Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

July 09, 2009 00:01 ET

Birchcliff Energy Ltd. Announces Expanded and Re-Focused 2009 Capital Expenditure Program and Directors' Approval for Construction of Birchcliff's 100% Owned Pouce Coupe South Natural Gas Plant

CALGARY, ALBERTA--(Marketwire - July 9, 2009) -

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES OF AMERICA

Birchcliff Energy Ltd. (TSX:BIR) is pleased to announce its increased 2009 capital expenditure program of $105 million, its decision to proceed immediately to build its Pouce Coupe South natural gas plant (the "PCS Gas Plant"), further production guidance for 2009 and preliminary production guidance for start-up of the PCS Gas Plant.

This capital budget will allow Birchcliff to increase its strategic control of its core area in the Montney/Doig natural gas resource play and to increase its Montney/Doig production and further establish its position as a leading low cost resource finder and producer.

Birchcliff's 2009 Capital Expenditure Program can be segregated into two parts, capital expenditures of approximately $61.4 million associated with normal course oil and gas operations and capital expenditures of approximately $43.6 million related to its PCS Gas Plant and the related Montney/Doig horizontal natural gas drilling and infrastructure program which will result in additional production to Birchcliff in 2010 when the PCS Gas Plant starts-up.

2009 Capital Expenditures relating to normal course Operations

On February 12, 2009 Birchcliff announced a capital expenditure budget of $80 million. As a result of depressed natural gas prices, Birchcliff is reducing its 2009 normal course oil and gas operations capital expenditures to $61.4 million, which is slightly less than estimated 2009 cash flow. Birchcliff has budgeted to spend $40 million of capital in the second half of 2009 which includes the drilling of 8 (7.7 net) wells. Approximately $21.4 million of capital was spent in the first half of 2009 in respect of normal course oil and gas operations.

Birchcliff plans to continue to focus its capital spending primarily on the expansion of its Montney/Doig natural gas resource play with the majority of 2009 capital being directed to vertical and horizontal wells on lands to which no reserves were attributed in the December 31, 2008 independent engineering evaluation prepared by AJM Petroleum Consultants. This is expected to result in the addition of new low cost reserves and continued growth for Birchcliff during 2009 assuming drilling results are consistent with those achieved by Birchcliff with past horizontal drilling on this resource play. During the second half of 2009, Birchcliff expects to spend approximately $18.4 million on drilling, related infrastructure and land on its Montney/Doig natural gas resource play which includes the drilling of 2 (2 net) Montney/Doig horizontal natural gas wells as part of its normal course oil and gas operations.

Second half budget plans for our second resource play, the Worsley light oil pool, allocates approximately $14 million to prove the further development and exploitation potential of the light oil pool and a minor acquisition. This capital program includes the drilling of 1 (1 net) horizontal well and 3 (3 net) vertical wells as well as capital to support expansion of the waterflood program.

2009 Production

Birchcliff's current production rate is approximately 11,500 boe per day. Average production for the second quarter 2009 as estimated from field data was 11,150 boe per day as compared to previously announced guidance for the second quarter of 11,000 boe per day.

The revised 2009 capital expenditure program is expected to result in a 2009 average production rate of approximately 11,300 boe per day. Birchcliff's 2009 exit production rate is expected to be approximately 11,700 boe per day. Birchcliff's average product mix for 2009 is expected to be 72% natural gas and 28% light oil.

Pouce Coupe South Natural Gas Plant and Related Montney/Doig Natural Gas Drilling

Birchcliff is also pleased to announce that the Board of Directors has approved the construction of its 100 % owned PCS Gas Plant which will have an initial design inlet capacity of 30 mmcf per day. Birchcliff expects that the PCS Gas Plant will be fully operational by early in the second quarter of 2010. Birchcliff expects to use a minimum of 70% of the plant capacity for its own natural gas from the Pouce Coupe area and the balance will be used for third party and/or partner gas.

Birchcliff expects to drill additional Montney/Doig horizontal natural gas wells which will commence production with the start-up of the PCS Gas Plant. Birchcliff expects that these wells will add approximately 3,400 boe per day of net production. With this additional production Birchcliff expects its production rate to increase to approximately 14,000 boe per day when the PCS Gas Plant is on stream.

