Junex prepares to kick-start Quebec’s oil industry

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On the ridge of an unnamed peak in Quebec's Chic-Choc Mountains, Peter Dorrins is hoping to buck an industry downturn and make history.

Here, 10 minutes up a back road some 20 kilometres west of the town of Gaspé, the chief executive of Junex Inc. has struck oil – a decent pool, in fact, horizontally drilled and not fracture-stimulated, the kind of spine-tingling conventional oil discovery that makes the normally poker-faced geologist a bit giddy with anticipation.

While much of the oil sector retrenches to survive the worst decline in crude prices in six years, Junex is capitalized and expanding. If all goes well, the junior resource company's Galt project could be Quebec's first commercial oil play – at least in the modern era, with initial deliveries coming as soon as the fourth quarter of 2016. For a province still wrestling with its approach to oil and gas development, it's a potentially symbolic turning point that could open the door to more activity.

"The genie's out of the bottle," says Mr. Dorrins as he leads a visitor on a tour of the drill-pad facilities at the Galt No. 5 well. "We have oil. We have not fracture-stimulated it. We have a healthy result. The government's investing in it. They recognize the potential. So I think it's going to happen."

Exactly how new all of this is for Quebec is made obvious in the small details. Inside the so-called doghouse, the nickname for the steel shelter used by the driller and his crew, a wall chart outlining the procedures for an emergency well shut-in has been penned by the Alberta Energy Regulator. The rig itself is second-hand, purchased from Calgary-based Akita Drilling. Before Mr. Dorrins organized a site visit last month, some of Junex's board members had never seen a drilling operation.

The ambition to produce Quebec oil stretches back at least to the late 1800s, when British prospectors flocked to this picturesque seaside region and found oil seeping from the ground. But according to historical accounts, early drilling efforts by companies such as Petroleum Oil Trust Ltd. were largely done blindly and never at any significant depth; although some oil was produced, corporate bankruptcies were common. Later, successive provincial governments were more interested in promoting hydroelectricity, leaving Quebec to import oil by tanker to meet its needs.

"The view from people outside is: 'That's great what you've got. But it's Quebec. Are you going to be able to produce it?'" Mr. Dorrins says, referring to a common misperception that the province is against all hydrocarbon development. In fact, Junex has already produced oil, in small test quantities that it has sold to Quebec's two refineries. The Quebec government is a significant Junex investor, with an equity stake of about 24 per cent.

Based on preliminary best estimates by Texas-based consultancy Netherland, Sewell & Associates, the total oil initially in place at the Forillon and Indian Point formations on Junex's Galt property is 557 million barrels, of which some 10 per cent to 15 per cent is believed to be recoverable. The company's production testing on site has yielded 7,200 barrels of light, sweet crude at rates topping 300 barrels a day.

Judging by what's been observed so far, Galt compares favourably to conventional oil projects in Alberta, Mr. Dorrins says. Although it's too early to predict stabilized production rates, there's a potential for 6,000 barrels a day based on 30 wells pumping out 200 barrels each. Total production cost is about $25 a barrel, including trucking and royalties, the CEO says, which means the play will make money on an operating basis as long as the price of Western Texas intermediate stays above $25 ($19 U.S.).

"I think that if the project is started gradually, there will be ways of moving forward economically," says Eric Lemieux, an analyst with PearTree Securities in Toronto, adding that even Quebeckers who oppose oil from Western Canada might support a locally produced crude and pay a premium for it.

For the Gaspé Peninsula, a chronically depressed region with a 15-per-cent unemployment rate – more than double the national average – the Junex project and those of other companies in the region hold the promise of jobs, even if they are few in number.

It has taken Junex 17 years to crack the science of this formation. It'll take a few more months and drilling three more wells to prove it has a commercially viable operation. Juniors Pétrolia and privately held Mundiregina Resources Canada Inc. are also active in the area and pushing toward production.

"I'm of the view now that it really doesn't matter where [Quebec's oil and gas industry] starts," says Michael Binnion, head of the sector's trade group in the province. "You can start with something small like Galt or you can start with something big in the Utica or end up doing something on Anticosti Island. But just start somewhere doing something. One success will beget another success."