page Ted Stevens tells Alaska legislators A7 to focus on investment climate

Vol. 11, No. 13 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of March 26, 2006 • $1.50

WASHINGTON, D.C. This month’s Mining News inside Senate revives ANWR Delegation, Arctic Power gird for battle in U.S. House with budget resolution BY ROSE RAGSDALE 49 vote victories on the overall budget For Petroleum News resolution and an amendment intro- duced by Sen. Pete Domenici, R-N.M., aving survived the U.S. Senate to fund the Energy Reserve Fund with budget resolution process against all revenues from ANWR leases. H odds, language that calls for open- ANWR opponents, led by Sen. Maria ing the coastal plain of the Arctic Cantwell, D-Wash., bypassed an attempt National Wildlife Refuge to development to spike ANWR drilling language in is moving to the next arena in Congress. favor of trying to bring down the entire The U.S. House of Representatives is “I am optimistic our budget resolution if ANWR instruction scheduled to debate the proposed blue- chances are better was included. The effort failed despite print for the FY2007 federal budget dur- this year than they hope fostered earlier in the week when were last year. That ing the week of March 26. Senate vote was several Republican senators vowed to The Senate adopted $2.9 trillion legis- mouth-to-mouth vote against drilling. lation March 16, including a provision for resuscitation.” The White House included ANWR – Jerry Hood, Arctic oil and gas exploration and development Power in ANWR. Republicans won narrow 51- see ANWR page A11

CANADA Canadian gas in trouble? BY GARY PARK For Petroleum News LNG poses threat to Arctic gas pipelines he loss of accessible, low-cost natural gas Coal gas touted for Mackenzie reserves combined with fast-rising finding Just a handful of liquefied natural gas termi- T and development costs are posing a threat to nals could throw a wrench into the Alaska and gas pipeline by junior company Canada’s natural gas sector. Mackenzie Delta gas projects, a Calgary ana- Add this year’s slide in gas prices to the mix and lyst warned. P resident George W. Bush is promot- what looked like a robust future only three months Bill Gwozd, the Ziff Energy Group’s vice ing the concept. So are Montana Gov. ago has turned sour. president of gas services, said five plants Brian Schweitzer and Alberta Premier The challenge is outlined in recent findings by importing 1 billion cubic feet per day of LNG Ralph Klein. Ziff Energy Group, which has predicted output would match the combined output of the two That’s good enough for West Hawk from the Western Canada Sedimentary basin will northern schemes. Development, a junior mineral explo- shrink by 2.6 billion cubic feet per day to 14 bcf And delays would further imperil the two ration and development company. per day over the next decade. Arctic pipelines, which are already lagging sev- Prompted by the enthusiasm of those Having previously reported that the full-cycle eral years behind their original timetables, he political leaders for clean coal technolo- cost of replacing reserves in the basin was C$6.10 gies, the Vancouver-based firm is now see LNG page A11 developing a plan to turn vast coal see GAS page A10 deposits in the Northwest Territories into synthetic gas in hopes of occupying some of the space on the COOK INLET proposed Mackenzie Valley gas pipeline. West Hawk is pinning its dreams on recently acquired coal holdings near Tulita (also known as Fort Norman) and near No news is bad news Fort Liard. The purchase covers all rights to 272,503 acres, with one 11,500 acre property estimated to hold reserves of 273 million Cook Inlet is finally getting a jack-up rig, but is anyone paying attention? tons of thermal coal, just a fraction of the billions of tons West BY KAY CASHMAN Hawk figures its properties hold. Petroleum News Mark Hart, president and chief operating officer of West see INSIDER page A10 he latest news about the jack-up rig coming to Alaska this summer is that there isn’t much T news. After all the hullabaloo about the need for a jack-up in Cook Inlet to get offshore BREAKING NEWS prospects drilled, only one oil and gas company has approached Escopeta Oil about using it. A3 U.S. arm of Shell mystery buyer: Calgary-based SURE Escopeta is the small Houston-based independent Northern Energy to probe untapped oil sands resource in new area that is bringing the rig to Alaska, footing the multi- million dollar mobilization, as well as the day rate A4 AVCG snags Canadian partner: Signs joint venture with charges. TG World Energy to explore North Slope, may spend $46.9M 2006-09 And after all the concern politicos have given to looming natural gas shortages in Southcentral Alaska, only one government official has offered A8 Putting spur line in context: Alaska gas development to help get an exemption to the federal Jones Act. authority report identifies 16 alternatives for Southcentral gas shortage see INLET page A4 Tellus jack-up contents Petroleum News A weekly oil & gas newspaper based in Anchorage, Alaska ON THE A COVER FINANCE & ECONOMY Senate revives ANWR Alaska Congressional delegation, Arctic Power gird for battle in U.S. House with budget resolution Canadian gas in trouble? Ziff analysts now put finding and development costs in the Western Canada basin at C$17 per barrel: LNG poses threat to Arctic pipelines A5 Taking their place in the line-up Cook Inlet jack-up in jeopardy? Marathon and BP might be ready to play in the sands, while Japan steps up contacts with Alberta government Concerns about gas shortages in and industry Southcentral Alaska have not produced political, industry interest in rig A6 EIA projects WTI at $64 per barrel in 2006 GOVERNMENT OIL PATCH INSIDER A5 Ted Stevens: focus on investment climate Coal gas touted for Mackenzie gas Administration calls for return to original production pipeline profits tax bill; Ben Stevens says he opposes committee substitute B3 Senate Resources ups ante for PPT ON THE B COVER Committee substitute increases production profits tax Forest talks Alaska gas rate from 20 to 25 percent, keeps Cook Inlet oil under present tax Resource, Lower 48 pricing, excess of demand over supply motivation to B6 Venezuela looks at privatization contract invest Aboriginal leader’s quest INTERNATIONAL Youthful Liard chief works with government to hold summer B4 Putin commits to gas supplies for China Yukon land sale B5 Mexico: alliances needed for deepwater Resources kills clawback LEGAL House Finance to start on governor’s production profits tax bill in late March B2 Kerr-McGee sues Interior over royalties Heavy oil not in PPT bill NATURAL GAS Barents Sea exploration well a bust A8 Putting Alaska gas spur line in context Oil prices steady: inventory vs. jitters Report for Alaska Natural Gas Development Authority State issues ACMP determination for Kenai identifies 16 energy alternatives for Southcentral gas storage gas shortage EXPLORATION & PRODUCTION SAFETY & ENVIRONMENT A3 Shell breaking ground in oil sands B2 BP mulls options following federal order

