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MONTREAL — It has been a swift fall from grace for junior exploration companies whose fortunes are tied to Quebec’s nascent shale gas industry.
Calgary-based Questerre Energy Corp., worth $800-million only a year ago, has a market capitalization barely one fourth of that today as investors cashed out following the Quebec government’s decision in March to put commercial hydraulic fracturing drilling on hold pending a detailed environmental review.
Junex Inc. and Gastem Inc. aren’t faring any better. Each has seen its stock fall more than 50% off their 52-week highs on the Toronto Venture Exchange.
Behind closed doors in the board rooms of some of these energy firms, the introspection has been gut-wrenching. Directors questioned what the decision means for business and what they should do next. Backers questioned whether to keep their money in or pull out.
The answers aren’t yet fully clear. But those ready to write off the shale gas industry in Quebec would be sorely mistaken. What were once big dreams for striking a profit payload in the province are far from being dashed.
For Questerre, Quebec’s decision forced a brutal reckoning. The company holds development rights to more than one million gross acres of farmland along the southern flank of the St. Lawrence River in Quebec, smack in the middle of what has become known as the Utica shale gas formation. It estimates its property could yield a prospective recoverable resource of 18 trillion cubic feet. Its entire business plan was focused on developing Quebec gas.
“It turned out to be the wrong strategy,” Questerre chief executive Michael Binnion said in an interview. “[After the government’s decision], we examined the alternatives,” from going into sleep mode, conserving cash and waiting for a potential positive outcome from the environmental review, to pulling out of the province altogether and plowing resources into other jurisdictions.
In the end, the company decided on a three-pronged approach: Hold onto its Quebec option and participate its study process; further develop a separate oil play in Saskatchewan; and use its expertise in hydraulic fracturing to hunt for major new discoveries. Mr. Binnion is also taking advantage of some downtime to take French immersion courses in Quebec City. He speaks what he calls “tourist French” now and he says he wants to improve it, in part to better communicate the company’s position.
He’ll need it.
For prospectors such as Questerre, selling Quebecers on the safety of shale gas has proven to be tougher than anyone had imagined. The government gave the industry an initial green light for exploration without having in place a detailed regulatory framework to oversee it. And the companies have since failed to properly explain the process, called “fracking,” and its benefits and risks to average people.
Shale gas is extracted from the rock below by injecting millions of gallons of water, sand and chemicals at high pressure through a well to prop open cracks, allowing the gas to flow out. The biggest concern is the environmental impact on the fresh water, before and after it is used.
When officials with the Quebec Oil and Gas Association met with farmers and other local residents last fall to explain their plans and address concerns, they were frequently shouted down with chants of “We don’t want your gaz de SH#T!,” a play on the French phrase for shale gas — gaz de schiste. The association has since hired former Quebec premier Lucien Bouchard as its chairman to rescue the vilified sector.
His challenge is immense.
Popular support for fracking is the lowest in Quebec of all Canadian provinces at 22%, according to a presentation on emerging energy issues this month by polling firm Angus Reid. That’s less than half the 46% support it enjoys in Alberta. The national average is 31%, Angus Reid found in a June survey of 1,007 Canadians.
The pollster said there is a large amount of ignorance about fracking in both the United States and Canada, which presents a strong opportunity to educate citizens.
“This is an issue of social acceptability,” said Jean-Yves Lavoie, chairman and president of Junex. “We’ve have to regain good fame.”
Junex has $18-million in cash reserves and no debt. It will look for projects outside Quebec while waiting for the government-appointed panel to make a final recommendation, Mr. Lavoie said. The government has imposed a “quasi-moratorium” on all oil and gas exploration in the province, he said, which is stymying the company’s Plan B to work on its other assets in the Gaspé region.
The total estimated value of extractable natural gas from Quebec’s Utica formation is between $45-billion and $210-billion — a potential gold mine of taxes and royalties for a province that’s heavily indebted and desperately hunting for new sources of revenue. The leading developers of the resource in Quebec are Alberta-based Talisman Energy Inc., which is well diversified with other energy plays elsewhere, and Questerre.
Mr. Binnion argues the industry has been defeated for the time being by ignorance and inexperience. Unlike British Columbia and Alberta, Quebec has no culture and familiarity with the oil and gas sector, he says.
“People fear most the risks they don’t see and the risks they don’t control,” Mr. Binnion said. “The idea of fracturing rock deep underground where they can’t see it and they don’t control it [is] one of the most difficult types of risks to explain to people. All opponents have had to do is show up without any evidence and say, ‘It contaminates your water.’ And people go, ‘Whoa. It contaminates our water? I don’t want to hear more, I’m worried already.’ ”
In Alberta and B.C., regulators and companies both make “huge investments” in educating the public about any new technology, but that effort was botched in Quebec, said Bill Laurin, a specialist in oil and gas regulation with Lawson Lundell LLP in Calgary.
“It might be that Quebec can’t turn it around,” Mr. Laurin said. “If you can’t get a hold of the political side of it to allow responsible development to proceed, it’s really a loss to the province to have those resources stranded.”
Quebec has now decided it will not approve shale gas development until it’s proven safe by independent study. A panel of 11 experts has been mandated to undertake a strategic environmental assessment expected to take between two and three years.
In the meantime, the province has cancelled exploration permits without compensation and issued a new set of regulations to govern shale gas development. Detailed administrative practices should follow.
Mr. Binnion says the environmental assessment is more a political and education exercise to ease Quebec into shale gas acceptance than a scientific inquiry.
His view isn’t being well received by the Liberal government of Jean Charest, which has been trying to deflect criticism that the whole strategic review process is rigged in favour of development.
Whether there will be any investors left to bet on the outcome is another question altogether. There aren’t very many near-term reasons to buy the shares of any company involved in oil and gas exploration in Quebec for the moment. This is a waiting game now.