THE INDEPENDENTS 2003: Tapping shallow gas to power mines

Three firms plan to develop unconventional gas to supply affordable power to industry

Patricia Jones

Petroleum News Contributing Writer

Alaska’s non-competitive shallow gas leasing program was designed to locate local sources of gas consumers in remote areas can tap at less cost than other energy sources available in rural Alaska, such as diesel.

But three of the state’s shallow gas applicants see an industrial use — tapping unconventional shallow gas to power mining projects.

Teck Cominco, which applied for and received the first four shallow gas leases from the state in 2000, hopes to eventually utilize methane gas to replace diesel generators which provide about 25 megawatts of power for the company’s Red Dog zinc mine in remote northwest Alaska.

Following suit this year, Usibelli Coal Mine based in Healy, Alaska, applied for eight shallow gas leases for potential coalbed methane gas sources near its open-pit coal mine.

Holitna Energy, a start-up with an eye to providing up to 80 megawatts of power for the potential Donlin Creek gold deposit being developed in southwest Alaska, also applied this spring for four shallow gas leases in an unexplored basin in the upper Kuskokwim River region close to the proposed mine site.

All three lease applicants hope for, but have yet to prove up, methane gas contained in the buried coal seams or organic shale deposits that can be tapped to provide large amounts of continuous electricity in remote areas. Of the three, only Usibelli is located on the state’s existing power grid.

Leasing program modified

“The intent was to supply power to Bush villages. That was the intent … it’s very apparent the original intent is not how it is shaping up,” he said.

Application fees for each lease have been raised from $500 to $5,000. Annual rental payments have also been raised from 50 cents to $1 per acre.

Those changes were made “mainly to be sure those putting in leases were serious about doing something, and to keep some speculators away,” Hansen said.

The state also modified how the shallow gas can be extracted. Originally, developers could drill only to 3,000 feet. Now, developers can follow a formation to deeper levels, as long as part of the gas resource remains above 3,000 feet, Hansen said.

Most of the land surrounding rural villages is held by Native corporations and cannot be leased under the state program. And many villages don’t offer enough of a potential market for gas infrastructure to be built, he said.

“To supply local villages, the economics have to be there, and we’re finding out as we work the program, one or two villages are not going to give a company the revenue it needs to spend millions of dollars developing shallow gas facilities,” Hansen said. “It’s a young program.”

Needs more time, better zinc prices

The four leases were scheduled to expire at the end of October, said Hansen, following the company’s presentation and formal request in early October.

“They want to drill more core and have more evaluation of the organic shales,” he said. “They’re proceeding with their evaluation … I know the director was satisfied with what they have done so far and what they intend to do.”

The four leases cover 23,040 acres of land north and east of the Red Dog mine. Teck Cominco paid application fees of $500 per lease and annual rent of 50 cents per acre for its shallow gas leases. The company opted to keep the leases under the original program guidelines and will continue to pay the 50-cent rent fees, Hansen said.

Teck Cominco had planned to drill up to two shallow gas test wells this summer, but pulled back from that work, as the company had not acquired all necessary permits in time to ship in equipment, said Red Dog general manager Rob Scott.

“The plan is to get all our permits, so if we choose to do further exploration … we are in a position to do the test work,” he said.

The company will decide in the next few months if and when to proceed with the shallow gas exploration, Scott said.

“There isn’t a definite plan as far as actual timing goes. The price of zinc is extremely low and the mine is hanging on, trying to struggle through, so we don’t have a lot of extra money to spend on speculative gas that is not well defined,” he said.

Two phases of exploration are being considered. In the first, about $2.8 million will be spent drilling two wells that will test permeability and flow rates of methane gas contained in the shale formations, Scott said. The second phase would involve wells drilled farther away from the mine, to test the field’s size.

The shallow gas resource was discovered in rich organic shale during mineral exploration drilling at Red Dog, the world’s largest producer of zinc. (There is no coal in the area, a state official said.)

Since 1998, data collected from those mineral core holes, smaller in diameter than conventional shallow gas drill rigs, have produced a geological estimate of a 2 trillion cubic foot gas resource in the shallow shale formation at Red Dog.

Upstart eyes Holitna Basin

He left the company and formed his own business, Holitna Energy, to try to tap an unexplored remote sedimentary basin believed by state geologists to be gas prone. The 70-mile long teardrop shaped basin that straddles the Farewell Fault in southwest Alaska, is located about 50 miles from the Donlin Creek gold deposit, now believed to contain almost 28 million ounces of gold.

Holitna Energy applied in May for four shallow gas leases, covering 19,840 acres of land in a seven mile long, six mile wide section of state land located east of the Holitna River and southeast of the Kuskokwim River village of Sleetmute.

While waiting for the state to issue lease terms, St. George has partnered with the local Native organization covering 10 villages in the area, The Kuskokwim Corp., called TKC.

Holitna Energy and TKC are forming a new company that will develop the Holitna basin gas fields and related infrastructure, to include a power plant and electric lines to Donlin Creek and neighboring villages.

“It’s exciting because we would not be able to develop this without them,” St. George said. “Working with a Native corporation makes a lot of agencies and government people satisfied that the development will benefit the local people, which is why we’re doing this whole thing.”

TKC, which owns the surface land rights to property adjacent to the state leases, will hold a 10 percent interest in the new company, and can increase that ownership share by bringing capital to the partnership, St. George said.

The two entities are currently seeking $1.2 million for exploration work planned for this winter. St. George said he plans to conduct a detailed gravity survey and to use that information to determine drill sites for two test wells, scheduled to be completed in March 2004.

“The gravity survey will provide enough detail about the structure, and it will be less expensive,” he said. “We can also accomplish it earlier in the winter, to allow more time for planning the drilling work.”

Usibelli plans test wells next summer

The company plans its first shallow gas test wells next summer, probably drilling a conventional pattern of five wells on existing coal mining claims within a half-mile of Usibelli’s shop and headquarters.

“Some geology in that area looks favorable,” said Steve Denton, Usibelli’s vice president of business development.

Past coal mining exploration work indicates the presence of four coal seams, which are “fairly thick,” Denton said. They range in depth from 250 to 900 feet, he said.

Four water-monitoring wells are being drilled this fall in the area, so the company can begin gathering water quality background for exploration permits. The company’s consultant, Casper, Wyo.-based Goolsby, Finley & Associates, will take a look at the core samples pulled from those water monitoring wells, Denton said. “We won’t get any testing of gas production from them.”

To replace existing power and heat supplies, Usibelli would need to produce 0.4 billion cubic feet of gas a year. The coal mine burns coal and used oil for heat, and currently receives electric power from the railbelt grid, a “significant cost of operation,” Denton said.