The PCS Gas Plant is a significant milestone for Birchcliff as it will result in a step change in terms of production and will provide the following benefits:

1. increased production growth from the Pouce Coupe area where Birchcliff's current and future production growth is presently constrained by insufficient gathering and processing capacity;

2. reduced operating costs which will increase netbacks;

3. increased strategic competitive advantage over competitors in Birchcliff's core development area;

4. increased third party revenues which will reduce Birchcliff's operating costs and improve netbacks;

5. increased control over production volumes and decreased exposure to production curtailments caused by third party operated processing plants;

6. increased run times from its natural gas wells in the Pouce Coupe area;

7. increased ability to expand production in the area by expanding the processing capacity of the PCS Gas Plant to correspond with the timing of its drilling plans in the area; and

8. reduced construction cost of the Gas Plant as a result of the currently increased availability of services and equipment necessary to complete construction and the resultant competitive pricing for plant components.

The PCS Gas Plant is being constructed in the heart of Birchcliff's Montney/ Doig natural gas resource play. Control of infrastructure is a key component to the successful development of any natural gas play but is magnified in these circumstances because of the intense competition for infrastructure and gathering and processing capacity as the development of unconventional natural gas in the Pouce Coupe area of Alberta continues to grow. Birchcliff has proven in the last several years that it can find and develop natural gas in its focus area at low costs. The PCS Gas Plant will allow Birchcliff to produce natural gas at lower operating costs than producers that rely on 3rd party processing. This will position Birchcliff to become a dominant low cost finder and producer of natural gas in the Pouce Coupe area of Alberta.

Capital Expenditures and Drilling associated with the Pouce Coupe South Gas Plant

The total cost of the PCS Gas Plant including the acid gas disposal well and related gathering and sales pipelines is estimated to be $47.5 million, of which $3 million was spent in 2008 on the acid gas disposal well and engineering work, $32.5 million is expected to be spent in 2009 and $12 million is expected to be spent in 2010.

Birchcliff expects to drill 7 (4.9 net) Montney/Doig horizontal natural gas wells and construct related pipelines in 2009 and 2010 at a net cost of approximately $28 million. This drilling program is expected to fully use the PCS Gas Plant capacity when it starts-up. Of this $28 million, during 2009, Birchcliff expects to spend $10.9 million to drill 4 (2.8 net) horizontal Montney/Doig natural gas wells. These wells will not add any production until the PCS Gas Plant commences operations. This drilling is in addition to the drilling included in the $61.4 million budgeted for 2009 normal course operations that are described above. To utilize the full capacity of the PCS Gas Plant, Birchcliff believes it will have to drill 3 to 4 more Montney/Doig horizontal natural gas wells during 2010 and 2 to 3 Montney/Doig horizontal natural gas wells during each of 2011 and 2012.

The long life low decline nature of the Montney/Doig horizontal natural gas wells builds a strong long term production profile for Birchcliff. A key element to the development of the Montney/Doig resource play is the limited capital that has to be spent to replace Birchcliff's base production declines and utilize the full capacity of the PCS Gas Plant.

The prolific high initial deliverability of these Montney/Doig horizontal natural gas wells returns Birchcliff's capital investment quickly, but just as importantly, Birchcliff expects that after the initial steep production declines, the wells are expected to produce with relatively low decline rates for up to 20 years. It is this long term, low decline portion of the expected production profile that builds long term sustainable cash flow for Birchcliff and is the strategic reason why Birchcliff is moving forward with the development of the Montney/Doig natural gas resource play and the development of the PCS Gas Plant.

Pouce Coupe South Gas Plant Operating Costs

Assuming Birchcliff uses 70% of the PCS Gas Plant capacity and that the remainder of the capacity is being used by third parties, Birchcliff expects its operating costs for its Montney/Doig production in the Pouce Coupe area will fall to approximately $1 per Mcf, which is a significant reduction from its current operating costs.

Alberta Royalty Incentive Programs

Birchcliff is extremely pleased with the recently announced extension to Alberta's New Well Royalty Reduction program and the Drilling Royalty Credit program. These programs provide material royalty incentives to Birchcliff. Each Montney/Doig horizontal natural gas well is approximately 4,200 metres in length and qualifies for a drilling incentive of $840,000 in royalty credits. Further, Birchcliff expects that the first half Bcf of natural gas produced from each new Montney/Doig horizontal natural gas well will result in additional royalty savings of approximately $350,000 assuming a natural gas price of CAD $3.25/GJ at AECO and even greater royalty savings of approximately $800,000 assuming a natural gas price of CAD $5.50/GJ at AECO.

