Siemens-led consortium plans to test old Houston well for gas to be sent to Fairbanks

A pair of Alaska Native organizations and a multinational industrial technology firm believe they can find the missing link to the natural gas supply chain for Fairbanks in an old exploration well near Houston.

Knikahtnu Inc., an Alaska Native village corporation, in a partnership with Siemens Government Technologies and the Knik Tribe, has applied to lease about 6,200 acres north of Big Lake from the Alaska Mental Health Trust Land Office on the prospect that the tract holds commercial quantities of natural gas.

The consortium presented a competing plan to the Alaska Industrial Development Authority's Interior Energy Project to supply LNG to the Fairbanks area via rail to the Interior Gas Utility Board of Directors in late August.

Siemens representatives told the IGU board they are in talks with multiple Cook Inlet gas producers and believe they can secure feedstock gas for $5 per thousand cubic feet, or mcf, of gas, which would be significantly cheaper than the gas price Southcentral gas and electric utilities have been able to secure on much larger volume contracts.

However, contracting for gas on favorable terms for the Interior could also be challenging because it is for a relatively small demand, likely starting at a little more than 1 billion cubic feet per year range and growing as Interior residents and businesses sign up for gas.

As a result, the partners are also looking to source their own gas — giving them control over the feedstock cost — which could cut the cost of the biggest variable in the supply chain in half, they contend.

AIDEA and IGU currently have a three-year supply contract with Hilcorp for $7.72 per mcf, while the Knik-Siemens proposal before the IGU board lists a "conservative" feedstock price of $4 per mcf for their own gas supply.

Getting additional natural gas supplies to the Interior has long been seen as a way to reduce at times crippling home heating costs, but supply chain and conversion expenses, combined with a relatively small gas market, have challenged the economics of making it happen.

The gas could also go a long way towards improving the air quality that often reaches unhealthy levels during winter in the Fairbanks area if it is cheap enough to get residents who currently burn wood or heating oil to convert their home systems.

Knikahtnu owns roughly 3,000 acres near Houston and the Alaska Railroad tracks that would be the site of a Siemens modular LNG plant, and, Knikahtnu leaders hope, eventually an industrial park fed by the gas.

The Knik Tribe is part of the plan on the premise that the Tribe is eligible for federal funding streams that could help improve the economics of the project.

Knikahtnu CEO Tom Harris said in an interview that the Mental Health Trust parcel and surrounding area has been explored for oil for nearly 50 years, but drillers kept finding gas.

"If you look at the drill history there's been a significant amount of gas there," Harris said.

There are coal seams in the area that are gradually being pushed downward in a geologic action called subduction with every one of the frequent, often unnoticed earthquakes that occur in Southcentral, Harris described. The subduction leads to "natural fracking" and coal bed methane production, he said, and that led the group to believe it is worth investigating further.

That's where the Mental Health Trust land comes in. Harris estimated it would cost $3 million to $5 million for each new well in the area, but the parcel the consortium wants to lease for 10 years — at $10 per acre per year — already holds the Northern Dancer-1 well.

Trust Land Office Executive Director Wyn Menefee said the Northern Dancer well drilled by now bankrupt Storm Cat Energy in 2006 was cased but never tested.

"It's basically closed, but it's not plugged and abandoned so it can be reopened and tested," Menefee said.

Prior investigations into coal bed methane in the Big Lake-Houston area were met with resistance by residents who didn't want industrial activity in and around neighborhoods, Menefee said, so it never materialized. In this case, however, the trust parcel is far enough away from populated areas that the "urban interface problem" shouldn't arise again, he said.

Menefee added that there's no telling whether the group will be successful, given the fickle nature of oil and gas exploration, but the lease application says the partners must either bring the well into production or finally plug and abandon it.

"There was enough interest to drill the well the first time; sure the finances for the company didn't work out. Right now, with Knikahtnu considering it, (if) certain things come together — the location, the potential resource, proximity to transportation infrastructure — all of those things start working well together," he said.

Harris commented that if the state Legislature had fully funded the Mat-Su Borough's half-finished and now stalled rail spur to Port MacKenzie, the whole Knik-Siemens proposal would be moot because the rail would go right past the existing LNG plant now owned by IGU.

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Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.