Thompson pitches local drilling credits

Fairbanks lawmaker seeks to tackle high energy costs in the Interior and rural areas by developing local sources of natural gas

Stefan Milkowski

For Petroleum News

Gas pipelines get most of the attention, but Rep. Steve Thompson, the former Fairbanks mayor serving his first term in the Legislature, has a different plan for bringing natural gas to Fairbanks — incentivize local drilling.

Thompson’s HB 276 started out as a bold proposal that included a 100 percent tax credit for the first new exploratory well drilled in the Nenana basin near Fairbanks.

The House Resources Committee scaled back the credits and expanded the bill to include other areas of the state. Generous credits would now be offered to the first four seismic exploration projects and the first four exploratory drilling projects located in six target areas (Fairbanks, Glennallen, Egegik, Port Moller, Emmonak, and Kotzebue).

A Department of Natural Resources review would help ensure projects have a reasonable chance of success and would benefit the state.

Petroleum News spoke with Thompson on March 20.

Petroleum News: What was your goal in introducing HB 276?

Thompson: The goal was to get some of the smaller frontier basins explored and hopefully producing natural gas for smaller communities and remote areas suffering from the high price of heating their homes and creating electricity.

Petroleum News: What’s the status of oil and gas exploration in the Interior?

Thompson: The Nenana gas basin is approximately 60 miles from Fairbanks. There was a well drilled two years ago on the very southern tip of the geological strata (by Doyon Ltd. and partners). They didn’t hit gas but they said they had some promising looks at the cores, and that everybody feels like in the northern end of that geographic strata, there’s probably gas.

That’s what we’re trying to incentivize, getting them to drill there.

If they can do that and hit gas, that would sure solve some of the Interior’s problems — not only Fairbanks but also probably outlying areas. Tower Hill’s mine is very close to there, and they’re going to have a world-class operation that will need a ton of electricity. They’re planning on year-round employment of 500 people. Things like that are what less expensive energy would do.

Right now the cost of energy in the Interior is unbearable. We have people in Fairbanks whose bills for electric and home heating are more than their house payment.

Petroleum News: HB 276 was originally modeled after Sen. Tom Wagoner’s tax credit for Cook Inlet, which passed in 2010 and was meant to bring a jack-up rig to the inlet. Why use that as a model?

Thompson: We consulted a lot with Tom. It’s a successful formula. It seems to be able to attract companies that can attract investors.

Petroleum News: Are you confident a gas find in the Nenana basin would reduce energy prices in Fairbanks given the cost of a pipeline and other necessary infrastructure?

Thompson: Oh, yes. The ASAP line (Alaska Stand Alone Gas Pipeline) is a $7 to $10 billion project because of the length of it. If we could have something that close to Fairbanks, it would definitely lessen the cost of getting it to market.

Petroleum News: What about oil?

Thompson: I’ve heard (Doyon’s) seismic reports show there might be oil in that area too, which probably helps with enticing investors.

Petroleum News: Could finding oil near Fairbanks bring down the price of petroleum products?

Thompson: Gas is the main thing we’re looking at. The trans-Alaska pipeline runs close to Fairbanks and there’s a small line to the two refineries in Fairbanks, but we don’t see any big savings off that.

Petroleum News: Barrow is supplied by a small gas field nearby. Is that a model for what you’d like to see?

Thompson: Yeah, it is. Barrow, Nuiqsut, a lot of places up north are on natural gas, which really makes it inexpensive for them compared to us. I’ve heard electricity in Nuiqsut is 8 cents per kilowatt-hour. In Fairbanks we’re over 23 cents. Our heating oil is up between $4.10 and $4.20 a gallon.

In some of the villages around Fairbanks, it’s a lot higher. Some of those places are paying upwards of 50 cents per kilowatt-hour and anywhere from $6 to $9 for heating fuel.

Petroleum News: Do you think a gas find near Fairbanks could help outlying communities as well?

Thompson: That remains for the experts to figure out. If we could do propane, I’m sure it could be shipped by barge out of Nenana. That would be a boon for villages along the Tanana and Yukon rivers.

Thompson: We’re also looking at trucking gas from Prudhoe down to Fairbanks. We have a bill, HB 289, for aboveground liquefied natural gas storage tanks for the trucking operation.

We have a lot of possibilities, but none are for sure. We have to keep all those possibilities in play so eventually we end up with something that will help alleviate the cost. HB 9 is to ensure we continue the work, because there’s no project yet. That (pipeline) is quite a few years off. In the meantime, we’re suffering in the Interior.

Petroleum News: How would HB 289 work?

