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Weekly UpdatesEfforts to explore and develop sources of natural gas in locations other than Alaska's North Slope and Cook Inlet appear to be steadily grinding to a halt, and industry is pointing to the state and local government as a primary contributor to the slowdown.
Andex Resources, operator of the Nenana Basin gas project west of Fairbanks, has put that program on hold until company officials and state regulators determine impacts stemming from a new production tax proposed by Gov. Frank Murkowski and passed by State legislators earlier this year.
"We currently do not have plans to drill," said Tom Dodds, president and CEO of the Houston and Denver-based Andex. "Our project has been adversely affected by the new tax bill and we're still trying to determine the economics."
Increasing the size of the tax rate, basing it on profits and linking gas taxation to oil prices are moves that are " ... certainly not encouraging for a lot of new exploration," Dodds said. "The bottom line is that it is very adverse to our risk economics."
Part of the consortium working on the Nenana Basin program is Usibelli Coal Mine, which also applied independently in 2003 for shallow-gas leases near the company's Healy based mine operation.
That project has also stalled, according to Steve Denton, vice president of development at Usibelli, but due to a different governmental impact. The Denali Borough passed an ordinance in September that "effectively closes about 40 percent of the exploration license area to all forms of exploration activity," Denton said. "We're not sure we want to be awarded the license for the remaining area--it's enough to wound the whole project."
Whether the local borough has authority to close state lands to development remains an unanswered question for Denton, and the Usibelli company. "There are obviously legal issues that the state and borough have to work out--who has control of the subsurface resources," he said.
CONFLICTING MESSAGES
Another local entity that planned to explore for natural gas in a remote region of Southwest Alaska, Holitna Energy, received in early October rejection of its license application by the state Division of Oil & Gas, more than three years after the company's original filing.
Phil St. George, an Eagle River resident who formed Holitna Energy in 2003, filed a reconsideration request with the State and is working to submit supporting evidence to counter the division's assertion that the Holitna project is not in the state's best interest.
The negative decision announced in early October contradicts a preliminary best-interest finding made in August 2005, when then division director Mark Myers wrote that the potential benefits of the project outweigh the possible adverse impacts and that issuing the license "will best serve the interests of the State of Alaska."
Only Teck Cominco is moving forward this year with its shale gas exploration program near the company's Red Dog zinc-lead mine in Northwest Alaska. The small project is designed to locate and hopefully identify sources of gas for electric generator feedstock that would allow a reduction in diesel shipped to the remote mine.
Crews planned to drill up to four 3,000-foot holes on site during the summer and fall exploration program, according to Jim Kulas, environmental superintendent at Red Dog.
With the number of stalled projects outweighing the advancing programs, some in industry are questioning whether the State will offer support for gas developments in locations other than the North Slope or Cook Inlet.
"The idea that just because we've got a small project, it is not important, is baloney," said Denton. "The whole concentration for the shallow-gas program was to develop in small remote areas for the benefit of local communities. What has changed is that we're not developing these small resources-the state has taken a huge step backwards and it's very disappointing."
Bill Van Dyke, acting director of the Division of Oil & Gas, cites an exploration well being reworked this summer on Native lands near Glennallen and two active license areas held by Forest Oil in the upper Susitna as evidence that State programs are working.
"We certainly haven't given up on the remote or higher risk areas," he said. "Healy ran into challenges with the local folks ... for Holitna, at the end of the process the commissioner determined that this was not in the best interest to award the license, but overall the program is moving forward."
NENANA BASIN NEEDS DRILLING
Located about 50 miles west of Fairbanks is the underexplored Nenana Basin, a Tertiary-age alluvial basin believed to be gas prone.
Potential for coalbed methane and conventional natural gas is good in the Nenana Basin, according to State reports, as good reservoir rocks are associated with thick coal seams, and deep source and reservoir rocks and geothermal history are conducive for formation and entrapment of conventional natural gas.
