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MONTNEY LIGHT OIL PORTFOLIO

The light oil window of the Triassic Middle Montney is a large scale resource in the Western Canadian Sedimentary Basin and a major contributor to liquids and oil production growth over the past three years.

Recognizing the potential for the recovery of black oil in a normally pressured, higher permeability reservoir with mobile water, Velvet began amassing acreage in the oil window of the Montney that spans from Karr / Gold Creek to Pouce and Flatrock, in northeast British Columbia. Beginning in 2013, through Crown land sales and several asset acquisitions, Velvet has amassed a large oil-prone Montney acreage position totalling 350,000 net acres, with an estimated 1,600 horizontal Montney drilling locations.

Velvet’s most advanced Montney project is at Gold Creek where its core Montney position of 293 net sections is scalable and repeatable within interbedded dolomitic siltstones and shales. This oil charged reservoir is 150 – 200 metres thick at preferred operational depths between 2,100 – 2,300 metres (TVD). In June 2017, Velvet brought its first Montney light oil production onstream at Gold Creek, which at that time, increased corporate production to over 20,000 boe/d. To-date, the company has drilled 35 gross/net horizontal Montney wells at Gold Creek, increasing area production to 19,000 boe/d (corporate > 30,000 boe/d). A typical 2,500 metre lateral length well with over 130 completion stages, costs approximately $7.0 million (DCET). Velvet strongly believes in completion design being a differentiator in its well productivity as is illustrated in the IP90 and IP365 maps below. Area production is processed through a gathering system operated by SemCAMS Midstream at a competitive cost structure for Velvet.

In August 2018, the Alberta government approved Velvet’s Emerging Resource Program (ERP) application for Gold Creek, significantly enhancing the return on this light oil asset. Velvet has a 7-year window to drill the eligible wells and a total of twelve years to accumulate the benefit. During that time, Velvet will receive a flat 5% royalty rate on production from the eligible wells. As a result of Velvet’s DCET, operating and transportation costs and royalty initiatives, the Company’s Gold Creek asset rivals world class light oil basin netbacks and returns.

In early 2018, Velvet acquired additional acreage prospective for Montney light oil in Karr / Simonette. Since acquiring that land, Velvet has had its 100/16-17 well on production for 350 days with average production over that time of 457 bbl/d (160,000 bbl cum oil). In 2Q2019 Velvet began drilling an additional two wells off the existing 6-10 pad. Those wells are expected to be brought on production through summer 2019. SemCAMS is in the process of constructing new infrastructure in the area which will allow Velvet to expand activity entering the back half of 2019.

Velvet’s geotechnical team has further identified a Montney light oil analog further northwest at Pouce and began consolidating acreage here in 2017. With a land position totaling 65,000 net acres, Pouce has the potential to emerge as a third Montney light oil development asset. To-date, the Company has drilled two horizontal wells at Pouce and brought one well onstream in the fall of 2018 with the second scheduled to be on stream in the fall of 2019. Our Flatrock, B.C. position encompasses 53,000 acres situated amongst offsetting well control and Montney drilling activity. Velvet continues to advance its technical work at Flatrock to be drill-ready in 2020.

Velvet has amassed 350,000 acres of land with an inventory in excess of 1600 horizontal Montney locations with a Company estimated Original Oil In Place of 15.4 billion barrels. To date, 215 of those 1600 locations have been booked via Velvet’s independent reserve evaluator representing a booking of 13% of potential locations. Velvet is encouraged about a secondary zone being tested in its Gold Creek acreage. Since inception, Velvet has differentiated itself by organically growing its production base to 30,000 boe/d. Our internal Montney inventory supports continued organic growth over the next several years.

Gold Creek D23 Gold Creek LSW Karr/Simonette Pouce Coupe Flatrock TOTAL
OOIP (BnBBLS) 5.9 2.6 2.5 1.9 2.5 15.4
Inventory Locations (#) 634 402 138 238 229 1641
Oil EUR/well (mmbls) 350 350 711 350 350 380
Recoverable Oil (MMbbls) 222 141 98 83 80 624
Recovery Factor (%) 3.8% 5.4% 3.9% 4.4% 3.2% 4.1%
Booked 2P Locations (#) 146 9 23 37 0 215
% Booked (%) 23% 2% 17% 16% 0% 13%

Liquids-rich Ellerslie Hybrid Resource Play in Edson

Velvet entered into the Edson area through the acquisition of Vero’s deep basin gas assets in early 2012. Velvet has since amassed over 320,000 net acres in the Edson corridor through Crown land sales and several tuck-in acquisitions.

Over the past six years, Velvet has drilled 113 gross (82.8 net) horizontal Ellerslie wells, including the drilling of 9 gross (8.1 net) extended reach horizontal (ERH) wells in 2018.  In 2018, Velvet shifted its strategy in Edson to optimize production through company-owned facilities and to generate free cash flow, resulting in Edson production level loading at approximately 14,000 boe/d.  Today, over 95% of our production has been added via the drill bit. We have made consistent progress in reducing costs and optimizing recoveries to generate high rates of return in Edson, including ERH wells, and today, several third-party research studies have defined our liquids-rich Edson Ellerslie as the low cost play in the Deep Basin of Alberta.

Velvet plans to spend $43 million in the Edson area in 2019, with the program exclusively oriented to drilling extended reach horizontal wells. This pace of activity will hold area production flat and allow the Company to generate free field cash flow to reinvest in our Montney light oil growth project at Karr/Gold Creek.

Edson Area Land, Gathering & Processing Infrastructure

Liquids recoveries drive the economics of the Ellerslie, with a typical well yielding 80 barrels of liquids per million cubic feet of natural gas. Approximately 70% of our liquids recoveries consist of condensate and light oil, which yield premium pricing relative to benchmark light oil in western Canada. Through our development and delineation program, Velvet has built its deep basin inventory to over 1,000 gross (700 net) locations.

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