U.S.-based arm of Dutch mega-major emerges as B6 Polar ice loss adds to rising sea levels mystery buyer at Alberta lease sale B8 Pipe corrosion big threat in Alaska A4 AVCG snags Canadian partner PETROLEUM NEWS • WEEK OF MARCH 26, 2006 A3

ALBERTA Shell breaking ground in sands U.S.-based arm of Dutch mega-major emerges as mystery buyer at Alberta lease sale; creates new Canadian subsidiary SURE Northern Energy to probe untapped resource BY GARY PARK the primary developer and producer if the A stronger indication of what is For Petroleum News first nation relinquishes control of its under discussion is expected at a leases and simply collects royalties. Texas-based arm of Royal Dutch community meeting on April 4 when A stronger indication of what is under Shell has disclosed it paid a record the Fort McKay leadership will discussion is expected at a community A C$468 million for almost 220,000 meeting on April 4 when the Fort McKay unveil details of work done by the acres of northern Alberta oil sands leadership will unveil details of work leases in February, ending six weeks of engineering firm SNC Lavalin to put done by the engineering firm SNC speculation about the identity of the mys- a cost estimate on a mining project. Lavalin to put a cost estimate on a mining tery buyer. project. Shell Exploration and Production in Canadian subsidiary’s ongoing business. Core drilling is also under way to the Americas said March 21 it is creating In addition to Athabasca, Shell Canada define the quality of the reserves. SURE Northern Energy, a new Calgary- is also playing a role in an attempt by a Earlier reports have pointed to a possi- based subsidiary, to evaluate and poten- tiny aboriginal community in northeast- ble 25,000 bpd operation coming on tially develop the heavy oil resources ern Alberta to develop a C$1 billion min- stream in the 2013-2015 period. using possible ground-breaking technolo- ing project covering more than 8,000 The land is close to the massive oil gies. acres holding an estimated 500 million sands operations run by Shell, Syncrude SURE is separate from Shell’s 78 per- barrels of recoverable oil. Canada and Suncor Energy. cent owned Shell Canada, which is 60 The Native-owned Fort McKay Group It was inherited by the Fort McKay percent operator of the Athabasca oil of Companies, a conglomerate of seven community as part of a 15,000-acre land sands project in partnership with Chevron businesses, has been working as an oil claim settlement that gives the communi- Canada and Western Oil Sands, each field service firm for the past decade and ty C$41 million in cash over three years, holding 20 percent. last year generated C$50 million in rev- of which C$10,000 is distributed to each Shell America’s Executive Vice enue for its 550 residents through a vari- member and C$33 million has been President Marvin Odum said Royal ety of operations. locked into a trust fund for future invest- Dutch Shell has a “suite of both enhanced Fort McKay and Shell Canada have an ment and new heavy oil technologies that could agreement that could see Shell become potentially apply to this type of resource.” “While these technologies are not commercially proven, we believe there is significant potential for us to pursue this opportunity,” he said. “This move represents a distinct opportunity to assess new and emerging technology.” Limestone-encased bitumen The bitumen in the area acquired by Shell is actually encased in limestone, which would require a shift from the cur- rent methods of extracting the raw bitu- men from sandstone or dirt, using open pit mining or steam-assisted methods. Neither of those systems works with limestone, which is not easily mined and breaks down if water is used. The resource is called carbonate and until now what little data has been gath- ered suggests the leases are not suited to thermal recovery techniques. Shell is not talking in detail about its challenges although a company official told the Globe and Mail that “some type of enhanced thermal recovery will be required to economically develop the resource.” The company has said it needs more time to conduct a detailed appraisal pro- gram. For now it is encouraged by the size of the resources (which Shell has not dis- closed), current market conditions and advances in enhanced oil recovery meth- ods. Venture 60 miles west of Fort McMurray The SURE venture is about 60 miles west of the established Fort McMurray oil sands region, moving into an area of deeper deposits where Robert Bedin, a senior analyst at Ross Smith Energy Group, said companies have tried and failed to develop a workable technology. The move by a new Shell subsidiary into the oil sands caught some off guard, given the track record of Shell Canada and its ambitious plans to expand the Athabasca project from 155,000 barrels per day to more than 500,000 bpd. However, Royal Dutch Shell said it is maintaining its full support for the A4 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

