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Vol. 15, No. 42 Week of October 17, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Geothermal drilling woes

Alaska electric co-op forced to file for bankruptcy due to cost overruns, debts

Wesley Loy

For Petroleum News

A risky quest to lower the cost of making electricity has generated a battery of financial troubles for a rural Alaska power utility.

Naknek Electric Association on Sept. 29 filed for Chapter 11 bankruptcy reorganization, citing assets of $10 million to $50 million and liabilities in the same range.

The filing stems from the electric cooperative’s involvement in drilling a well aimed at finding an underground source of hot water to harness for making electricity.

The small utility ran into unexpected costs and other problems with the drilling venture, a bankruptcy lawyer representing the co-op told Petroleum News.

Naknek Electric generates power for communities and salmon canneries at Bristol Bay in remote southwest Alaska.

Several creditors in recent months have sued the co-op in state Superior Court in Anchorage seeking to collect debts related to the geothermal drilling effort. Some of the companies that have sued or are listed as unsecured creditors in the co-op’s bankruptcy filing are familiar names in the oil and gas industry, including Baker Hughes, National Oilwell Varco and BJ Services.

But the biggest creditors appear to be Lower 48 banks that specialize in financing rural utilities.

“NEA has engaged in a geothermal drilling project requiring extraordinary capital,” Ronald Seigley, a vice president for CoBank based near Denver, said in a statement filed in the Superior Court. “NEA has suffered material delays and cost overruns in that project. This has impaired NEA’s ability to pay its debts as they become due.”

Naknek Electric is scrambling to raise some $1.5 million by Nov. 1 to complete additional work on its G-1 geothermal well, said Erik LeRoy, an Anchorage bankruptcy attorney for the co-op.

Without the new capital, he said, the only other option might be to plug and abandon the well, wasting a bold effort to find and develop an alternative energy supply for the region.

A steamy dream

Naknek Electric is a small operation with 18 full-time employees, its website says. It serves the communities of Naknek, South Naknek and King Salmon, all located along the Naknek River.

Like most electric utilities in bush Alaska, the co-op relies on diesel to generate power. Naknek Electric burns about 1.5 million gallons of diesel a year, with peak electricity demand coming in summer as fish processing plants work furiously to can and freeze the millions of sockeye salmon returning to Bristol Bay.

The co-op for years had pondered the idea of tapping geothermal sources to make power as opposed to hauling in expensive diesel. That interest seemed logical considering the co-op’s volcanic neighbor, the Katmai National Park and Preserve.

The utility felt that trying to gain access to the park for a geothermal development would be too difficult.

Subsequently, the co-op learned of drilling technology to tap geothermal sources at deeper depths, raising the possibility of finding a source outside the park boundary and close to existing roads and the electric distribution system, says an April 2007 geothermal overview on the co-op’s website.

The co-op’s vision was to create a 25-megawatt geothermal generation plant and 450 miles of transmission lines to bring electric power to 25 villages across the region.

The co-op was eager to find alternatives to diesel, the price of which spiked above $4 a gallon in recent years, LeRoy said.

“NEA took this incredible, ballsy leap of faith,” he said. The co-op would decide not only to drill for hot water on a site about seven miles northeast of King Salmon, it would buy a drilling rig outright to punch the holes.

A private, nonprofit lender known as CFC — the National Rural Utilities Cooperative Finance Corp. of Herndon, Va. — would finance the rig purchase. CFC also provided a line of credit for drilling the first well, LeRoy said.

ThermaSource, a California-based geothermal driller and now one of the co-op’s many creditors, ran the rig and spud the G-1 well on Aug. 16, 2009.

Naknek Electric General Manager Donna Vukich told Petroleum News in July that the well was completed to a depth of 10,433 feet and found what could be a viable hydrothermal system for generating power. She talked of maybe spudding a second well in September.

Bills come due, suits fly

Filing for bankruptcy was a difficult decision for the co-op manager and board of directors, LeRoy said.

The geothermal project was over budget, he said, in part because well costs went up with a state ruling that deep geothermal holes were subject to regulation as oil and gas wells.

Drillers accordingly used a drilling mud suitable for oil and gas wells, but the mud reacted poorly with the water structure in the well, LeRoy said.

Currently, the rig still stands over the well as the co-op seeks $1.5 million to clean out the drilling mud clogging the water structure, and to install a valve, he said. To do the work, more equipment including stronger compressors are needed to lift water and drilling fluids from thousands of feet downhole. Acquiring that gear is “a $400,000 problem,” LeRoy said.

Adding to the co-op’s struggles was difficulty lining up government grants for the well, he said.

Some creditors grew nervous and started recording liens, LeRoy said.

And filing suit to collect debts.

CoBank, which in June 2009 agreed to loan the co-op $7 million to buy diesel fuel, already has secured a judgment against Naknek Electric.

So has global oil field services company Baker Hughes, for $3.6 million.

ThermaSource and Anchorage-based BC Contractors Inc. are among others that sued Naknek Electric.

Now what?

Vukich, the co-op general manager, referred inquiries about the situation to LeRoy.

He laid out two possible paths.

The first is finding the financing to clean out the G-1 well and push forward with the geothermal project, which though expensive could pay off in the long-run for the utility, LeRoy said.

The co-op is applying to the U.S. Department of Agriculture’s Rural Utilities Service for a $40 million loan guarantee, which would help secure new financing to pay back creditors and continue with the project, he said.

The second path is “losing the well,” LeRoy said.

If the search for financing fails, the co-op doesn’t have enough income to do the work and the well might have to be plugged and abandoned, he said.

As for the fate of the co-op itself, LeRoy sees no chance of it shutting down electricity production. It has money for operations and net income to pay creditors, he said.

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