Duvernay Shale Oil/Gas Development

Trilogy has been active in the Duvernay shale play for approximately five years. Since its initial involvement in the play, Trilogy has participated in the drilling of approximately 60 Duvernay wells in the Kaybob area. The Company spent approximately $353 million net to evaluate these wells during this period while receiving $108 million in operating income. 

In 2015, Trilogy allocated $45 million towards non-operated Duvernay projects, with approximately $25 million being spent in the first half of the year, $15 million in the third quarter and the balance allocated to fourth quarter operations.

In the first and second quarters of 2015, Trilogy participated in the drilling of 3 (1.0 net) horizontal Duvernay wells and the completion of 1 (0.5 net) horizontal Duvernay well that was drilled in the fourth quarter of 2014.  These wells were completed through the second and third quarters and brought on production in the third and fourth quarters of 2015.  Initial production and flow test results from these four wells are encouraging and will support continued development in the future.  During the third quarter, Trilogy participated for its 33 percent working interest in a non-operated well, drilled to a bottom hole location at 16-12-061-20W5M, in the gas condensate area of the Duvernay play.  The well was completed in November and is expected to be on production in the first quarter of 2016.

The following table summarizes production information from these wells to December 31, 215.

Trilogy participated for its 30 percent working interest in the first 5 wells of an 18 well program (3 six well pads) that were rig released during the third quarter.  On November 19, 2015, Trilogy announced that it had entered into a definitive agreement to sell 11 net sections of its Duvernay mineral rights in the volatile oil window for net proceeds of approximately $112 million.  In connection with the sale, and in an effort to consolidate Trilogy’s Duvernay land position, Trilogy also swapped 5.25 net sections of its Duvernay undeveloped lands for an equivalent number of sections of Duvernay rights for no additional consideration.

The assets were predominantly non-operated Duvernay assets with average production (net to Trilogy) of approximately 730 Boe/d (1.8 MMcf/d of natural gas and 440 Bbl/d of natural gas liquids) for the first eleven months of 2015.  The transaction included Trilogy’s net proved plus probable reserves attributable to the assets of approximately 2.9 MMBoe as of the October 1, 2015 effective date based on Trilogy’s internal adjustment to the December 31, 2014 year end reserves estimate completed by its independent reserves evaluator to take into account production from January 1, 2015 to September 30, 2015 and no other factors.  Trilogy estimates that net of current reserves value and the developed acreage being disposed, it sold the equivalent acreage of approximately 9 undeveloped net sections for approximately $14,000/acre ($35,000/ha).

As a result of the sale, Trilogy’s capital expenditure commitments for these lands were reduced by approximately $15 million for the fourth quarter of 2015 and up to $75 million for 2016.  Trilogy continues to hold a substantial land position in the Kaybob area Duvernay play with approximately 190 sections of land (121,600 acres) in areas that the Company believes to be highly prospective for Duvernay shale development.

Trilogy continues to be encouraged with the progress that has been made by industry in the past five years with respect to the understanding and development of the Duvernay play. The continued evolution of drilling, completion and production techniques led to some very impressive results in 2015. Continued advancements in Duvernay shale completion techniques over this period provided for improved initial production rates and what is expected to be greater ultimate recoverable reserves. Trilogy believes that the Duvernay is proving to be a high quality shale play with attractive economics, as ultimate recoverable reserves increase through the evolving completion techniques and reduced well costs.  Over the past year, drilling and completion costs on multi-well pads have come down significantly, from what was originally thought to be $10-12 million per well to expected costs in the $8-10 million per well range.  Additional production information over the past year has provided Trilogy the opportunity to generate improved Duvernay type curves for its land position to better value the land base and thereby allocate development funds into what it believes to be the highest rate of return projects when commodity prices improve. Trilogy plans to continue to advance its Duvernay land base towards full scale commercial development and will be considering all options to accelerate the development of the play.