Canadian junior producer MGM Energy Corp. on Thursday clinched a farm-out agreement in the Mackenzie Valley’s Canol Shale with a subsidiary of Royal Dutch Shell plc. Financial terms were not disclosed.

Shell Canada Energy’s partnership with MGM in the Northwest Territories (NWT) brings “extensive experience with shale plays throughout North America,” said MGM President Henry Sykes, a former ConocoPhillips executive. “We are extremely excited about the Canol Shale play, and this agreement provides us with the ability to assess its potential.”

Shell agreed to fund the cost and complete two wells. The first well, EL466B, which would be vertically drilled, would earn Shell a 37.5% stake once completed. In May MGM requested a land use permit and water license from the Northwest Territories’ Sahtu Land and Water Board to drill EL466B; a final decision is expected “in the near future,” MGM officials said.

An option exists to terminate the agreement if MGM doesn’t receive “timely regulatory approvals” to drill the first well. If the vertical well permit is approved, Shell expects to complete the well this winter. After completing the first well, Shell would have the option to pay all of the costs to drill and complete a horizontal well to earn another 37.5% stake in EL466B.

“The parties have agreed to a drilling and completion plan for both wells,” which includes coring and multi-stage hydraulic fracturing, MGM said. Once the second well is completed Shell would serve as operator of the land and both wells.

MGM is currently active in the Mackenzie Delta, where it owns interests in six discoveries, and the Colville Lake/Sahtu region of the Central Mackenzie Valley, where it owns interests in two discoveries. The Canol holdings now total about 623,000 acres.

An auction last summer, which was held by Canada’s Department of Aboriginal Affairs and Northern Development in the Canol region, resulted in a total C$536 million in sales (see Shale Daily, July 11, 2011). The top six successful bidders were led by Husky Oil and also included MGM, Shell, Imperial Oil, ExxonMobil Canada and ConocoPhillips Canada.

However, producers know that the northern region of Canada is a costly place to drill. Among other things, winter ice roads have to be built before drilling may begin. In addition, there often is a shortage of labor because there is no year-round drilling. One exploration well can cost as much as C$25 million, according to MGM. The NWT Industry Ministry now is working with the Canadian government on funding for an all-weather road for the Mackenzie Valley.