Explorers 2023: Exploration licensing draws perpetual interest

Smaller players continue to utilize the frontier exploration program.

Eric Lidji

for Petroleum News

Almost the entirety of commercial oil and natural gas production in Alaska occurs in two basins: there is the North Slope including its nearshore waters in the Arctic Ocean, and there are the two onshore sides of Cook Inlet as well as the body of water in between.

These are also the general regions where the state holds lease sales each year.

Then there is the rest of Alaska: a vast state with many known and unknown opportunities for future development. Many obstacles hamper these areas: remoteness, lack of infrastructure, complex geology, land ownership and perpetual disinterest.

But opportunities undoubtedly exist.

For those companies who want to venture beyond the regions covered by existing lease sales, the state provides a mechanism to allow for activities: the exploration license.

In the decades since the exploration license program began, it has led to many issued licenses, a small number of exploration activities, and no commercial production to date.

Exploration licensing is not available everywhere, only in areas determined by the state.

The word "determined," here, is a technical term, referring to a corner of Alaska law and regulations governing land use in the state. The state Division of Oil and Gas can make a preliminary determination that certain areas are suitable for exploration licensing. From there, it can accept proposals for exploration and ultimately issue licenses, if it chooses.

Each April, companies can nominate specific segments within those areas. A nomination must cover a segment of land between 10,000 and 500,000 acres. The applicant proposes the geographic area, a financial work commitment, and a term limit. The process allows other companies to make competing bids, in an effort to get the best deal for the state.

This nomination process is intended to mimic the competitive nature of lease sales, so that the state of Alaska can fulfill the "maximum benefit" clause of the state constitution.

There are currently two active "determined" areas.

The "Southcentral Region" is an L-shaped area including the coastline along Prince William Sound and extending north to include the southern edge of the Interior, including the cities of Cordova, Valdez, McCarthy, Glennallen, Talkeetna, Paxson and Tok.

The "Nenana Region" covers a smaller area immediately west of the Fairbanks North Star Borough and immediately west and north of the Interior city of Nenana.

Through the exploration license program, the state is overseeing one active exploration license and three pending license applications, and has one license under appeal.

Houston-Willow

The partners submitted their initial application to the state in April 2007. The original application also included LAPP Resources Inc. After the 2011 death of principle Dave Lappi, the corporation was dissolved. The proposal advanced under Donkel and Cade.

The state received no competing proposals for the acreage. The partners expanded their proposed scope of work in 2015 and were awarded the exploration license in 2018.

The original decision called for a five-year term with a $750,000 work commitment, but the decision was later revised to a six-year term with a $500,000 work commitment.

Exploration in the Houston-Willow area began around 1917, when excavations for the Alaska Railroad exposed subbituminous coal, according to the Division of Oil and Gas. The coal was mined intermittently and supplied area military bases until at least 1955.

According to the decision, some 22 exploratory wells, stratigraphic test wells, and core holes have been drilled in the basin. Of those, 13 were clustered near Houston and Willow. Prior wells were drilled mostly to evaluate shallow gas and coalbed methane potential.

The U.S. Bureau of Mines drilled three Houston core holes in 1951-52, with reports of methane and brackish water. Anchorage Oil and Gas completed a sidetrack of one of these Houston core holes in 1955, but no information exists about the well results.

Anchorage Gas and Oil Development and Hackathorn Drilling separately completed five wells in the Rosetta exploration program between 1956 and 1962. The area saw little exploration for decades. Then, between 1998 and 2004, Growth Resource International and Evergreen Resources completed six coalbed methane wells in the Houston area.

"To date, drilling in the area has encountered no oil shows, and only noncommercial quantities of gas," the division noted. But, it added, "Further exploration using modern seismic, drilling, and logging techniques would likely help to resolve details of the anticline's geometry and to clarify its conventional gas and CBM resource potential."

Gulf of Alaska

In a preliminary finding from 2019, the state Division of Oil and Gas favored granting the company a 10-year license over 65,773 acres with a $1 million work commitment.

Cassandra Energy President William H. Stevens had a lease-purchase option with the Welch family of Cordova on the nearby 465-acre Katalla oil field where 154,000 barrels of oil were produced and refined in a small refinery that was completed in 1911.

The refinery burned down in 1933 and was never rebuilt.

Katalla is one of the legendary under-developed legacy fields of Alaska.

Sir Thomas Boverton Redwood encouraged a British consortium to drill an exploration well near Katalla Meadows in 1902, investigating oil seeps identified in the mid-1890s.

The British consortium sold some of its claims and wells in 1910 to Amalgamated Development Corp. out of Washington state. The following year, Amalgamated Development Corp. sold the claims to Chilkat Oil Co., which built a small refinery.

