Calima Energy in the right place at the right time as Canada’s Montney Formation generates excitement

Calima Energy Ltd (ASX:CE1) is confident its several core assets in the Montney Formation in western Canada will set it up long into the future, as demand for Montney gas increases. The Montney Formation covers about 130,000 square kilometres in the Canadian provinces of British Columbia and Alberta and is a major source of shale gas and tight oil. Calima, which completed a transformational merger with Canadian conventional oil-weighted energy producer Blackspur Oil in February, holds a 10-year lease over 49 sections (33,643 acres) of land in the Montney Formation. And in the second of a series of letters to investors outlining the potential of its assets at Montney, Calima reveals how its assets are looking formidable amid strong market fundamentals. Montney’s role in the green transition As covered by Proactive, Calima’s previous investor letter outlined the potential of the Montney Formation as a major source of natural gas and oil, thanks to its astonishing marketable gas reserves of 567 trillion cubic feet (TcF). That’s a huge amount, particularly when you consider that it makes up almost half of Canada’s annual gas production - and Canada is the world’s fourth-largest gas producer. It gives Montney - and by extension Calima - a crucial role in the global transition towards greener and cleaner energy. Canada is the world leader in environmental, social and governance (ESG) rankings when it comes to oil and gas exporters. “Canada doesn’t look like losing their number one spot anytime soon as 90% of their heavy oil producers have committed to reach net-zero emissions by 2050,” Calima says. “The new LNG plants being built and planned for the west coast are making the most of hydropower to deliver the world's lowest emission liquefaction facilities and both of these facts are relevant to our exploration of the mighty Montney. Not just gas, but oil too Oil will play a significant role in the green transition too, and beneath the Montney soil is not just reserves of gas, but oil. “If you hit the sweet spots, it also delivers light oil or condensate in association with the gas,” Calima says. “This is the stuff that the heavy oil producers can’t get enough of because they mix it with their heavy crude to enable transportation and to meet product specifications. “This ensures premium pricing for Montney condensate, and it means that in addition to playing a pivotal role in the world’s lowest emission LNG the Montney is also behind the growth of oil production committed to reach net-zero by 2050.” The Montney therefore could hardly be better placed to play a significant role in delivering the global transition towards low emissions energy. And though it is regarded as a shale play it is more typically a siltstone, which means it has its own porosity. It is also relatively thick with most producers being able to drill multiple stacked horizontal wells at one location. “Best economics in North America” Earlier this year, Raymond James (NYSE:RJF) analyst Jeremey McCrea said the Montney’s upside was among the very best on the entire continent. “The Montney, you could argue, has some of the best economics in the whole of North America,” he said. “In terms of remaining resources, it ranks only behind the Permian and Marcellus in the United States.” In the past, however, Montney has been a “victim of its own success”, argues Calima. “Wells in the Montney are so prolific that growth in production outpaced growth in pipeline capacity which is a common problem in the big resource plays,” it says. “Producers who wanted to supply high-value condensate to the oil sands producers had to find space on crowded pipeline networks, which created a differential between the price of gas in the US and the price of gas in Western Canada. “Good for the owners of the pipelines but bad for the producers or in our case prospective producers.  “This meant that in a North American market already oversupplied with gas, Canadian producers had to take a discount against prices in the US and this was the situation we faced when we drilled our play opening wells in the Montney in early 2019.  “Perhaps we missed the exuberance of the first wave of the Montney revolution, but we are now well placed for the second, which is better grounded in fundamentals.” Looking ahead Increased transportation capacity through new pipelines and upgrades to existing facilities has meant better market access for Montney gas and the price discount against the US has disappeared.  The increasing use of gas over coal, combined with domestic demand growth and access to international markets, gas prices, in general, have firmed up and gas futures are now looking encouraging. Condensate prices have also recovered strongly from lows in early 2020 “And all of this is happening before LNG on the west coast opens up Montney gas to world markets,” Calima says. The outlook for Canadian gas and condensate pricing is positive with gas prices on a sustained upward trend. The positivity and momentum are also reflected in an upsurge in M&A activity across the Montney. “In the middle of 2020 Conoco got the ball rolling with the purchase of a large portion of Kelt’s Montney holdings for C$550 million and CNRL followed close on their heels with the acquisition of Painted Pony for C$469 million,” Calima says.    “Then along came Tourmaline buying Polar Star, Chinook and some of Painted Pony’s acreage in a mini-shopping spree that set them back C$85 million.  “This was starting to get awfully close to us and they did not stop there because in April 2021 they paid C$205 million for half of our next-door neighbour Saguaro and then bought our other next-door neighbour Black Swan for C$1.1 billion.” Calima says it was frustrated to miss out on earlier momentum in the Montney, pointing to sustained record low gas prices, but now believes it is in the right place at the right time as the market recovers. “We are now in the fortunate position of being able to pick our moment to transact,” it says. “The recent merger with Blackspur gives Calima highly profitable production that is growing ahead of expectations so there is no pressure to take the first deal that comes along.” - Daniel Paproth