas fields could be found inCanada

• Successful in Québec– Acquired large land position

early– Leveraged expertise to high

grade land– Brought in high quality

partners to contributeintellectual and financialcapital

• Utica validates business planand represents one of thelargest gas discoveries inNorth America

Questerre portfolio of assets in Canada

Welcome to the gas age

�• Natural gas is the solution tocurrent energy issues and willbridge us to alternativeenergy

�• Shale is a stable, long termsupply of clean energy�– New shale discoveries result

in gas resources amountingto more than a 100 yearsupply

�– Natural gas burns nearly50% cleaner than coal

�• New sources of demand beingconsidered– Natural gas produces 30%

lower emissions thangasoline

North American Natural Gas Production Source: EIA, NEB, EnCanaSource: EnCana Corp Aug 09 Corporate Presentation

America Honda Motor Company

How is shale different

• Gas is extracted from therock, not drained from it

• Shale gas molecules movefive meters in five years sothe rock must be shatteredunderground by hydraulicfracturing

• The objective is tomaximize recovery andminimize the cost per frac

How is shale different

• Developing shale gas is likeunderground mining withthe tailings left in place andminimal surface disruption

• Shale gas projects don�’thave the �‘eureka�’ momentof conventionalexploration, they have a�‘tipping point�’

• The challenge is how to doit

St. David #1 during and after completion operations

How to do it

• Every shale is unique andis its own analogue

• Success is required at 13orders of magnitude

• Each order of magnitudehas its own learningcurve

• Success meansunderstanding ofeverything from micropermeability to publicpolicy

Source: Southwestern Energy Feb 09 Presentation

Overall strategy Innovate

• Really easy to say, but reallyhard to do when wells costbetween $5 million $10million each

• Need completion engineerswith mindsets of explorationgeologists

• Challenge is to create acorporate culture thatencourages, respects andrewards innovation andavoid fear of failure withoutlosing financial control

Simultaneous fracs on three wells in Barnett, Texas

Images courtesy of BJ Services Company Canada Ltd

New strategies are needed

• Conventional business strategy of operatorship, high workinginterest and controlling destiny is secondary

• Co operation with partners, government and community is required foreconomies of scale

• Focus on economies of scale to amortize up front costs and createefficiencies

• Especially true for juniors but even EnCana and Apache applied this inthe Horn River basin

• Economics challenge the strategy– Early wells are unprofitable

• Drill enough wells for a statistical data set, not one for productionsuccess

– Securing capital to find and develop a shale play is difficultparticularly for junior companies

Capital investment strategy

• Geoscience spending issignificant for the initial wellsbut essential to the learningcurve– These are the dollars that can

be amortized over thedevelopment on success

• Drilling and completion costsare the largest component ofcapital to develop a shale play– Well developed local service

sector relationships arecritical

• Local services are important, ifnot more important than thecheapest services– Proactively source local

suppliers for local benefitsand long term support for theindustry

Colors represent different

frac treatments

Treatment Well

Monitor Well

Source GMX Resources Inc. May 2009 Presentation

Infrastructure strategy

• Control over ability todeliver gas to market isessential to:

– Project timing– Cost of delivery– Consumer pricing– At the margin wells– New play development– Overall economics

Existing pipeline distribution network in the Lowlands

Government relations strategy

• Successful development of ashale play requires governmentinvolvement and support onmultiple fronts– Much more important than

conventional plays due toeconomies of scale

– Lack of predictable regulatoryframework hindersdevelopment

• Shale development in NewYork

• Québec Oil & Gas Association– QOGA is participating in a joint

industry government task force toimplement framework essential forfull scale commercial development

Financial strategy

• Invest for a rate of return, not a quick return of capital

• Manage investor expectations– Most investors time horizons are significantly shorter than the timeline

for developing a shale play– Capitalize on market timing to adequately finance development

programs beyond the initial wells– Communication of realistic timelines, expectations and all material

results is key to maintaining interest and credibility in market

• Low natural gas prices are a consideration– Affects investor perception on profitability of play in near term– Drilling inventory measured in decades and long term physical sales

contracts mitigate these concerns with positive outlook for natural gasin future

Applying the learning curve is the answerBarnett Shale (Texas)

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

5/7/1990 1/31/1993 10/28/1995 7/24/1998 4/19/2001 1/14/2004 10/10/2006 7/6/2009

Firs

tYea

rAv

gGas

Rate

(MCF

PD)

