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Vol. 16, No. 39 Week of September 25, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Geothermal meltdown?

Small Alaska electric co-op files plan to sell drilling rig to pay creditors

Wesley Loy

For Petroleum News

Naknek Electric Association’s troubled quest to find and develop a geothermal energy source appears all but dead.

The small Southwest Alaska cooperative intends to sell its drilling rig and pay its unsecured creditors a dime on the dollar.

That’s the upshot of proposed reorganization plan NEA filed Sept. 15 in U.S. Bankruptcy Court in Anchorage.

The co-op filed for Chapter 11 bankruptcy protection from creditors on Sept. 29, 2010, due to problems with the geothermal drilling program.

While the reorganization plan holds out some hope the program can continue — contingent on federal grants coming through — it seems the end is nigh for NEA’s attempt to find a cheaper way to make power.

“Going forward,” the court papers say, the co-op “will concentrate, again, on the diesel generation of electricity.”

The reorganization plan is subject to a vote of certain creditors, and a judge’s approval.

Search for alternatives

NEA serves the Bristol Bay area, known for its enormous summer runs of sockeye salmon. It was incorporated in 1949 and began distributing electricity in 1960. It is a nonprofit business, owned by its members. The utility has about 700 members and 1,100 meters in and around the villages of Naknek and King Salmon.

NEA’s major commercial customers are fish processing plants. It also has an important wholesale customer in the U.S. Air Force at King Salmon.

In the 1990s, NEA began looking at alternatives to diesel-fired power generation, including wind, coalbed methane and geothermal. Interest intensified as the co-op’s diesel costs spiked from around $1.20 per gallon in 2005 to more than $4 per gallon in 2008, says the disclosure statement filed with the proposed reorganization plan.

That led NEA’s board to “direct management to aggressively pursue a geothermal power solution to the high cost of diesel power generation.”

In early 2008, NEA bought a 120-acre drill site some 17 miles outside of King Salmon, and the following year bought an oil and gas drilling rig.

It began drilling its first exploratory geothermal well on Aug. 16, 2009, the court papers say.

But complications soon obscured the vision of multiple productive wells driving a geothermal power plant.

Problems set in

After drilling began, the U.S. Department of Energy said the well wasn’t eligible for grants, as no environmental assessment had been done for the project — a requirement NEA was led to believe wasn’t necessary, court papers say.

Another setback came three days before drilling began, when regulators with the Alaska Oil and Gas Conservation Commission told NEA its exploratory well would be regulated as an oil and gas well rather than a water well.

This meant NEA “would need more robust blowout preventers, and would have to use heavier drilling fluids than it had intended,” court papers say.

In December 2009, at a depth of 11,218 feet, a bit broke, forcing drillers to attempt a sidetrack. The first sidetrack failed, but a second was successfully drilled to 11,387 feet, the court papers say.

The change of plans with respect to drilling mud would prove a bigger problem.

On the advice of a vendor, the court papers say, NEA used barite, a dense mineral commonly used in heavy drilling fluids.

After drilling, the well refused to flow under its own pressure, preventing reliable testing of the well’s geothermal strength. NEA’s experts believe the barite drilling mud clogged the well, and despite the use of a large air compressor to try to flush out the mud, “the well continues to stubbornly resist cleaning,” the utility’s Sept. 15 court filing says.

Financial wreckage

NEA’s disclosure statement says costs associated with the well “were substantially greater than had been anticipated.”

By the Sept. 29, 2010, bankruptcy filing date, NEA “had incurred approximately $40 million of debt that was in one way or another associated with the geothermal project.”

In 2008 and 2009, NEA obtained commitments from federal agencies for about $18 million in grants or awards, but has received less than $3 million, the disclosure statement says.

Among the utility’s several dozen creditors are the National Rural Utilities Cooperative Finance Corp. and oilfield service company Baker Hughes.

Unsecured claims total $28.5 million.

The disclosure statement says the utility’s diesel power generation property is worth $6.2 million, and the drilling rig is worth about $11 million.

NEA bought the National 1320 rig in Eastern Washington in 2009 for $8.5 million, and made $3 million in winterization and other improvements.

More drilling still possible

NEA’s reorganization plan includes several major components.

First, the utility will continue to operate. It’s unlikely state utility regulators would allow a halt in service and a “piecemeal sale” of the co-op’s assets, NEA’s disclosure statement says.

The co-op proposes to sell the drilling rig and accessories, but retain the geothermal property including the wellbore. Proceeds would go first to secured creditors.

NEA also proposes to pay $3 million over 60 months to unsecured creditors. This would equate to about 10 cents on each dollar of claims, the NEA disclosure statement says.

The plan could be amended, however, should the Department of Energy release grant funds to drill another sidetrack to confirm the geothermal resource, court papers say. The payment schedule could change depending on the sidetrack results.

If NEA obtains the funding to continue its geothermal exploration and development, unsecured creditors could receive more money if the financing can be used to repay debts, the court papers say.

Rate stability a key goal

A major consideration for NEA is how to cope with the debt without running off its large commercial customers, the fish processors, court papers say.

The utility faces a “tipping point” where these customers could abandon NEA if rates go up. The customers could use or install their own generators, or they could take fish elsewhere for processing during the summer months when the salmon run hits and when NEA sells most of its commercial power.

NEA “believes that the rates it is currently charging members are very close to this tipping point,” the disclosure statement says. “A loss of any load could easily trigger a cascade effect where increased rates lead other commercial customers to switch to their own electric generation or shift operations to other communities.”

NEA rates went up substantially in 2009 “to help offset the costs of the geothermal well,” the disclosure statement says.

The reorganization plan itself does not raise rates further, but the disclosure statement says “minimal increases in utility rates” would be needed to make payments under the plan.

NEA “must balance the need to recover from rates sufficient funds to confirm a plan of reorganization with the risk that any increase in rates will cause members to elect to generate their own electricity,” the court papers say.

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