continued from page A1 twice what it would have cost two years ago. NORTH SLOPE INLET So which Cook Inlet operators have said they need a jack-up to explore their TG World Energy, AVCG/Brooks Without such a waiver Escopeta and its prospects? The two most prominent are partner, Centurion Gold Holdings, will Forest Oil for its Corsair prospect and Range form Alaska North Slope JV pay hefty fines because they are using a partners ConocoPhillips and Pioneer foreign-flagged ship to transport the Calgary-based TG World Energy Corp. has announced formation of a joint ven- Natural Resources for their Cosmopolitan Songa Offshore Tellus jack-up from the ture with Brooks Range Petroleum Corp., a wholly owned Alaska subsidiary of unit. Gulf of Mexico to Alaska. The Jones Act Kansas-based Alaska Venture Capital Group LLC. Since 1999 AVCG has estab- Forest has said pre-drill analysis indi- requires U.S. flagged vessels be used lished a substantial lease position on Alaska’s North Slope; Brooks Range cates its Corsair prospect could conserva- between U.S. ports. Petroleum operates all of AVCG’s interests and services. tively contain 137 million barrels of oil According to Escopeta President Former ARCO Alaska President Ken Thompson is managing director of AVCG and 480 billion cubic feet of natural gas. Danny Davis the only company that has while John Jay “Bo” Darrah, an AVCG managing member, is chairman, president Three of Corsair’s eight leases expire in talked to him about using the jack-up was and CEO of Brooks Range Petroleum. TG World said Brooks Range is the operator January 2007. The only “practical way of another small Texas independent, of the new joint venture. extending” those leases is to unitize them, Midland-based Rutter and Wilbanks, TG World has acquired an interest in most of AVCG’s oil and gas leases and has said Bill Van Dyke, acting director of the which owns the Cook Inlet Northern agreed to participate in the exploration and development of the leases. The compa- Alaska Division of Oil and Gas. But even Lights prospect (former names were nies have also agreed on a joint venture alliance for the exploration of an “area of then, an exploration plan would be needed Tyonek Deep and Sunfish). mutual interest” onshore and offshore “between NPR-A in the west and ANWR in to hold the unit. And that would likely the east and in which BRPC/AVCG currently has no petroleum lease ownership.” Lease expiration a factor mean drilling a well in the next year or two The joint venture went into effect March 18, subject to finalizing the joint oper- and either using the Tellus or bringing in a ating agreement in 10 days. The initial joint venture term is four years, but the joint “We’re hoping to use the jack-up next second jack-up, he said. venture will continue after the initial term, unless either company terminates it. summer,” Bill Rutter Jr. told Petroleum At Cosmopolitan, ConocoPhillips said “Our entry is a major growth step for TG World,” said Clifford James, president News March 24. (Rutter and Wilbanks it and partner Pioneer are still analyzing and CEO of TG World, “It is a strategic step that brings balance to our other major said in February that it has partners for seismic data, but PN sources say the com- asset, our Tenere Project in Niger.” Northern Lights but several more partners panies are also considering putting a plat- might be added before drilling.) form at Cosmo for exploration and then Exploration program “I congratulate Danny Davis for biting converting it to production, which is what the bullet and getting In January Thompson said AVCG had a three-year exploration program in five Forest did at Redoubt a rig up here. There prospects on the North Slope. The company owns a 10 percent working interest in At Cosmopolitan, Shoal. hasn’t been a jack-up the Cronus prospect that Pioneer Natural Resources is drilling this winter. in Cook Inlet for 15 ConocoPhillips said it and According to TG World, the new joint venture is exploring properties that “can Popp offers help years or so and there partner Pioneer are still be grouped into seven highly prospective play/lease areas,” including Gwydyr Bay, The only govern- are a lot of prospects analyzing seismic data, but PN Itkillik, Ocean Point, Slugger, Southland, Titania and Whiskey Gulch. Thompson ment official to step that need drilling. … has described most of these prospects as being in the “the billion-dollar fairway,” a sources say the companies are forward and offer to It’s a new day for particularly prospective area west and southwest of the Kuparuk River and Milne also considering putting a help convince the U.S. Alaska” because of Point units (see “AVCG set to explore slope” in the Feb. 5 edition of Petroleum platform at Cosmo for Customs Service to the increase in oil and News). exploration and then grant a Jones Act gas prices, he said, TG World says that the joint venture is planning to shoot 3D seismic and drill waiver was Bill