On track at Nenana
Doyon and partners form deal with Babcock & Brown Energy to drill well
With the triple fillip of a new partner, favorable production tax terms and an extended state exploration license, the group of businesses that is looking for natural gas in the Nenana basin in Alaska’s Interior is back on the road after a three-year hiatus in its exploration venture. On Nov. 17 Doyon Ltd. announced that Denver-based Babcock & Brown Energy is joining Doyon, Arctic Slope Regional Corp. and Usibelli Energy to “drill at least one vertical, 10,500-foot natural gas exploration well in the Nenana basin” in the summer of 2009.
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The planned well will be situated on Alaska Mental Health Trust land about four miles west of the town of Nenana and about 50 highway miles southwest of Fairbanks, Jim Mery, senior vice president of lands and natural resources for Doyon, told Petroleum News.
Doyon said that Babcock & Brown Energy will operate the well and will also manage any gas production resulting from a gas find. Of the four partners in the venture, Doyon has the largest equity ownership, Mery said.
Arctic Wolf rigMery said that the partners will subcontract the Doyon Arctic Wolf No. 2 rig from FEX, Talisman Energy’s Alaska subsidiary, to drill the well. FEX has the rig under contact from Doyon Drilling. UltraStar Energy plans to use the Arctic Wolf rig to drill an exploration well on the North Slope in the coming winter and is coordinating with Doyon and its partners to enable the use of the rig for the Nenana well in the summer, Mery said.
If commercial quantities of gas are found at Nenana, the Nenana partnership sees three potential gas markets, all in Alaska, Doyon said:
*Gas fired electrical power generation at Nenana — the exploration site lies close to the route of the electricity intertie between Fairbanks and Southcentral Alaska;
*Gas usage in Fairbanks for heating or power generation, with the gas being shipped to Fairbanks by pipeline; and
*Gas usage in Southcentral Alaska for heating, power generation or industrial purposes, with gas shipped by pipeline to Anchorage.
The question of which of these markets would pan out would depend on the scale of exploration success, Doyon said.
Prospective for gasThe Nenana basin occupies an 8,500-square-mile area in a long, narrow, northeast trending zone northwest of the town of Nenana and may attain a maximum depth of as much as 16,000 feet. The basin exhibits somewhat similar geology to the prolific Cook Inlet basin and is generally considered prospective for natural gas. Doyon says that the proposed well will be the first deep test in the basin.
Two wells have previously been drilled in the area, both shallow and both towards the basin edge rather than the basin center: the Nenana No. 1 drilled by Union Oil Company of California in 1962 west-northwest of Nenana, and the Totek Hills No. 1 drilled by ARCO Alaska Inc. in 1984 on the southern side of the basin. The Nenana well was drilled to 3,062 feet, found no pay intervals and was plugged and abandoned. The Totek Hills well was drilled to a total depth at 3,590 feet and encountered coal seams at various depths.
In 2002 Andex Resources purchased a state exploration license for the Nenana basin with a work commitment of $2.5 million. The license included about 500,000 acres of state land. Andex also negotiated oil and gas leases on about 41,000 acres of Native subsurface land owned by Doyon and on about 9,500 acres owned by the Alaska Mental Health Lands Trust in the basin.
Toghotthele Corp., a Native village corporation, owns the surface land over the Doyon subsurface holdings, Mery said.
In 2004 Doyon, the Native regional corporation for Interior Alaska; ASRC, the regional corporation for northern Alaska; and Usibelli Energy formed a partnership with Andex to fund the Nenana exploration.
2005 seismicIn the spring of 2005 Andex contracted PGS Onshore to carry out a 2-D seismic survey in the Nenana basin, as part of the exploration license commitment. Following seismic acquisition Andex proceeded with the analysis of the new seismic data, to determine a site for a 10,000- to 12,000-foot wildcat well — Andex had estimated the possibility of between 3 trillion and 10 trillion cubic feet of recoverable gas in the basin.
But, in 2006, uncertainty regarding changes in Alaska gas production taxes, as new production tax legislation moved through the state Legislature, put the dampers on planned drilling in the basin. And Andex eventually pulled out of the project, with the remaining Nenana partners taking over operatorship of the exploration license.
When in November 2007 the Legislature passed its eventual version of the state production tax — the Alaska’s Clear and Equitable Share, or ACES, tax — the statutes included a tax break for gas produced and used within the state. That tax break has proved crucial to moving the Nenana project forward, Mery said.
The Alaska Department of Natural Resources decision to approve a three-year extension of the Nenana exploration license, which had been scheduled to expire in September 2009, was also critical to continuing the project, Mery said (see sidebar).
“We’re drilling within a mile of state lands,” Mery said.
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State extends Nenana exploration license
On Oct.21 the Alaska Division of Oil and Gas approved a three-year extension to the Nenana state exploration license. The license had been due to expire at the end of September 2009 but will now run until the end of September 2012.
The state originally issued the license to Andex Resources in October 2002, with a seven-year term. In 2004 Andex joined up with Doyon Ltd., Arctic Slope Regional Corp. and Usibelli Energy to form a partnership for exploration of the Nenana basin. Although Andex proceeded to commission a seismic survey in the basin in 2005, the company dropped out of the partnership in 2006 because of uncertainties associated with pending changes to Alaska state gas production tax. The remaining partners took over the exploration license.
The partners have been seeking another company, to fulfill plans for drilling in the basin, and have now announced a new partnership with Babcock & Brown Energy.
As a result of the 2005 seismic work, the subsequent seismic processing and some airborne geophysical surveying, the work commitments associated with the exploration license have been met, Jim Mery, senior vice president of lands and natural resources for Doyon, has told Petroleum News.
But, because the Nenana exploration partnership lost three seasons of field work as a result of changes in tax policy, the licensees now want time to continue the exploration program in the basin, Mery said.
“Our intention is to have a bit more time so we can explore some more,” he said.
In a letter approving the license extension, Kevin Banks, acting director of the division, confirmed that the original license work commitments had been met but that “due to unforeseen circumstances, the licensees were not able to accomplish additional exploration as planned.”
The licensee must provide the division with all data obtained as a result of work associated with the exploration license, both to date and in the future, Banks said. Mery said that the partnership had already given the division the results of its seismic analysis, “as additional consideration for the (license) extension.”
New entrant to the Alaska oil and gas industryBabcock & Brown Energy, the company that will operate a new exploration well in the Nenana Basin in the summer of 2009, is a privately owned oil and gas exploration and production company with interests in Colorado, Wyoming, Illinois and Michigan, company Vice President Jim Dodson told Petroleum News Nov. 19. Dodson said that the company currently operates oil and gas production but he declined to give any details about the company’s size or its Lower 48 operations.
Babcock & Brown Energy started out in 1990 as Duncan Energy, a company owned by Babcock & Brown Ltd., a major Australian power generation firm, and by Nomura Securities of Japan, Dodson said. In 2000 Duncan Energy ended its association with Nomura and changed its name to Babcock & Brown Energy. Around 2004 Babcock & Brown Energy became completely independent from the Australian Babcock & Brown company, Dodson said.
Dodson said that Babcock & Brown Energy’s interest in the Nenana Basin reflects a recognition of the need for natural gas to supply local Alaska markets.
“We see a need for natural gas in central Alaska and Southcentral Alaska that doesn’t look like it will be met in the near term by any North Slope supplies,” Dodson said. “So we’re really trying to step in and find a local source of gas.”
Dodson was previously vice president of Andex Resources, the company that in 2002 purchased the Nenana state exploration license that the Nenana exploration partners now hold.