Woodford Shale (Oklahoma)

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1000

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6000

7000

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9000

10000

5/7/1990 1/31/1993 10/28/1995 7/24/1998 4/19/2001 1/14/2004 10/10/2006 7/6/2009

Avg

Gas

Rat

e (M

CFP

D)

Fayetteville Shale (Arkansas)

0

500

1000

1500

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3000

3500

4000

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9/1/2002 1/14/2004 5/28/2005 10/10/2006 2/22/2008 7/6/2009

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earAv

gGas

Rate

(MCF

PD)

Production data courtesy of Tristone Capital/IHS

• �“Learning curve is fundamental tooperational innovation inunconventional gas plays�” �–Southwestern Energy

• Every shale play has its ownlearning curve and requiresunique, innovative solutions

• Acquire a statistically significantset of results and createrepeatability by testing onevariable at a time

• Persistence and technologyinevitably lead to improvedresults– Step by step approach with each

building on the strength of thelast

– No instant success

The learning curve

�• Maximizing the gas whileminimizing the cost per frac isthe purpose of the learningcurve

�• All orders of magnitude inshale gas development gothrough a series of learningcurves�– Drilling & completion�– Geology & geophysics�– Infrastructure�– Reservoir development

Source: Talisman May 09 Corporate Presentation

Variability

• Expect variability in well results– Shale plays are statistical in

nature and a single well resultdoes not make or break theplay

• High variability often leads tohigher risking of the play– Top half of wells pay for entire

play so the average well needsto be economic

• Learning curve approachfocuses on overall results andembraces poor individualresults as an opportunity toinnovate

Barnett Shale (Texas)

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

5/7/1990 1/31/1993 10/28/1995 7/24/1998 4/19/2001 1/14/2004 10/10/2006 7/6/2009

Firs

tYea

rAv

gG

asRa

te(M

CFPD

)

Production data courtesy of Tristone Capital/IHS

Benefits of the learning curve

• Continuous innovation leads to improved productivity, lower costsand reduced risks

• With large areal extent, benefits of the learning curve can beapplied to many wells to realize potential of significant gas resource

• Risk of time and capital invested in advancing the learning curve iswell worth the benefits when successful

Case Study Liard shale

Mississippian shale/siltstone sequence

Stimulation on A 7 and B 3 wells

• Land position of over 23,000acres with pipeline access– Large unconventional resource

identified with gas in place over1 Tcf per square mile

• Mistake was focus oncommercial production in shortterm– Varied results from 5 mmcf/d

to under 100 mcf/d with noproof of repeatability of results

• Even with a short termproduction success, the play isunproven and the methodicalnature of the learning curve isrequired

Quebec shale compared to Southwestern Fayetteville shale

0

0.5

1

1.5

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2.5

3

3.5

4

01-Jan

01-Jan

01-Jan

01-Jan

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01-Jan

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Dai

ly G

as R

ate

(mm

cf/d

)

The learning curve to date in Québec

Results are moving in to second year of learning curveFayetteville production data courtesy of Southwestern Energy corporate presentationQuebec results are estimated 30 day equivalent ratesSpecific wells and intervals are confidential

Quebec

Trend Line

Southwestern

Trend Line

Year 1 Year 2 Year 3 Year 4

What does this mean for the future in Québec

• Industry must use the learning curve to innovate for existingplays and new horizons– Prove commerciality of Utica– Leverage experience with Utica to develop the shallower Lorraine

• Services are key partners– Utilize local contractors and services wherever possible to maximize

local economic benefits and garner long term support– Create long term relationships with suppliers to minimize ultimate

development costs

• Infrastructure is key– Flexibility in choice of infrastructure to match pace of development

is paramount to economics

• Government has a vital role to play– Securing fiscal stability is the most meaningful– A predictable, effective regulatory framework based on �‘guichet

unique�’– Assuring safe, environmentally sound conservation of the resource

for the benefit of the citizens of Québec

1650 AMEC Place1650 AMEC Place801 Sixth Avenue SW801 Sixth Avenue SW

Calgary, Alberta T2P 3W2 CanadaCalgary, Alberta T2P 3W2 CanadaTel: (403) 777 1185Tel: (403) 777 1185Fax: (403) 777 1578Fax: (403) 777 1578www.questerre.comwww.questerre.cominfo@questerre.cominfo@questerre.com