Popp, noting the inlet is an converting it to production, four wells over an initial four-year exploration program, at a total estimated cost of special assistant to the “expensive” place to which is what Forest did at US$46.9 million, with its share US$17 million, payable in stages. TG World can Kenai Peninsula explore and develop. Redoubt Shoal. elect not to participate in any part of the planned program, in which case the com- Borough mayor on oil, On Feb. 21 Bill pany will forfeit its property rights in the lands involved in that part of the program. gas and mining issues. Rutter III told The planned exploration program includes a 3D seismic survey in the 2005-2006 “We’ve asked Gov. (Frank) Murkowski Petroleum News that “Cook Inlet has exploration season, followed by a second 3D survey, the drilling of the first well and for help on the Jones Act, and written him been dormant for nearly 40 years. At the acquisition of more leases in the 2006-2007 season, according to TG World. a letter, but we haven’t heard back from sixty-dollar oil, it’s screaming to be devel- —ALAN BAILEY him,” Davis said. oped.” On March 23 Petroleum News asked Rutter Jr. said most of the inlet wells the governor if he intended to help “have only been drilled into the top of the Escopeta. He said he’s aware of the effort structure. … But you don’t know how to bring a jack-up into Cook Inlet but that much oil and gas is in a structure until it’s tough to get an exemption. However, you drill down the sides of it, drill deep- www.PetroleumNews.com he said his office was gathering more er.” information. ADDRESS Escopeta’s Kitchen wells will be Dan Wilcox CHIEF EXECUTIVE OFFICER When asked why Escopeta chose to use P.O. Box 231651 drilled in about 70 feet of water and be Mary Lasley CHIEF FINANCIAL OFFICER Anchorage, AK 99523-1651 a foreign-flagged heavy lift vessel to trans- 16,000 to 17,000 feet deep as compared port the Tellus to Alaska, Davis said no Kay Cashman PUBLISHER & EXECUTIVE EDITOR EDITORIAL to an average vertical depth of approxi- U.S. flagged vessels were available. Kristen Nelson EDITOR-IN-CHIEF Anchorage mately 12,000 feet for the deepest inlet 907.522.9469 Escopeta could have chosen a slower Susan Crane ADVERTISING DIRECTOR wells. The first well will take about 90 U.S. flagged barge but the current day days to drill and test, Bob Warthen told Amy Spittler SPECIAL PUBLICATIONS EDITOR Editorial Email rates for jack-ups worldwide — $135,000 Anchorage Petroleum News March 23. A long-time to $140,000 per day in the Tellus class — Gary Park CONTRIBUTING WRITER (CANADA) [email protected] Cook Inlet geologist, Warthen is a partner Canada necessitated using a faster vessel to make Ray Tyson CONTRIBUTING WRITER in Escopeta Oil and general manager of [email protected] the trip north. Hong Kong-based Coscol Steve Sutherlin ASSOCIATE EDITOR Alaska operations for the company’s new (HK) Investment & Development Co.’s BOOKKEEPING & CIRCULATION Alaska affiliate, Escopeta Oil of Alaska. Alan Bailey STAFF WRITER 520-foot-long Tai an kou heavy lift vessel 907.522.9469 Davis hopes that the Tellus will start a John Lasley STAFF WRITER Circulation Email will be transporting the Tellus from the [email protected] whole new wave of oil and gas explo- Allen Baker CONTRIBUTING WRITER Gulf in late May, arriving in Alaska in late ration in Cook Inlet. But even though July with a targeted first spud date of Aug. Rose Ragsdale CONTRIBUTING WRITER ADVERTISING Escopeta has the Tellus under contract for 907.770.5592 1 at one of Escopeta’s three Kitchen Sarah Hurst CONTRIBUTING WRITER Advertising Email three years with a one-year option to prospects. [email protected] extend, unless companies “step up to the Paula Easley DIRECTORY PROFILES/SPOTLIGHTS Escopeta has hired ASRC Energy plate and use it we’ll have to let it go Steven Merritt PRODUCTION DIRECTOR CLASSIFIEDS Services to operate the Tellus. ASRC 907.644.4444 when we’re done. … The demand for Judy Patrick Photography CONTRACT PHOTOGRAPHER Energy will oversee Inlet Drilling crews jack-ups is high around the world, and trained for the Tellus by Songa. Mapmakers Alaska CARTOGRAPHY FAX FOR ALL DEPARTMENTS day rates are getting higher,” he said. 907.522.9583 Forrest Crane CONTRACT PHOTOGRAPHER According to a Petroleum News source Editor’s note: Stories about Escopeta’s Petroleum News and its supplement, at drilling company Rowan a current day Tom Kearney ADVERTISING DESIGN MANAGER plans are in the Feb. 26, March 5, 12 and Petroleum Directory, are owned by rate for the Tellus would be between Heather Yates CIRCULATION MANAGER Petroleum Newspapers of Alaska LLC. 19 issues of Petroleum News. The newspaper is published weekly. $135,000 and $140,000 — more than Tim Kikta CIRCULATION REPRESENTATIVE Several of the individuals listed above work for independent companies that Dee Cashman CIRCULATION REPRESENTATIVE contract services to Petroleum Newspapers of Alaska LLC or are freelance writers.