Kennecott Copper Corp. acquired the properties in 1922, a few years after additional drilling in the area led to a small boost in production. That summer, a Mobil field party reported: "If the same area with the same geology were located in California, a deep well would unhesitantly be recommended" - a sentiment that has echoed down through the decades all across the Alaska oil patch. The refinery burned down in 1933 and was never rebuilt. The area became a ghost town. All told, 154,000 barrels of oil were produced.

Following a visit to the site in 1938, Chevron geologist G. Dallas Hanna wrote, "This history of the region has been filled with countless blasted hopes and bitter disappointments. Millions of dollars have been spent fruitlessly on projects which doubtlessly seemed commercially feasible at the time, but which were destined to fail for one reason or another. Probably no other equal area in Alaska has had so sad a fate."

Even so, a new attempt to develop the area came in 1951, when Northern Development Co. discovered a provision of federal law giving the Interior Department permission to grant contracts in frontier basins. Throughout the late 1950s and early 1960s, many companies visited Katalla, drilling some 25 wells. None yielded commercial discoveries.

Chugach Alaska Corp. secured an exclusive exploration contract over the area from the early 1980s through the early 2000s. Stevens joined that venture in the early 2000s, but his project was thwarted by a combination of environmental and regulatory delays.

In late 2020, after completing its review of the proposal, the state ultimately denied the application, saying that the proposal failed to serve the best interests of the state.

"The decision isn't ruling out exploration in the Gulf of Alaska," then-Division of Oil and Gas Director Tom Stokes told Petroleum News. It ruled out Cassandra's Katalla proposal for exploration in a remote coastal location some 40 miles east of Cordova.

The change came largely as a result of interagency land management agreements.

For example, the U.S. Fish and Wildlife Service asked not to include some of the state-owned coastal lands it manages along the coast of Controller Bay. Those lands were needed for staging equipment and siting drilling locations as part of the proposal.

The final finding noted also shallow waters and navigation hazards in Katalla Bay, as well as "local severe winter weather conditions" such as wind speeds and wave heights, all of which increased the potential risk of accidents and spills during exploration.

It might have been possible to offset some of those concerns with mitigation measures, but those measures would require a large discovery. At the moment, according to the state, the geologic data doesn't suggest a large discovery. In short, "the potential positive effects of the exploration license do not clearly outweigh or balance the potential negative effects to the other resources and habitat of the license area," Stokes wrote.

Cassandra Energy appealed the decision, and the appeal remains open.

Susitna Valley

The two license areas cover 913,249 contiguous acres in the Susitna River basin within the Matanuska-Susitna Valley, immediately west of the Parks Highway. The first area covers 433,331 acres, and the second covers 479,918 acres immediately to the north.

Alaska Natural Gas Corp. submitted its proposal in late April 2017, asking for 10-year licenses, each with a $500,000 work commitment. "The proposed amount was not accepted because it did not reflect the current economic climate or the likely costs to conduct a field program sufficient to realize usable data. Costs of the proposed activities described in the proposal were considered, including remote sensing; geological, geochemical, and geophysical studies; and exploration drilling," the state concluded and instead imposed a $3 million and $3.3 million work commitment, respectively.

The licenses only allow for natural gas exploration. The Susitna Valley is considered gas-prone, with a higher likelihood of unconventional resources such as coal-bed methane.

Alaska Natural Gas Corp. is a privately held company. In state corporations filings, Robert Fowler is listed as president and Jean-Robert Pronovost as secretary and treasurer.

On its website, the company said it plans to use horizontal drilling technology to target coal-bed methane - extracting natural gas from underground coal seams in the region.

The state describes the Susitna Valley basin as underdeveloped.

To date, there have been nine exploration wells and four core holes drilled within the license area. All were plugged and abandoned as dry holes, although some had gas shows.

The 7,265-foot Union Texas Pure Kahiltna Unit No 1 was completed in March 1964, and the 13,708-foot Unocal Trail Ridge Unit No. 1 was completed in October 1980. Both wells encountered coal beds, "suggesting a correlation with the coal-bearing formations in the Cook Inlet basin that produce natural gas," according to the state finding.

While five previous wells in the Susitna basin have encountered coal seams, "none proved to have coalbed methane in economic quantities," according to the state. For that and for some other geologic reasons, the state said that the potential for conventional oil and gas, as well as coalbed methane, is "low to moderate" in the Susitna Valley.

Cook Inlet Energy LLC obtained a 10-year exploration license over the area in 2011.

Susitna Basin Exploration License No. 4 covered 62,909 acres with a $2.25 million work commitment. The company acquired a second license, Susitna Basin Exploration License No. 5, in 2012, covering 45,764 acres with a $250,000 work commitment. The company never completed its proposed work and had ultimately surrendered both licenses by 2016