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Tax Credits Bolster Middle Earth Exploration in Alaska

Doyon says Frontier Basins well has ‘1 in 2’ chance of gas, ‘1 in 4’ chance of oil


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Alaska Division of Oil and Gas “Frontier Basins Overview”

All of the oil and gas liquids produced in Alaska come from Cook Inlet and North Slope fields. But that may be about to change.

Separate drilling programs underway this summer by Doyon Limited and Ahtna, Inc. could produce the first oil and gas from Alaska’s vast and largely unexplored Frontier Basins.

After working to “de-risk” the Nenana Basin for ten years, Doyon Limited President and CEO Aaron Schutt says the ten thousand vertical feet well, Toghotthele No. 1, planned on state land near Nenana this summer has a one in two chance of producing gas and a one in four chance for oil.

Doyon holds about four hundred thousand acres of state oil and gas leases in the basin and forty thousand acres of subsurface rights received under the Alaska Native Claims Settlement Act.

Data shows a tremendous amount of gas generated in that region, he said. As with all oil and gas wells, the million-dollar question is where to drill to bring the trapped resources to the surface, Schutt says.

The trap contains a mean estimate of 70 million barrels of recoverable oil and 200 billion cubic feet of natural gas.

“There could be plenty of gas for Fairbanks and the rest of the Interior in that one well location,” Schutt says.

If Toghotthele No. 1 in the Nenana Basin is successful, Doyon says it could open the door to exploration in the larger Yukon Flats Basin.

Ahtna is exploring forty-six thousand acres under its Tolsona Exploration License from the state in the Copper River Basin. This summer the company will drill a deep gas exploration well of four thousand to five thousand feet deep in the thick Nelchina sandstone near Glennallen, close to a pair of earlier wells that found gas and water together under high pressures, Ahtna says.

Companies say their Frontier Basin oil and gas exploration projects are part of a larger, multi-faceted effort to reduce energy prices strangling Interior Alaska communities.

 

‘Greatest care should be exercised’

Over the past decade, Doyon was reimbursed between $62 million and $65 million through several state exploration credits—including the Frontier Basins Tax Credits Program approved by the Legislature in 2011, according to the company’s written testimony delivered to the House Resources Committee March 2.

That investment could net hundreds of millions in returns to Doyon and the state. At $60 per barrel oil, the state would collect $525 million in oil royalties alone from the oil Doyon hopes to produce from the Toghotthele No. 1 well, writes Sarah Obed, vice president of external affairs for Doyon.

Summer exploration plans were based on the “reasonable expectation” that the project would be eligible for the state’s tax credit program, now undergoing a rewrite in the Legislature, she writes.

Doyon is one of several companies using state tax incentives to reduce the financial risk of investing hundreds of millions in the state’s remote sedimentary basins where there is no current production and little existing data.

Although some oil exploration was completed in the 1960s, ’70s, and ’80s in Alaska’s Frontier Basins, most are largely unexplored.

Sandwiched between the North Slope and Cook Inlet, in a vast region also known as “Middle Earth,” federal and state studies estimate Alaska’s Frontier Basins hold 234 million barrels of mean recoverable oil and 5,641 million cubic feet of gas.

However, Doyon Senior Vice President for Lands and Natural Resources James Mery says new information from Doyon’s study of the area indicates those numbers could be much, much higher.

Since approving Frontier Basin tax credits, the state has licensed 580,802 acres, leased 605,915 acres, issued seven exploration licenses, and converted exploration licenses to leases at Susitna II, Copper River, and Nenana, Alaska Division of Oil and Gas Director Corri Feige said during a presentation November 20, 2015, to the Senate Oil and Gas Tax Credit Working Group.

“At a time when the public sector contraction of spending has the potential to plunge the state’s private sector into a recession, the greatest care should be exercised for any changes to the tax credit system,” the group wrote in its report released December 1, 2015.

 

Alaska Division of Oil and Gas “Frontier Basins Overview”

 

Stay Tuned for More Doyon Oil and Gas News

So far this season, Doyon has wrapped up its 2D seismic program in the northern part of the basin and built a couple of miles of road, a new drill pad, and work camp at the drill site near Nenana. That 2D data will be processed over the summer and will help guide future work in the northern part of the basin, Schutt says.

And when the river opens up, Doyon will begin ferrying its Arctic Fox drill rig and other equipment to the site, he says. It will take forty-five truckloads to move the whole rig across the Nenana River.

Historically, Doyon has worked in the Nenana and Yukon Flats basins. Thus far, Doyon has conducted 2D seismic, gravity, magnetics, and lakebed geochemical surveys in the Yukon Flats Basin. But exploration work there is on hold while Doyon explores its state leases in the Nenana Basin, Schutt says.

Previous wells found very thick, highly permeable rock with excellent reservoir potential, he says.

“We just need to find a place where everything comes together and that oil and gas is pooled,” he says.

Mery says drill holes on the shallow sides of the basin show immature coal and shale sources.