Petroleum News (ISSN 1544-3612) • Vol. 11, No. 13 • Week of March 26, 2006 Published weekly. Address: 5441 Old Seward, #3, Anchorage, AK 99518 (Please mail ALL correspondence to: P.O. Box 231651, Anchorage, AK 99523-1651) Subscription prices in U.S. — $78.00 for 1 year, $144.00 for 2 years, $209.00 for 3 years. Canada / Mexico — $165.95 for 1 year, $323.95 for 2 years, $465.95 for 3 years. Overseas (sent air mail) — $200.00 for 1 year, $380.00 for 2 years, $545.95 for 3 years. “Periodicals postage paid at Anchorage, AK 99502-9986.” POSTMASTER: Send address changes to Petroleum News, P.O. Box 231651 • Anchorage, AK 99523-1651. PETROLEUM NEWS • WEEK OF MARCH 26, 2006 A5

ALBERTA Taking their place in the oil sands line-up Marathon and BP might be ready to play in the sands, while Japan steps up contacts with Alberta government and industry

BY GARY PARK For Petroleum News

he oil sands mania, driven

T partly by fore- MARATHON COURTESY casts of US$50-plus oil prices over the fore- seeable future and partly by the indus- try’s bandwagon fixation, shows no Marathon Executive signs of let up. Vice President Gary In a year when Heminger China and India are both talking about multi-billion dollar investments through state-owned companies, Talisman Energy says it hopes to “expose the value” of its leases and Chevron is think- ing about spending billions to become a big-league operator, you might think the sector is ready for a breather. Not quite. Now Marathon Oil has expressed interest in using some of its seven refineries in the United States to support a stake in the oil sands, speculation per- sists that BP could shed its doubts and join its peers in northern Alberta and the prospect of Japanese refiners importing synthetic crude is picking up pace. Marathon Executive Vice President Gary Heminger said his company is pon- dering an “integrated” deal by commer- cially leveraging its refinery position in ed unconventional deposits in the annual Business Council earlier in March that But that will only be possible if PADD 2 into a possible equity stake in statistical review of world energy that it she has no doubt the oil sands will be the Canada opens new United States markets the upstream oil sands. has published for more than 50 years. “single most positive development in He said Marathon’s strong selling That passing nod to the oil sands Canada we’ll see in the current decade.” see MARATHON page A6 point is that it leads market share in could be expanded as non-conventional Michigan, Ohio, Kentucky, Indiana and oil gains significance, company officials West Virginia and is No. 2 in Minnesota have said. and the Chicago marketplace. However, there is a school of thought Beyond saying that Marathon’s strate- that BP may not be able to delay indefi- gy is under wraps, Heminger did not nitely an entry into the oil sands, despite indicate whether any a rate of return of about talks are taking place The pressure to join the oil 13 percent compared with those holding oil with the 33.4 percent sands properties. sands is reflected in attached to the deepwa- statistics compiled by ter Gulf of Mexico, BP has said nothing Raymond James analyst including BP’s own BP has said nothing John Mawdsley, who Mad Dog project. about its intentions — if estimates the world has Ian Henderson, who any — leaving observers found only 16 billion managed US$680 mil- to suggest that the barrels of oil in the past lion at the JP Morgan world’s second largest Fleming Natural oil company may be five years while consuming Resources Fund in hard pressed to ignore 170 billion barrels. London, is one of many the oil sands when the observers to argue that industry is short of bypassing the oil sands is a mistake. exploration prospects. Shut out of the most attractive acreage Consumption far outpacing in the Middle East and replacing only 95 discoveries percent of its 2005 production, BP — The pressure to join the oil sands is like Chevron and ConocoPhillips — is reflected in statistics compiled by faced with having to buy reserves. Raymond James analyst John Mawdsley, But BP has always downplayed the who estimates the world has found only size of the oil sands deposit, accepting 16 billion barrels of oil in the past five only the 11 billion barrels that are “under years while consuming 170 billion bar- active development,” not the 174 billion rels. barrels that are widely seen as recover- Bank of Nova Scotia economist able using known technologies. Patricia Mohr told the Canada-China It wasn’t until last year that BP includ- A6 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

WASHINGTON, D.C. EIA projects WTI at $64 per barrel in 2006 Oil demand growth expected to be steady, only modest increase in spare oil production capacity, continued risks of instability

