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Doyon Limited Pioneers Frontier Basins

Middle Earth pushes oil and gas exploration in Alaska’s quiet corners

Map: Alaska Department of Natural Resources

The state’s latest oil and gas exploration incentive program, dubbed Frontier Basins, is also known as Middle Earth. Set aside fantastical images of J.R.R. Tolkien’s world of hobbits and elves. This Middle Earth earned the name for its general location between existing incentive programs for oil and gas production on the North Slope and Cook Inlet—and state officials and potential oil and gas producers hope this Middle Earth is very real.

The Frontier Basins/Middle Earth program, created by legislation during the last session in Juneau, provides major incentives for companies drilling exploratory oil or gas wells or obtaining seismic data in six areas.

The state will pay up to 80 percent or $25 million in exploration costs and 75 percent or $7.5 million of seismic costs for qualifying work. Any production that results gets a tax break. In return, the state gets access to seismic data otherwise kept confidential.

The statute limited eligibility to sedimentary basins in the state’s less-explored and hard-to-reach regions: the Kotzebue and Selawik Basins; Nenana and Yukon Flats; Emmonak; Glennallen and Copper River area; and the Alaska Peninsula near Egegik and Port Moller.

State officials and lawmakers want more seismic information and exploration in “frontier” plays otherwise too risky and expensive to work. But they also hope to provide new energy sources for Fairbanks and rural communities throughout the state.

“Around the state there’s all kinds of need for local-use energy,” says Paul Decker, a petroleum geologist with the Alaska Division of Oil & Gas and manager of the division’s resource evaluation section. “Let’s find people willing to explore and take some of the risk out of this exploration.”

 

Public Player

Doyon Limited, the Fairbanks-based Native regional corporation, is the only company so far to publicly announce planned seismic and exploration activity under the new program. The company plans to work in the Nenana Basin and Yukon Flats areas. Doyon otherwise wouldn’t be interested in seeking new oil and gas plays in the areas, says Jim Mery, Doyon’s vice president for lands and natural resources.

“They’re very, very risky financially. They’re high-risk propositions,” Mery says. “Really, without the state participation, we wouldn’t be pursuing these projects as aggressively as we are.”

Doyon is currently in the process of permitting a 12,000-foot exploratory well for next summer about 10 miles from the road system in Nenana. That well qualifies for the 80 percent credit. The corporation is starting work on a seven-mile road to access the drill site. Doyon is also conducting a seismic program north of Stevens Village, which also has qualified for the 75 percent credit.

Local geology in the areas is promising, Mery says.

Doyon—with former partners Arctic Slope Regional Corp., Usibelli Energy, Cedar Creek Oil and Gas, and Rampart Energy Co.—already drilled a well on the other side of the long, narrow Nenana Basin about six miles east of the exploratory well Doyon plans to drill under the Frontier Basins program. That well wasn’t economic, but it did reveal a rich source rock—a geologic layer that produces hydrocarbons at conditions where the oil and gas can be retrieved.

“Based on seismic information, we know a lot of source rock should be buried deeper where hydrocarbons would be expelled from that rock,” Mery says. “That’s a significant motivating factor for us.” Doyon originally entered the Nenana Basin seeking natural gas, but now considers it an oil and gas play. The corporation still expects to find gas, but it’s the oil prospects that really motivated Doyon’s involvement, Mery says.

“We still expect to find gas and do something very productive with it in the Interior, but the oil possibilities have really helped drive our decision-making forward,” he says.

 

‘A Game-Changer’

The Frontier Basins program was created by legislation last session. Rep. Steve Thompson, R-Fairbanks, sponsored the original bill, House Bill 276, which was ultimately folded into a larger tax incentive bill, Senate Bill 23. Thompson’s interest grew out of the proximity of Nenana Basin—the largest area in the incentive program, where Doyon is a major landowner—to Fairbanks.

The idea for the incentives arose from Cook Inlet credits initiated by former state Sen. Tom Wagoner of Kenai. Wagoner approached Doyon early on, Thompson got involved, and Doyon worked with legislators to get the legislation passed, Mery says.