Expansion of the Pouce Coupe South Gas Plant

As part of its future planning for the development of the Montney/Doig natural gas resource play, Birchcliff has designed into the critical components of the PCS Gas Plant, sufficient capacity to permit the expansion of its natural gas inlet design capacity to 60 mmcf per day. This is intended to permit the continued growth of Birchcliff's production from this prolific Montney/Doig play while improving processing costs. A phase 2 expansion could be operational as early as late 2010 but the decision to move forward with this phase 2 expansion will be made in the fourth quarter of 2009. That decision will be based upon, amongst other matters, Birchcliff's then current view of future natural gas prices.

Outlook

Based on Birchcliff's current capital structure, the royalty incentives available in Alberta and the results that have been achieved to date on the Montney/Doig natural gas play, Birchcliff believes that proceeding with the business plan described above will position it to capture significant value from the Montney/Doig natural gas resource play over the coming years and expose Birchcliff to significantly more upside value potential when natural gas prices improve.

FORWARD LOOKING STATEMENTS

Certain information set forth in this news release contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Birchcliff's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the competition for qualified personnel and management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be incorrect and, as such, undue reliance should not be placed on forward-looking statements. Birchcliff's actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits will derive therefrom. Except as required by law, Birchcliff disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Specifically, this news release contains forward looking statements as to Birchcliff's expected:

(a) 2009 cash flow;

(b) 2009 average production rate and product mix, 2009 exit production rate and production rate when the PCS Gas Plant starts-up;

(c) production and decline rates and reserves from Birchcliff's future Montney/Doig horizontal natural gas wells;

(d) the expected capital and operating costs and capacity of the PCS Gas Plant and the expected costs of Birchcliff's future Montney/Doig horizontal natural gas wells and other future operations;

(e) the expected timing of completing the PCS Gas Plant and the drilling, completing, equipping and tying-in of future wells; and

(f) third party revenues from the PCS Gas Plant;

The primary assumptions on which each of the above forward looking statements is based are set forth below:

Item (a) assumes that average commodity prices for the second half of 2009 are US$69 WTI for crude oil and CAD$3.56/GJ at AECO for natural gas, that Birchcliff receives drilling incentive royalty credits of approximately $6 million, the validity of Birchcliff's estimates of the impact of the existing royalty regime on future production and the assumptions applicable to Item B and the validity of Birchcliff's estimates of operating, transportation and general and administrative costs based on past experience and future expected events.

Item (b) assumes the validity of Birchcliff's estimates of future production from existing producing wells and the assumptions applicable to Item (c) for future wells.

Item (c) assumes that Birchcliff's Montney/Doig horizontal natural gas wells will experience production and decline rates similar to other existing wells in similar tight gas reservoirs that have been reviewed and analyzed by Birchcliff's technical staff and similar to Birchcliff's existing Montney/Doig horizontal natural gas wells.

Item (d) assumes that the validity of estimates of future capital and operating costs and plant design capacity made by Birchcliff's technical staff and the consultants that Birchcliff has retained to assist it based on their respective industry experiences and the assumptions applicable to Item (f).

Item (e) assumes the validity of the scheduling estimates made by Birchcliff technical staff and the engineering consultants that Birchcliff has retained based on their knowledge and industry experiences.

Item (f) assumes that the PCS Gas Plant will operate at full capacity and that 30% of capacity will be used to process partner gas and third party gas for a fee that includes a return on invested capital and recovery of operating costs in accordance with the 2005 Jumping Pound formula.

Birchcliff is a publicly traded company that trades on the TSX Exchange under the symbol "BIR".

This press release is not for distribution to United States Newswire Services or for dissemination in the United States.

The TSX Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Birchcliff Energy Ltd.
    Jeff Tonken
    President and Chief Executive Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Bruno Geremia
    Vice President and Chief Financial Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Jim Surbey
    Vice President, Corporate Development
    (403) 261-6401
    (403) 261-6424 (FAX)