PETROLEUM NEWS canes, other extreme weather and geopo- 3.2 percent owing mainly to the hurri- litical instability. Total liquefied natural gas imports cane-induced infrastructure disruptions in he U.S. Department of Energy’s The agency said recent events in are projected to increase from the Gulf of Mexico. According to MMS, Energy Information Administration Nigeria, Iran, and Iraq have been of par- their 2005 level of 630 bcf to 830 approximately 400 million cubic feet per T expects crude oil prices to remain ticular concern and are contributing to bcf in 2006 and to reach 1.03 day of natural gas production is expected high, an average of $64 a barrel for current and projected high oil prices. For trillion cubic feet in 2007. to remain offline prior to the start of the West Texas Intermediate, through the end example, following attacks on Nigerian next hurricane season, June 1. However, oil facilities in mid-February, Shell sus- overall dry gas production is projected to of the year, and then decline to an average 2007, for an average daily production rate pended export operations at its Forcados increase by 2.2 percent in 2006 and 1.7 of $61 per barrel next year. of 5.8 million barrels. facility, shutting-in 340,000 barrels per percent in 2007. The agency said in its March 7 short- The Minerals Management Service day of production. An additional 154,000 term energy outlook that it based its pro- expects some 255,000 barrels per day of Total liquefied natural gas imports are barrels of daily onshore and offshore pro- jection on continued steady world oil oil production in the federal offshore Gulf projected to increase from their 2005 duction by Shell is also unavailable. demand growth, only modest increases in of Mexico to remain offline until the start level of 630 bcf to 830 bcf in 2006 and to The increase in world spare oil capac- world spare oil production capacity and of the next hurricane season June 1. reach 1.03 trillion cubic feet in 2007. ity is projected to be only modest this continued risks of geopolitical instability. Lower 48 oil production is expected to On Feb. 24, working gas in storage was year and next, the agency said, despite Henry Hub natural gas prices, which increase by 390,000 barrels per day to 4.6 an estimated 1.97 tcf, with stocks 344 bcf averaged $8.98 per thousand cubic feet in new supplies from both non-OPEC and million barrels per day this year, followed above a year ago and 641 bcf above the 2005, and averaged about $13 an mcf in OPEC countries. New supplies are being by an increase of 322,000 barrels per day five-year average. Much of the current December, have recently slipped to below offset by declines in many mature fields, in 2007. Oil production from federal off- high storage level is accounted for by $8 per mcf, the agency said, due to weak- including the North Sea, Mexico and the shore fields Mars, Mad Dog, Thunder unexpectedly warm winter weather, par- er heating demand and resulting high lev- Middle East. Horse, Atlantis, Holstein, and Nakika is ticularly in January. els of gas in storage. The EIA expects an Non-OPEC supply grew by an annual expected to account for about 14.4 per- Spot Henry Hub natural gas prices, average 2006 Henry Hub spot price of average of 800,000 barrels per day cent of Lower 48 oil production by the which averaged $8.98 per mcf in 2005, $8.11 per mcf, about 10 percent lower between 1995 and 2005, and is projected fourth quarter of 2007. are expected to fall close to $7 per mcf than in 2005, and then expects the price to to grow by 900,000 bpd in 2006 and by The agency said Alaska is expected to over the next few months (from an aver- move back toward an average of $8.74 per 1.6 million bpd in 2007. account for 13.7 percent of total U.S. oil age of about $13.44 per mcf in mcf in 2007 as demand picks up and the World oil demand growth, 1.2 million production in 2007, is expected to decline December). domestic market tightens. bpd in 2005, is expected to increase