Primary Petroleum

For small companies, a big play is all they need. “I can tell you this project is large enough,” Primary Petroleum President, CEO and found­er Mike Marrandino declares. “It’s going to garner all our attention for the foreseeable future because of the size of our company. It’s a very big project. We’re fully focused on the U.S. side.

“Back in May 2005, we came across the profound fact that if you’re a junior oil and gas company looking to acquire acreage on the Alberta side, you would pay $200 acre,” Marrandino recalls. “To lease on the Montana side, you pay $1.50 an acre.” That difference enabled Primary Petroleum to purchase a sizable position in the southern Alberta basin. “So we went forward in 2007 and we acquired a large land position, about 120,000 acres,” Marrandino remembers.

In only about 18 months, the Southern Alberta Bakken Basin source channel or fairway has been identified as approximately 175 miles long from the northwest to southeast and 40 miles in width, Marrandino says. “There’s probably been close to 100 wells drilled in the last 1-1/2 years, and that has provided confidence geologically, in the presence of the resource,” he emphasizes.

A rock formation approximately 200 feet thick acts as a bottom seal on the gas-charged oil deposit that is located about 7,500 feet deep on its western flank and 4,500 feet on the eastern flank, Marrandino estimates. Through horizontal drilling and hydraulic fracturing, the potential for multiple billions of barrels of oil can be obtained from the shale, he references from several research studies completed in the area.

Bakken sourced oil has been successfully drilled and exploited from the Williston Basin in eastern Montana. “The biggest difference between the Williston basin and the southern Alberta basin is the southern Alberta basin is a baby brother to the Williston basin,” Marrandino maintains. “The southern Alberta basin is more complex from a geological perspective, not as deep and not as overpressurized, so you will not get the initial production rates as high as the Williston Basin. You will not get the estimated ultimate recovery of oil from the wells in the southern Alberta oil basin – you’re going to get about half because of these differences. But also, your cost to exploit it are less than half because you don’t need the big rigs, and you don’t need to drill as deep and your horizontal lengths are less. Your return on capital are expected to be better because your costs are less.”

Joint-venture Partner
With the metrics that Primary Petroleum is obtaining on its acreage, along with the shear magnitude of its acreage position in this new potential Bakken resource play, it has decided to seek out a joint venture partner that can provide the technical and financial resources to assist in the oil exploitation on its leases.

“So as we went forward here, we grew our land position,” Marrandino says. “We were able to complete a sizeable equity offering which placed the company in a strong negotiating position with potential joint-venture partners. Our goal was to find a major oil and gas company to help us exploit and develop close to 500 sections. We needed a partner with the financial strength and technical expertise, if this play developed to those types of metrics. Primary decided to go forward on parallel paths to commence the exploitation of oil on its leases and at the same time seek out a major as a joint venture partner, all the while keeping track of what all the other industry players were doing.

“In the early summer of 2011, JP Morgan contacted Primary Petroleum to inform us that they introduced our company to one of their clients, who expressed an interest in meeting with us to discuss a joint venture possibility,” Marrandino recalls. “We were already pretty far along with several other companies, as we were evaluating the commercial terms they presented. But when you get a company that is a brand name in the industry and is a major, and is interested in your play, we were going to take the time to evaluate it, as they are a company that checked all the boxes for us – they are financially strong, with technical expertise in shale oil plays and have a presence in the Williston basin, and they could command services.”

In October 2011, Primary Petroleum completed the joint venture with the U.S.-based major that enabled Primary to receive $48.5 million for a 32.5 percent working interest in all of its leases in this play. Of the $48.5 million, $7.5 million was a cash payment to Primary, and $41 million was placed in trust to be spent on 3-D seismic vertical and horizontal wells to rerisk the play in 2012. It is expected that the end of 2012 will complete the $41 million phase 1.

60-day option
After the completion of the phase 1 program, the joint venture partner has a 60-day option that if exercised must provide Primary with an additional $41 million to be spent on a 3-D seismic, vertical and horizontal drilling commitments and in turn receive a further 17.5 percent working interest. This secondary program is to be completed by the end of 2013. After the end of the phase 2 program, Primary and the joint venture partner will become 50-50 partners in the southern Alberta basin prospect.

“If they exercise their option, Primary is carried for 100 percent of the costs until the end of 2013,” Marrandino points out. “Our whole goal and mandate as a small junior oil and gas company is to put together these types of plays to the point where we can attract the majors with their financial strength and technical expertise to exploit them into successful and commercially viable projects. We couldn’t develop it ourselves, because of both the financial and technical commitment that’s required. We needed a strong joint venture partner so the project would get developed in a more timely manner with the financial and technical resources of our partner.

“Our ultimate goal would be to be bought out by our joint-venture partner, or a company like them,” he concludes. “If this play becomes successful, it’s hard to believe that a large company would want us as a 50-percent partner. It would be more financially advantageous for them to just buy the company and keep the entire play to themselves. So in this area, in the southern Alberta basin, we are the smallest company with the largest land position. We’re in a very fortunate and unique situation to be in a position, upon success, to be able to increase and capitalize shareholder value for each and every one of them as this play gets further exploited and developed. So that’s Primary.” EMI