“We see in our seismic these same rocks much deeper where there is more heat that can release both oil and gas, which can migrate to traps,” he says. “Much of the gas we have seen in earlier wells in thermogenic—comes from deeper sources where heat has pushed the gas, including propane, from the source rock.

“The presence of propane is often an indicator of a petroleum system that includes oil.”

New 3D data means this time Doyon has a better idea of the structures underground to pinpoint its well site, Schutt says.

Doyon has worked with several partners on the project over the years but now holds a 100 percent equity stake in the field.

“The state is our current partner through tax credits,” he says. “They are a big part of the exploration effort.”

There are at least a dozen major fields in Alaska, Schutt says. But the economics are challenging and the work is very high risk.

Work planned this season will employ more than 150 direct employees and more than 30 mostly-Alaskan organizations in the Nenana Basin.

The regional corporation for Interior Alaska, Doyon Limited has more than nineteen thousand shareholders and 12.5 million acres of land. It is the largest private landowner in the state.

“Stay tuned,” Schutt says. “We are likely to have other news as we process the 2D data this summer.”

 

Ahtna Plans Gas Exploration Well Near Glennallen

Ahtna’s Frontier Basins work includes reprocessing 2D seismic data, acquiring new Tolsona 2D seismic data in the Copper River Basin, and permitting a new exploration well for 2016 near Glennallen.

The company says it selected the drill site on state land after evaluating more than forty line miles of new 2D seismic data and processing more than eighty miles of existing data in the basin.

The gravel pad and access road were constructed in early 2016, equipment was mobilized in March, and drilling was completed in April with well testing wrapped up by early May and demobilization and site cleanup expected to be complete by the end of June, Ahtna says.

The Tolsona well is two miles east of a pair of gas exploration wells Ahtna sank with the Texas-based independent oil and gas company Rutter and Wilbanks between 2005 and 2007.

This time Ahtna says it has prepared for the exceptionally high formation pressures and problems with water encroachment encountered at the two previous wells.

Ahtna says it also is exploring the feasibility of a small-scale liquid natural gas, or LNG, facilities to ship fuel to other communities, similar to how LNG is trucked to Fairbanks now.

A second proposal under consideration would construct a small gas-to-liquids plant that would convert natural gas to liquid fuels like diesel.

The regional corporation for the Copper River area, Ahtna, Inc.’s 1,900 shareholders own about 1.77 million acres of land, which includes four mountain ranges, 540 miles of highway, and three thousand miles of secondary roads.

 

NANA Looking for Interested Partners

NANA is in the early stages of an exploration project in the twenty-eight-thousand-square-mile Kotzebue Basin where Standard Oil Company of California—which later became Chevron—drilled two test wells in the 1970s about 80 miles apart.

To begin, NANA reprocessed 400 miles of the 1,500 miles of vintage 2D seismic data shot in the Selawik Basin and completed a geological review of existing information and data from two dry exploration wells drilled in 1974 and 1975: Nimiuk No. 1 drilled to 6,311 feet and Cape Espenberg No. 1 drilled to 8,373 feet.

Several companies have reviewed, or are currently evaluating, the data under signed confidentiality agreements with NANA, according to Lance Miller, vice president of NANA Natural Resources.

NANA is in the early stages of data gathering, but thus far the geology suggests the basin may be more gas prone than oil prone, he says.

Sustainable local energy would reduce energy costs—the number one barrier to development—and create opportunities to manufacture value added products, he says.

“High energy costs are crippling to livelihood and business in the region,” Miller says.

In some villages in the NANA region, fuel is nearly $10 a gallon, he says.

A nearby fuel source also could provide cheaper fuel to Red Dog Mine, which is located on NANA land and currently ships in 18 million gallons of fuel a year.

“If natural gas could help lower energy costs, that would be advantageous for the entire region,” Miller says.

State tax credits are an incentive for companies to explore in an area that is extremely expensive, he says.

NANA also is looking for other partners to help with funding and to bring oil and gas expertise to the team, Miller says.

NANA represents more than 13,900 Inupiat shareholders in northwest Arctic communities and holds thirty-eight thousand square miles of land.


Other Projects Licensed in the Frontier Basins

  • Usibelli Coal Mine, Inc. drilled one well in 2014 to a total depth of 1,279 feet in the Healy Basin gas-only. Results remain confidential under the terms of its exploration license, but the well is listed by the state as “plugged and abandoned.”
  • Cook Inlet Energy formerly held multiple leases in the Susitna Basin and southwest Cook Inlet exploration licenses, and it converted much of one exploration license to lease, but no wells were drilled. All of its non-producing assets were relinquished as part of bankruptcy reorganization filing accepted in February by the US Bankruptcy Court in Anchorage.
  • Cassandra Energy submitted an application in 2015 for an exploration license to work in the Gulf of Alaska, which is under review.
  • Samuel Cade and Daniel Donkel submitted an exploration license application to work in the Houston-Willow Basin, which is under review.

This article first appeared in the June 2016 print edition of Alaska Business Monthly.

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