to 1.5 by 4.9 percent in 2006 and by an addi- The agency said that barring extreme On the weather front, EIA said million bpd in 2006, as U.S. demand tional 4.5 percent in 2007. Oil production weather conditions for the rest of the year, January was warmer than expected, fol- recovers from a net decline in 2005 to from recent discoveries will partially off- 2006 should bring a noticeable easing in lowed by a relatively normal February. slow growth of 280,000 bpd in 2006. set the decline in oil production from the spot natural gas prices, leading to an The agency said heating fuel demand has World demand growth is expected to Prudhoe Bay field in the North Slope. annual average decline in the Henry Hub been down this winter across fuels and be 1.8 million bpd in 2007 because of price of about 10 percent. regions due to the relatively warm overall economic growth in developing Asian Level gas demand expected this year The respite is expected to be short- weather conditions. countries, with Chinese demand growth Total 2006 natural gas demand is lived. Concerns about potential future projected at about 500,000 bpd per year. Global oil markets expected to remain near 2005 levels and supply tightness and continuing pressure from high oil market prices are keeping Domestic production then increase by 2.4 percent in 2007. Many of the same factors that drove Natural gas-intensive industrial output expected spot natural gas prices for the world oil markets in 2005, such as low expected to increase is expected to recover following last next heating season at high levels, with world spare production capacity and rapid The agency said average domestic oil year’s hurricanes, contributing to a 4.3 the Henry Hub spot price again rising world demand growth, will continue to production is expected to increase by 6.8 percent growth in industrial demand this above $10.00 per mcf. affect markets in 2006 and 2007, the EIA percent, some 350,000 barrels per day, to year and a 1.5 percent increase in 2007. The Henry Hub price is expected to said. Other factors are less certain, such an average of 5.5 million barrels per day. Domestic dry natural gas production average approximately $8.74 per mcf in as the frequency and intensity of hurri- A 5.3 percent increase is expected in in 2005 is estimated to have declined by 2007.

continued from page A5 ing industry leaders from Japan spent a they should be a source of gas, oil and week in Canada in January talking with oil China is already a contender to petrochemical products by 2020 when out- MARATHON and pipeline companies. take half of the 400,000 barrels put should comprise 1.3 million bpd of raw That was followed up in early March per day Enbridge hopes to ship such as California for synthetic crude, or bitumen, 1.66 million bpd of oil products when Alberta government officials and rep- from Alberta to British and 400,000 bpd of petrochemical prod- extends its reach to China and Japan. resentatives from Enbridge and Petro- Columbia’s deepwater port at ucts, including diesel oil and ethylene. China is already a contender to take half Canada visited Tokyo. of the 400,000 barrels per day Enbridge Kitimat, but Japanese interest in For now, Japan’s Ministry of Economy, Petro-Canada’s manager of oil sands the Gateway pipeline has been hopes to ship from Alberta to British market development, Don Goodrow, told a Trade and Industry is weighing the possi- Columbia’s deepwater port at Kitimat, but conference that we are “here to hear your piqued this year. bility of importing synthetic crude, which Japanese interest in the Gateway pipeline needs.” could become an economic proposition has been piqued this year. Duke du Plessis, from Alberta Energy Research Institute, said that not when the Kitimat port is able to receive A delegation of government and refin- Economic Development and the Alberta only can the oil sands offer stable supply VLCCs, very large crude carriers. PETROLEUM NEWS • WEEK OF MARCH 26, 2006 A7

