Paramount continues to execute the large-scale development of its Deep Basin lands that will materially increase production volumes and cash flow. The Company's drilling activities are currently focused on the Montney, Dunvegan, and Falher formations, which are high pressure, liquids rich, tight gas formations with large reserves potential. These plays continue to generate robust rates of return in the current low natural gas price environment because of the high liquids content in these formations.
The Company achieved significant reserves growth in 2012 as a result of its development activities in the Kaybob Deep Basin. Further increases in reserves are expected as facilities expansions are completed and development drilling continues.
To support the accelerated development of Paramount's Deep Basin lands, the Company constructed its wholly-owned 45 MMcf/d Musreau Refrig Facility, is building a 200 MMcf/d deep cut processing facility at Musreau and is participating in the deep cut expansion of the non-operated Smoky facility, which together will more than triple Paramount's current gas processing capacity to over 300 MMcf/d. The Company has also entered into long-term agreements to transport, de-ethanize and fractionate NGLs streams that will be produced from these new facilities, and has entered into a long-term ethane sales agreement with a petrochemical company.
Average daily sales volumes in the Kaybob COU during 2012 were 10,910 Boe/d, an increase of 30 percent compared to 2011. Sales volumes in the first quarter of 2012 were impacted by the fourth quarter 2011 electrical component failure at the Musreau Refrig Facility. The re-commissioning of the facility was completed in March 2012, and average sales volumes increased to 12,236 Boe/d in the second quarter. Sales volumes in the second half of the year were reduced as a result of the previously described Third Party Disruptions. By the middle of September, production across the Kaybob COU was curtailed to less than 6,500 Boe/d, including a temporary reduction in throughput at the Musreau Refrig Facility to 10 MMcf/d. Sales volumes reached 13,500 Boe/d in November following the partial resolution of Third Party Disruptions.
Between December 2012 and February 2013, Kaybob COU sales volumes have ranged between 11,500 Boe/d and 13,500 Boe/d as operations continue to be impacted by Third Party Disruptions. Based on the current NGLs constraints and projections of capacity for the remainder of 2013, production is expected to be within the current range until the expansion of a third-party NGLs pipeline is completed, Paramount secures additional fractionation capacity and the Musreau Deep Cut Facility is brought on-stream. The Kaybob COU has approximately 28,000 Boe/d of first year production behind pipe which will be brought on-stream when the Musreau and Smoky deep cut expansions are on-stream.
After the start-up of the Musreau Refrig Facility, operating costs for the Kaybob COU were reduced to approximately $5.00 per Boe, before deducting processing income. The Musreau Refrig Facility provides significant savings to the Company through the elimination of third-party processing fees. The Kaybob COU's per unit operating costs are expected to further decrease with the commissioning of the Musreau Deep Cut Facility, as fixed costs will be applied over significantly larger production volumes. In the third quarter, Paramount received a $6.2 million settlement in respect of a business interruption insurance claim related to the electrical equipment failure at the Musreau Refrig Facility in December 2011.
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