Thompson: It was originally patterned after the gas storage bill in the Kenai. But we didn’t want to tie it to the Cook Inlet because it’s for aboveground, LNG storage tanks.

We started out talking with Fairbanks Natural Gas and the Flint Hills refinery. They’re working together on trucking gas from the North Slope, and to do that, they would need a large liquid natural gas storage tank.

It started out as a million-gallon LNG storage tank. (The state) would pay 50 percent of the cost of the tank, up to $15 million. In Resources, they said this could be used by smaller villages and outlying areas that are not going to have a pipeline built to them. They reduced it down to a 25,000-gallon tank.

This makes it so Delta Junction could have a storage tank and truck gas from the Slope. Or if we end up with the ASAP line coming to Fairbanks, they could haul from Fairbanks to Delta, or Tok, or Glennallen. If they have a big line going to tidewater, LNG tankers could haul around to Bethel.

Petroleum News: Sens. Joe Thomas and Joe Paskvan are sponsoring legislation to build a pipeline from Cook Inlet north to Fairbanks (SB 215). What do you think of that idea?

Thompson: It has possibilities if they can show there’s a 50-year supply in Cook Inlet. Escopeta first said they had 3.5 trillion cubic feet of gas discovered. Now they’ve scaled it back, maybe 1.5 trillion. If that’s all they’ve got, that’s 20 years or less of gas for Cook Inlet, Anchorage, and the Kenai. I don’t think they’d want to sell to Fairbanks.

So I think that’s another one that needs to be kept in play, but I don’t think we need to spend too much money on it until they can prove they have a big supply of gas in Cook Inlet. If they’ve got the gas, it makes sense.

Petroleum News: The Resources Committee made HB 276 a statewide bill, reduced the size of the tax credits, and offered credits for seismic work in addition to drilling. How do you feel about the changes?

Thompson: I think it still has a lot of strength. It’s changed a bit but it definitely still gives a boost to companies that want to see if there’s something viable.

The Department of Natural Resources has to approve a project before they give credits, so they have to show there’s a strong possibility (of a find). I think that will cut down on liability for the state.

Petroleum News: Your original version offered a 100 percent tax credit for the first exploratory well. Now it’s 75 percent for seismic work and 80 percent for drilling. In hearings, a Doyon representative said he wasn’t sure 75 percent was enough to stimulate investment. Are you confident there’s still enough incentive in the bill?

Thompson: I think there is. If you talk to Jim (Mery, the Doyon representative), one of his problems is keeping investors interested because the Nenana basin is tied to Prudhoe Bay as far as production tax. He’s had some hesitancy by investors who say we’re going to invest in Cook Inlet because they have a zero production tax down there (for oil).

Anything we can do to help offset their cost on an exploratory well has to be a plus for them. It’s 80 percent of the cost, $22.5 million. It takes away some of the pain in case they don’t find anything.

Petroleum News: Do you think production taxes should be lowered for the Interior?

Thompson: That’s going to be an argument for another day. I think that will be looked at in the next year probably.

Petroleum News: Right now a company like Doyon could get essentially a 65 percent credit for exploratory work, by combining the exploration credit with the loss carry-forward credit.

Thompson: Yes, as it is now. This would take that 65 percent up to 80.

Petroleum News: The bill that moved out of Resources caps exploration credits statewide at 65 percent. Right now a company with existing production can get 80 or 90 percent because of the high tax rate.

Thompson: That was section (q) of the bill. I believe that was removed over the weekend.

Petroleum News: I thought Resources moved the bill March 14.

Thompson: They did. I went and talked to them and said I’m doing a committee substitute to be introduced in Finance and we’ve got a real kickback from oil companies — the big oil companies — a few of them whose view is it’s not going to work.

They agreed, Yeah, that was just a thought, we didn’t realize the problems it would cause, go ahead and take it out.

Petroleum News: What chance does HB 276 have of getting through the Legislature this year?

Thompson: Well, we’re getting awful short on time. I have a feeling because of the number of other basins we’re looking at, we have wide support.

We’re rolling in Rep. Reggie Joule’s bill, HB 280, drilling credits for the Selawik Basin (near Kotzebue). So now we’ve got six different basins that are remote areas that definitely need relief from high energy costs.

Petroleum News: What else should people know about your bill?

Thompson: This is statewide. It’s trying to bring relief to remote areas that don’t have a possibility of having a gas line built to them. If they can find a good supply of natural gas that’s marketable and could bring down energy costs in the villages, it could do away with power cost equalization, which would save the state millions of dollars in the long run.