The Explorers 2008: State considers exploration licenses

Proposals cover ‘frontier’ basins in Houston and Central, state issued only four licenses to date

Eric Lidji & Alan Bailey

Petroleum News

The State of Alaska offers access to land and waters in five prospective regions through annual lease sales, but for more than a century explorers have scoured other, more remote corners of Alaska in the search for oil and gas, areas not covered by lease sales.

While these areas might contain significant resource potential, they often don’t justify the time and expense of holding a lease sale. So nearly two decades ago, the state started a program to let adventurous companies poke around small chunks of the Last Frontier.

This exploration license program filled a gap in the management of state lands, but for years it remained unused. Since starting the program in 1990, the state has received only nine applications, all within the last six years, and issued only four licenses.

But the maturation of Alaska as an oil province and rising commodity prices around the world have helped spur interest in the program. Last year, the state converted a license in the Copper River to traditional oil and gas leases, the ultimate intent of the program.

And currently the state is weighing new proposals from companies asking to explore two different underdeveloped basins, one in Southcentral Alaska and another in the Interior.

BGI North America LLC wants an oil and gas exploration license covering around 72,443 acres of the Crooked Creek-Circle basin located in Interior Alaska east of the community of Central and south of the community of Circle.

LAPP Resources Inc. is requesting a natural gas exploration license covering around 21,080 acres near Houston and Willow, north and east of the Parks Highway.

The state Division of Oil and Gas received both proposals last year, and is now reviewing public comments to decide whether the licenses would serve the best interests of the state. The state has only denied one previous proposal for an exploration license.

There is no deadline for the state to rule on the two pending proposals.

Because the state staff responsible for the best interest finding also handles other similar documents for state lease sales, the Division of Oil and Gas could take a year or more to rule on the recently proposed exploration licenses.

More information on the state licensing program can be found at www.dog.dnr.state.ak.us/oil/programs/licensing/licensing.htm.

For BGI: Yukon, if you try

Specializing in seismic activities, BGI focuses on overlooked or underdeveloped oil regions around the country and often partners with more experienced operators during the production phase of projects, according to staff geologist Jesse Crews.

“What we try to bring is a level of geologic expertise,” Crews told Petroleum News in April 2008. “If we can, we try not to be too intimately involved on the operations side.”

The Crooked Creek basin would be the first exploration venture in Alaska for the company, which maintains operations in Illinois, Oklahoma and New Mexico and is working toward a new project in Arizona. The company claims to manage 5 million barrels of oil equivalent in proven reserves.

While BGI holds a current business license in Alaska, the company has no existing land holdings in the state. A trip to the subarctic would be a new and risky experience.

“This would be higher risk than the things that we’ve done in the past,” Crews said. “Of course if there’s higher risk, there’s higher reward.”

BGI is requesting a 10-year license and proposing a minimum work commitment of $500,000 to explore for oil in the acreage around Crooked Creek.

In a look at the resource potential of the Yukon Flats back in 2004, the U.S. Geological Survey estimated the Crooked Creek area could contain 160 billion cubic feet of technically recoverable natural gas and 6.47 million barrels of technically recoverable oil.

But although the basin is considered gas prone, BGI plans to look for oil, intrigued by the possibility that structures to the east extend beneath Crooked Creek, and motivated by the knowledge that rising oil prices improve the economics of any project. “If there’s gas there, that’s fine too, but it would be better if there was oil there,” Crews said.

If the company gets the exploration license, it plans to run several lines of seismic, refine the gravity work and try to pin down whether that eastern structure continues into Crooked Creek basin.

The proposed exploration area is just south of land owned by Doyon Limited and near the area being considered for a land swap between Doyon and the U.S. Department of Fish and Wildlife.

LAPP: a return to Houston

Attempts to develop these resources date back more than five decades, according to “Crude Dreams,” Jack Roderick’s history of oil and gas development in Alaska.

In the mid-1950s, Anchorage Gas and Oil Development Co. Inc. drilled several exploration wells in the area after the U.S. Bureau of Mines discovered methane gas there, but the company suspended all the wells before the end of the decade.

Now, LAPP Resources is requesting a 10-year license and proposing a minimum work commitment of $500,000 to explore the Houston basin.

But the company isn’t new to the area by any means.

LAPP Resources is an Anchorage exploration company owned by David Lappi, a longtime Alaskan and advocate for coalbed methane and shallow gas development in the state, as well as a leaseholder and energy entrepreneur.

“The goal is to find and produce hydrocarbons,” Lappi said. “I don’t think we have any particular idea about what might be there.”

Lappi has been trying to develop the resources for nearly 20 years, first examining the shallow gas and coalbed methane possibilities of the area in 1991, when he returned to Alaska after a decade-long stint in western Australia.

For the next 10 years, Lappi took part in early efforts to extract natural gas trapped in seams of underground coal near Houston, first by acquiring state leases in the area in 1993 and then by drilling five exploration wells in the area between 1998 and 2000.

Declining gas production in the Cook Inlet motivated the company to start looking again at Houston. Lappi said his company believes there is “plenty of gas in the basin” but that not enough exploration has been done to prove that hunch.

Extension sought for Nenana

Doyon Ltd., Arctic Slope Regional Corp. and Usibelli Energy asked the state to expand the terms of the license from seven to 10 years. If the state agrees, the exploration license would not expire until September 2012.

The companies have met the work commitments for the license to date.

The original licensee, Andex Resources, contracted PGS Onshore to conduct a two-dimensional seismic survey in the Nenana basin in the spring of 2005.

Over the following two years, a series of changes to the state production tax code created uncertainty and the current licensees lost three seasons of fieldwork as a result, according to Jim Mery, senior vice president of lands and natural resources for Doyon.

However, the most recent tax code revisions introduced parity for gas produced across the state, removing one of the largest obstacles facing the Nenana project. With the tax situation now settled, the licensees want time to continue exploring the basin.

The 8,500-square-mile Nenana basin lies in a long, narrow, northeast trending zone just a few miles northwest of the town of Nenana, on the Parks Highway about 45 miles south of Fairbanks in Interior Alaska. The basin exhibits somewhat similar geology to the prolific Cook Inlet basin and is generally considered prospective for natural gas.

Only two wells have been drilled in the basin, both toward the basin’s edge.