Two holes were drilled in the shallower, southern portions of the sedimentary basin, one by Unocal in 1962 and one by Arco in 1984. Unocal's Nenana No. 1 was located due west of Nenana and that 3,062-foot hole produced coal seam gas shows, according to a State report. Arco's Totek Hills No. 1 well also produced coal seam gas shows in its 3,590-foot hole.
Andex Resources received a conventional gas exploration license for 482,942 acres of land in 2002 and in 2004, put together a consortium to begin prospecting the area. Joining Andex was Usibelli, Doyon Ltd. and Arctic Slope Regional Corp.
The partners funded a two-dimensional seismic program that was completed during the winter months of early 2005. About 215 line miles of seismic data were gathered during the winter program.
While specific seismic results have not been made public, partners in the project have previously said the data was encouraging.
The consortium discussed drilling one or more of the prospects during the 2005-2006 winter season, but a lack of availability of drill rigs in the Interior was cited then as the reason for the delay.
Now, it's the group's ongoing assessment of impacts from the recently passed PPT. "We're still going through interpretations of the provisions of the bill," said Dodds. "It's not written well, not clear, so we've asked for some determinations to Clarify."
Because the area has never been drilled, the risk of discovery is high. Losing to higher taxes a larger portion of profits that might be returned on the investment is a huge disincentive to risk spending the $6 million to $12 million for an exploration well, he said.
The mere fact of the significant tax structure change also creates "political risk in Alaska," Dodds added. "It's this tax this year, what will it be next year? There's a big political risk in the state of Alaska that we don't have anywhere else."
Andex is weighing these factors when considering where to spend its exploration dollars. "We're not prepared to make a proposal to our partners until we understand the economics of this tax bill," Dodds said. "It's up to every company to decide, but I don't expect a lot of new people to come to Alaska. In fact, it already has caused some to leave."
Van Dyke, at the Division of Oil & Gas, said the state's modeling indicates that the new tax structure improves project economics for new exploration areas such as the Nenana Basin, although that specific project was not assessed. "If they think they're worse off, they need to go through the numbers with us."
LOCALS OBJECT TO HEALY BASIN
Usibelli, which applied in 2003 for shallow-gas leases on 46,000 acres of state land located north and east of its existing coal mine site near Healy, has a different dilemma to sort through.
Since January, the local borough has been considering a number of different resolutions regarding the proposed development. In September, the Denali Borough approved an ordinance that prohibits exploration activity on the license area west of the Parks Highway, according to Denton, which amounts to nearly 40 percent of the project.
"I don't know that we would want to pay the money per acre for exploration land with such a huge cloud over it," he said. "We think it's illegal, but the state has to defend it ... whether (the borough) has the authority for those sweeping land decisions."
Until that argument is sorted out, Usibelli has asked the state Division of Oil & Gas to hold its decision on the final best-interest finding for the exploration license.
"The state needs to make a decision whether to start exercising authority over its subsurface resources and whether to actively develop those subsurface resources, because right now, it doesn't appear to be the case," Denton said.
STATE REJECTS HOLITA BASIN LICENSE APPLICATION
The third gas project currently on the rocks is the Holita Basin property, a 26,000-acre parcel located south of the Kuskokwim River village of Sleetmute. Holitna Energy applied for shallow-gas leases in early 2003, hoping to begin exploration later that year in an effort to identify an alternative source of fuel for the neighboring Donlin Creek gold project.
The state's shallow-gas-leasing program was abolished in 2004 and original applicants were allowed to convert their requests to conventional gas licenses. In early October, the Division of Oil & Gas finally released the final best-interest finding, ruling against the proposed project.
The decision reversed the preliminary finding issued in August 2005, which outlined substantial mitigation measures intended to minimize impacts and to enhance the positive aspects of the proposed license.
"In review, DO&G has concluded that no mitigation measure is sufficient," the final decision said, citing the small size of the license area making it difficult to "allow exploration activities to occur harmoniously with the other uses in the area and without impact to sensitive fish and wildlife resources.
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