MGM Energy Corp MGMCF

Big Changes happening in Regulatory Regime

[OilEng]

Hi Glacierman and Shambola

I have been giving some thought to your comments about the regulations, environmental review and pace of development. Thank you, they are very good points. You have stimulated me to do a lot of research on this matter and please tell me what you think.

I have a lot of experience in evaluation oil and gas properties with major oil companies as I have a petroleum engineering degree and an MBA. Based upon engineering and economics MGM has the potential to be huge. Crescent point has increased from $1 to $40 with cummulative dividends of $20. I would expect similar returns from MGM but I don't think MGM will produce a drop of oil. They will get taken out by a supermajor like Exxon, Shell or Conoco.

However, the environmental, political realities are something else. It is for this reason that I would like to encourage a discussion. I think this is worth eveyone's time as I believe that MGM offers the opportunity to be a life changing financial event if we play it right.

Here is the research that I have come up with. There are major changes happening in how things are regulated in the NWT.

1. First, the prize is HUGE. There is a lot of oil and gas. I think the companies and the government of the NWT will be highly motivated to overcome the obstacles. I don’t think folks appreciate the size of this oil deposit. Many have compared it to the Bakken and the Eagle Ford. Some have compared it to the Duvernay and Montney. I believe that the Canol is far larger than all of these. It is larger in total reserves but what is more important is that it has more oil per well. This is because it is twice as thick as most other reservoirs.
2. Next, is infrastructure. The area is remote, but there are ways around it. The first is what Husky is doing. With an all weather road you can drill all year round and barge or truck stuff in via the existing winter road. I believe they can fill up the existing pipeline by 2016.
3. The second is that the winter road from Wrigley will be upgraded to an all season road. The Federal Government has paid for the initial studies and those have all been submitted. You can find the details on the GNWT website. I spoke to MGM management and they and other companies have spoke to the government and would like to see the road between Norman Wells and Tulita finished first. A bridge across the Great Bear River at Tulita would greatly extent the winter road season.
4. The completion of the all-weather road from AB and the twinning of the pipeline would happen by 2018. I think field capacity is +500,000 bopd. The Bakken is at 720,000 and Eagle Ford is at 400,000. They ramped up in 4 years.
5. The big question is whether the regulatory environment will allow for this. We all know the sad story of the MVP. I think things are changing. Here is some thoughts.
   1. None of the leases petroleum rights are owned by the natives. They are all Crown owned by the Federal Government
   2. Some of the native own the surface rights. I would guess it is 1/4
   3. It would like a company wanting to drill on your land. They would have to negotiate a contract with you to access your property, but would not have to give you royalties. The government would get those.

Here is a link showing the breakout: https://slwb.com/sites/default/files/slwb/documents/Surface%20Subsurface%20Rights%202.pdf

For Summit and Colville it was a little different. The native owned most of surface and a some of the mineral rights.

3. On March 31, 2014 the Crown rights are turned over to the GNWT in a Devolution Agreement that has been negotiated. The regulations then will be set by the GNWT and administered like other provinces. This eliminates one level of bureaucracy: the federal government.
4. The GNWT will then receive 50% of the royalites and the aboriginals will get 25% of the GNWT share. Presently the Feds get 100% of the royalties.
5. When Devolution happens, things will be more like AB and BC. The province regulate oil and gas activity and so will the GNWT. The feds will be out of the picture.
4. Husky, MGM and Conoco have reached Access and Benefit agreements with the natives.
5. The Sahtu LWB administers all lands and water permits in the Sahtu district: native and crown. The board is not just a native board, but represent all interest in the region. Larry Wallace is the head of the SLWB and is non-native. He owns the Norman Wells hotel and is a former bank manager. I have carefully read all the documents on the SLWB and they recognize that the system is broken. They have made impressive gains on fixing it. Here is a document with recommendations from the SLWB and MVLWB on how to fix the system. I was impressed by the amount of progress they have made since that document was written.

https://slwb.com/sites/default/files/documents/Perspectives_on_Regulatory_Improvement_in_the_Mackenzie_Valley-MVLWB.pdf

In summary here is what I think will happen:

1. Testing this winter will show how big the prize is.
2. The GNWT is going to revamp the oil and gas regulations to look more like AB and BC. I think Minister Ramsey who is in charge of this file, has publicly stated that the NWT recognizes that this play is a game changer for the territory and they see it as providing a bright future. They want it to go ahead.
3. Devolution is going to happen on March 31, 2014 and the GNWT will be calling the shots on regulation and environmental review.
4. I think the regulatory regime will be different than BC and AB in that there will be much, much more consultation with the people in the region BEFORE a development is proposed. The usual way of doing business in AB and BC is for the company to make a proposal and then seek a social license. This really is a bad way of doing things. The NWT may have a better way.
5. I think the infrastructure canl be built quickly if their are not road blocks.. The studies and public consultation have been done for the highway. The reports have been submitted. I have seen how quickly things can get done when the super majors like Shell, Imperial and Conoco put the time and money into a project. The regulatory and infrastructure problems are nothing compared to the offshore in places like Indonesia, Nigeria and some of the Latin American countries which have civil wars going on while you drill.
6. This project is the size of a couple of oil sands developments. There should be and will be environmental studies. However, this can only be done once they know what they have.
7. MGM will get bought out before there is any oil produced.
8. The big oil companies have the time and resources and expertise to manage this project. The MVP was killed by economics not regulation and I think the coming regulatory regime will be much more favourable.