Thompson’s office also worked with Kotzebue’s Rep. Reggie Joule, says Jane Pierson, Thompson’s chief of staff. Subsequent talks with the state Department of Natural Resources led to the addition of the bill’s requirement that companies release seismic data after a two-year period, she says.

Cook Inlet incentives come with a provision where producers pay back the state once they commercialize wells, Pierson says. That provision did not get included in Thompson’s bill.

“This is more wildcatting. Really, it’s a wildcat bill,” she says. “The idea is the state gets the information too. That was the trade-off.” The pluses, as far as Thompson is concerned, are that state incentives should help companies snare investors and maybe also find new energy sources. “If we had an energy supply, whether it’s oil or gas, located this close to Fairbanks, it’s a game-changer,” Pierson says. “If Kotzebue finds they can commercialize for their use, it’s a game-changer. Alaska’s pretty much an island. The more self-sufficient you can be, the better off you are.”

 

How It Works

Doyon, and any other companies interested in taking advantage of the Frontier Basins incentives, must first pre-qualify with the Department of Natural Resources Commissioner’s office. Among the considerations: well location and proximity to community in need of local energy; proximity of existing infrastructure to get any oil or gas to market; an operator’s experience and safety record; cost schedule projections; and whether the planned well is designed to take full advantage of the oil or gas potential of the prospect or reach at least 12,000 feet down—either way, getting to the level of economic hydrocarbon reservoirs. “The state’s not interested in paying the cost for a well down to 1,500 feet. That hardly tells you more than a water well would,” the Oil & Gas Division’s Decker says. “If you’re going to spend this kind of money, back this kind of exploration, you’re going to want to extract some meaningful information about these basins so we can understand the resources better.” The Frontier Basins/Middle Earth program provides 80 percent of the cost of total exploration expenditures or $25 million, whichever is less. It limits that to four wells within the six areas and no more than two wells in any one area.

A well must be more than three miles from a pre-existing well to make sure the program encourages new exploration rather than subsidizing existing operations. “This is very generous to get them through the highest risk part, which is always with the chance you drill a well and find nothing,” Decker says. Companies doing seismic analysis get compensated by the state for 75 percent of total costs or $7.5 million. Seismic work is limited to four projects, with one in each of the six areas.

Companies conducting exploration get a 4 percent tax rate for any new production that results, for seven years.

Until January, the oil tax rate for Middle Earth was the same as the rate on the North Slope, according to Destin Greeley, with the state tax division. Under the new incentive, the tax cap is 4 percent on gross. The old tax was based off a net amount. Those minor differences add up quickly, officials say.

Potential producer Doyon says it’s the pairing of state incentives with future tax breaks that make the program so appealing.

 

Shhhh ...

Other companies besides Doyon may be talking with the state about taking advantage of the Frontier Basins incentives, but officials can’t say. Confidentiality constraints bar the state from releasing any information about exploration or seismic activity. As of December 2012, DNR had heard from several different companies about four different areas. The new law, however, requires the state to release all information about the companies involved and what they’re finding during exploration. All data from drilling and seismic work must be turned over to the state for public release within two years of getting the credit. Credits apply to work after June 2012 and before 2016.

That’s OK with Doyon.

“If the state is going to fund 80 percent of the well, they ought to be able to get the data and do with it as they choose,” Mery says.

The data requirement gives the state another public benefit from the program, Decker says.

The two-year delay on seismic data gives explorers the right to operate without any competition knowing what they’re up to. When it’s past, Alaska—and Alaskans—gets information that can add critical geological and geophysical data and help draw additional activity in energy-starved regions.

“We get information and the right to make seismic data public to encourage follow-on exploration if the initial explorer throws in the towel,” Decker says, adding that the we means “state government and other interested companies, but also local citizens in need of fuel.”    

 

Zaz Hollander is a journalist living in Palmer.

This article first appeared in the February 2013 print edition of Alaska Business Monthly magazine.

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