Coalbed Methane Search Expands to Alaska

Abstract:If successful, a pilot project near Anchorage not only could increase energy supply to local areas, but could signal accelerated coalbed methane activity across the entire continent.

Analysis:The drilling's been completed on eight coalbed methane (CBM) wells in a pilot project north of Anchorage, AK, and if upcoming production testing shows them to be economic, local utility companies could have a new source of much-needed gas to help warm area homes and power local industry.

Furthermore, even with natural gas pipelines now in the area, many of the smaller communities there still depend on diesel fuel to run power generation stations and home heating facilities—an expensive necessity in remote areas of a state that's almost totally remote, anyway.

Success with CBM could, in fact, be rather crucial, given that existing conventional natural gas supplies in the Cook Inlet Basin are nearing the end of their economic life. A viable CBM production operation also would bode well for new industrial activity in the area surrounding Anchorage, Alaska's largest city.

But expanded CBM development in south-central Alaska holds promise for the contiguous U.S., as well, since some experts believe that coals will be the next most practical source of gas for America, one day perhaps even overwhelming the deepwater Gulf of Mexico as the country's leading gas supply theater. In fact, CBM already constitutes about seven percent of current U.S. gas production, and that share is climbing every day.

Alaska itself, of course, holds tremendous untapped coal reserves, particularly shallow coals in the general area around the Cook Inlet. They might possibly even serve to supply future methane to Lower 48 markets, particularly if a gas line from the North Slope were to be built.

The producing company involved in the current activity is Evergreen Resources Inc. of Denver, a leading U.S. producer of CBM. Evergreen, formed in 1981, has chalked up impressive success in producing methane from the gas-rich coals of the Raton Basin in southern Colorado. Meanwhile, it has begun expanding its operations in North America and is moving overseas, where it plans to test coalbeds in several areas in the U.K., Ireland, Northern Ireland, and Chile, as well as—of all places—the Falkland Islands. But Alaska seems to be the company's current new CBM focal point.

Evergreen last year acquired a 100 percent working interest in two Alaskan CBM properties. One—a block called the Pioneer Unit—it acquired from Unocal and Ocean Energy. The other, three tracts contiguous to the unit, it snagged in a state lease sale. Together, they total about 72,000 acres.

The leases lie about 30 miles north of Anchorage between Wasilla and Houston in the state's Matanuska-Susitna Valley, where several rivers empty into the upper Cook Inlet. In the late 1990s, as operator at the Pioneer Unit, Unocal had drilled test wells there, but determined the area would not yield commercial quantities of methane.

Evergreen, obviously, begs to differ. John Sexton, the company's president and CEO, remarked recently that it’s not uncommon for large oil companies to fail at CBM production, only to have a smaller specialist company like Evergreen follow behind and succeed. In fact, he's correct. This has often been the case not only in the Raton and San Juan basins of Colorado and New Mexico, but also in the Powder River Basin of Wyoming—currently the three major CBM hotspots in the Lower 48 States. Despite the fact that major companies hold large lease blocks in prime CBM territory in the U.S., independent operators have dominated successful development.

But back to Alaska and the Evergreen project. According to estimates by the U.S. Geological Survey (USGS), unless something is done about it fairly soon, Anchorage itself could be out of heat and electricity in seven to 13 years.

A USGS research geologist recently pointed out that the shortfall actually could come as soon as 2005, because peak gas usage occurs during the long winter months, and the area lacks sufficient storage capacity. His estimate is based on the area's current consumption rate of about 220 bcf/year, and according to the USGS, new area conventional gas reserves have not been found in sufficient quantities to equal current consumption, a condition that has existed since the 1980s.

Contributing to this, of course, is that state authorities control prices for most conventional natural gas produced. Also, no major pipeline leads outside of the state, where demand would encourage new exploration. The Anchorage area is a stranded market. Currently, the gas is consumed by only three entities: heating and electricity for Anchorage and some outlying communities; a nearby LNG plant that serves Japan, and a local fertilizer plant. However, these consumers alone are using up the current conventional reserves, which are located both onshore on the Kenai Peninsula west of Anchorage and offshore in the inlet itself.

But what about all that North Slope gas that currently is being curtailed? The general consensus is that without a major line to the Lower 48 from which to spur, it simply would be too expensive to build a new line to the Anchorage area.

So, coalbed methane from local wells probably would be the next most feasible alternative, and Evergreen Resources hopes to provide it.

Generally, methane production is most profitable when target coalbeds are at shallow depths. The drilling equipment used resembles that employed for water wells, so drilling costs are usually quite low. Like many smaller CBM producers, Evergreen provides most of its own drilling and completion equipment, including pumps for the sometimes-expensive dewatering process that precedes desorption of the gas from the coal itself.

In fact, Evergreen drilled its eight wells this past fall to depths of between 2,600 feet (800 meters) and 3,700 feet (1,100 meters). Four wells each were drilled from "pads" with close well spacing. According to the company, the wells penetrated coal seams with thicknesses of 80 (25 meters) to 150 feet (45 meters), an ideal situation for commercial production. Completion and production testing will not be attempted until next year, the company said. Once begun, that activity would the take about nine months.

However, Evergreen is encouraged by cores and electric logs from all eight pilot wells. From those indicators alone, they believe the area eventually could yield recoverable reserves of as much as 2 tcf of methane. That much would be nearly twice the amount of known proved conventional gas reserves in the Cook Inlet Basin of some 2.7 tcf.

An increased supply of gas would be a godsend for Alaska. According to a recent report by the state's Division of Oil & Gas, a large community in the state typically pays about six to nine cents/kilowatt hour for electricity, while in rural areas, the cost runs to 20 to 35 cents. The largest expense, of course, is the diesel fuel that has to be boated or flown into most rural areas. An average medium-sized rural community with a population of about 600 persons uses about 250,000 gallons of diesel fuel each year, which could be replaced by about 34.5 mmcf/year of gas.

But more gas would be needed for activity beyond home heating and electricity, however, and the state would like to see additional gas available for new industry in rural areas, which have a notoriously high unemployment rate. Sufficient gas supplies, then, also could make such rural communities more self-sufficient and provide much-needed jobs.

But all of that probably would be moot unless Alaska CBM development was to prove successful. Evergreen's efforts probably are being watched closely not only in Alaska itself, but in Houston, TX, and other Lower 48 oil company headquarters locations, as well as in Washington D.C. Somewhat indirectly, successful CBM development in the 49th state could result in increased efforts to make this country's vast coal reserves more valuable as a source of gas than as a fuel itself. That would eliminate many of the downside elements that are associated with coal mining.

And it also could add much more prominence to CBM as a fast-growing addition to the energy mix not only in this country, but in Canada, as well, where producers are only now lining up to test that country's CBM possibilities, particularly in the western provinces.

So while Evergreen Resources' Alaska CBM activity today seems somewhat insignificant compared to the petroleum industry’s high-profile, worldwide search for conventional oil and gas, it may still hold the key to much wider expansion of a secure domestic energy source. We'll have to wait and see.