Methane gas is usually present in areas where coal is concentrated. Therefore, we explore areas where there are known coal resources because such areas have an increased likelihood of containing methane gas. The Matanuska-Susitna (“Mat-Su”) Valley in Alaska is known for its significant coal reserves, which are larger than those in the prolific Powder River Basin of the United States. Estimated Alaska coal resources are largely in cretaceous and tertiary rocks distributed in three major provinces: Northern Alaska-Slope, Central Alaska-Nenana, and Southern Alaska Cook Inlet. Cretaceous resources, predominantly bituminous coal and lignite, are in the Northern Alaska-Slope coal province. Most of the tertiary resources, mainly lignite to sub-bituminous coal with minor amounts of bituminous and semi-anthracite coals, are in the other two provinces.
The Company’s Coal Bed Methane (“CBM”) development program follows a controversial and ultimately unsuccessful attempt by Evergreen Resources, Inc. (NYSE:EVG), a Colorado based oil & gas company (“Evergreen”), to drill for coal bed methane in the Mat-Su Borough in 2004. In 2004, Evergreen was awarded coal bed methane mineral rights on nearly 300,000 acres from the State without any notification to private individuals who owned the surface rights to some of the same acreage. Additionally, Evergreen’s development proposal contemplated a denser well spacing of one well per 20 acres, which when coupled with the conventional fracturing drilling method, triggered public concerns of tremendous land surface disruption and environmental damage. In the face of insurmountable public criticism and opposition to their drilling proposal, Evergreen relinquished the mineral rights back to the State and abandoned its proposed drilling program.
As a direct result of the failed Evergreen coal bed methane drilling initiative, the Mat-Su Borough Assembly adopted some of the strictest regulations for coal bed methane drilling in the United States. The new ordinance limits well density, requires setbacks from private homes and public schools, and establishes rigorous public notification requirements, including a mandatory public hearing.
Evergreen’s mistakes and their apparent disregard for the Mat-Su Borough’s environmental concerns led to distrust of outside energy companies. In light of such developments, NAEG decided to apply its experience working with Native American communities to the Mat-Su Valley. In January 2005, the Company’s principals formed the Company’s wholly owned subsidiary, NAEG Alaska Corporation (formerly Fowler Oil and Gas Corp). For the past 5 years, the Company has built relationships with the local residents and government agencies of the Mat-Su Borough, as well as the State of Alaska. In June 2007, with encouragement from the Mat-Su Borough, NAEG applied for a drilling permit with the Mat-Su Borough Planning Commission to drill for CBM gas on its initial pilot well that is situated on 840 acres. Over 1,000 letters were mailed to residents living in the area, and a public hearing of the Mat-Su Borough was held on October 2, 2007. The permit was approved at that hearing. In addition, the State of Colorado held its public hearing on January 15, 2008, and the Company’s State permit was approved by the Alaska Oil & Gas Conservation Commission (“AOGCC”) on February 25, 2008. The Company has received support from both State and Borough governments regarding the development of CBM in the Mat-Su Valley because, in addition to its environmental sensitivity, it will address the dwindling shortage of gas and provide revenue for the State and Borough.
On June 3, 2008, the U.S. Department of Energy approved two more years of natural gas exports from Alaska’s Cook Inlet to Asia. The approval was in response to a request from Nikiski Liquefied Natural Gas (“LNG”) plant owners, ConocoPhillips (“Conoco”) and Marathon to extend the plant’s export license for two years, from April 1, 2009 to March 31, 2011. The companies will be exporting 98.1 billion cubic feet of liquefied natural gas to Japan and other Pacific Rim countries during this time. Due to Conoco’s renewal of the LNG exporting license and the dwindling supply of natural gas in the Cook Inlet, we believe that NAEG is well positioned to commercially produce CBM.
The Company’s plan includes a horizontal drilling method combined with a down-hole waste water disposal system perfected by Baker Hughes that will (i) dramatically decrease the gas recovery time, (ii) eliminate the need for multiple surface well heads and allow for the use of smaller, less environmentally-intrusive pumping mechanisms and (iii) eliminate waste water re-surfacing disposal problems that often accompany more conventional drilling methods. The horizontal drilling method enables a single vertical well to be drilled approximately 4,000 feet below the surface with multiple subsurface lateral wells reaching approximately 2,500 feet horizontally into the coal seams.
In October 2007, our wholly-owned subsidiary, NAEG CBM Operations, received a permit and approval to drill its first unitized well, called the Kircher Unit, consisting of 840 acres. This is the first coal bed methane gas drilling permit ever issued under the new coal bed methane drilling ordinance implemented by the Mat-Su Borough. In November 2007, the state permit application was filed and approved on February 25, 2008. We posted our oil & gas surety bond with the Mat-Su Borough immediately post approval of the drilling permit. An access road and drilling pad has already been built on the Kircher Unit well-site.
There is a severe natural gas shortage in the Cook Inlet area, where the supply of natural gas has been dwindling in recent years. The area’s annual production of 207 billion cubic feet of natural gas is moving in the direction of under-production rather than the projected annual market requirements.
All of the coal bed methane gas wells to be drilled are near the Enstar Gas pipeline, a common carrier pipeline regulated by the Public Utilities Commission, through which all commercial purchasers of natural gas in the Cook Inlet area, such as Chugach Electric and ConocoPhillips, access their natural gas supplies.