JUNEAU Ted Stevens: focus on investment climate Administration calls for return to original production profits tax bill; Ben Stevens says he opposes committee substitute BY KRISTEN NELSON investment in those Alaska prospects, he world. Petroleum News projects. He said he said. He said he hoped the believes a new tax he battle in Juneau over appropriate Legislature wouldn’t Rubber stamping bill must be fair to changes to production tax rates took “nickel and dime this not expected people who have T an interesting turn the week of March process” that it’s Stevens said he already made invest- 20, with Sen. Ben Stevens, R- going through with doesn’t think anyone ments. Anchorage, noting in a meeting of Senate the oil tax and the expects 60 legisla- ConocoPhillips, he Resources March 22 that he opposes the gas pipeline. tors would take the said, has made over committee substitute, and his father, U.S. He said the exist- TED STEVENS “good piece of FRANK MURKOWSKI half the investments BEN STEVENS Sen. Ted Stevens, R-Alaska, telling legis- ing severance tax work” that the gov- that would be affect- lators that he thinks the focus should be on system with its economic limit factor, or ernor and industry put together and rub- ed. They are also the company who urged the investment climate. ELF, worked to bring investment money berstamp it. But making changes is one the governor to move the gas pipeline. The senior Stevens said in his address to enhance development. thing, he said, throwing it out and starting They’ve provided the momentum and to the Alaska Legislature earlier March 22 Industry has agreed that with oil prices all over again is another thing. And the they’re going to be punished more by that there must be a favorable climate for so high there should be taxes in place of suggestion of some legislators that they elimination of the transition provisions, investment in Alaska, and noted that what ELF, he said, but the industry made recent should act without any respect to the pro- Stevens said. happens in the state Legislature impacts investments from which the state will get ducers hurts the investment climate, he He said he wasn’t urging the both development within the state and income, and industry would like to recov- said. Legislature to rubberstamp but to be fair. what happens in Washington, D.C. er those investments. The opportunities Alaska has for devel- Remember, he said, we’re asking On the D.C. side of the equation “I think that is perfectly normal and opment — the gas pipeline, NPR-A, OCS industry to invest in ANWR, NPR-A and Stevens told legislators that the state has perfectly proper” and that the state should and ANWR — are investment heavy, he the OCS. There are plenty of opportunities few friends in Washington, where the feel- create the climate for investment so that said, and the state competes for invest- ing is one of why should the federal gov- people will put up money to develop ment with opportunities elsewhere in the see TAX page A8 ernment send money to Alaska when Alaska is not willing to put its own money into projects. Others, he said, believe the state already gets too much federal aid. The state’s economic potential is extraor- dinary, Stevens said, with two-thirds of the nation’s outer continental shelf, gas hydrates and half of the nation’s coal. With the potential of the gas pipeline, the Arctic National Wildlife Refuge, the OCS and the National Petroleum Reserve- Alaska, the state needs to proceed careful- ly, he said, because each involves federal land. He also said the state competes with many areas of the world for resource development and there must be a favor- able climate for investment in the state. Transition provisions crucial Asked about his views on the produc- tion profits tax in a press conference after his address to the Legislature, Stevens said he believes the focus should be on the investment climate in Alaska. He said he thinks that elimination of the transition provisions which the governor proposed as part of the production profits tax was particularly damaging. Under the governor’s proposal compa- nies would have been allowed credit for investments made over the last five years when there was the expectation that fields developed, like the Fiord and Nanuq satel- lites, would pay no severance tax. Stevens said the state will need invest- ment for development of NPR-A, the gas pipeline, ANWR and the OCS, all of which will bring the state a lot of money. The job of the Alaska Legislature, he said, is to create a favorable climate for A8 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

ALASKA Putting natural gas spur line in context Report for Alaska Natural Gas Development Authority identifies 16 energy alternatives for Southcentral Alaska gas shortage BY ALAN BAILEY gas line direct from the North Slope to the close second. A spur gas line with an esti- The spur line option scores fairly low Petroleum News Cook Inlet; building an enriched gas line mated delivery of 145 billion to 220 billion because of its dependence on a North Slope that would deliver natural gas and liquefied cubic feet per year falls a little lower on the export gas line. Colorado-based team has complet- petroleum gas direct from the North Slope scale. ed a study into energy alternatives to Cook Inlet; importing LNG from outside Other natural gas options, such as Start-up date for Alaska’s Cook Inlet region. A Alaska; developing other Alaska gas basins increased Cook Inlet production, the pro- The next criterion was start-up date. Commissioned by the Alaska such as the Nenana, Copper River and duction of coalbed methane or the develop- How quickly would the energy source Natural Gas Development Authority, the Bristol Bay basins; and implementing coal ment of gas from other Alaska basins could come on line and start providing energy study shows how options such as Angda’s gasification, as has been proposed for produce significant volumes of gas but fall service? proposed gas spur line from Glennallen to Agrium’s Nikiski fertilizer plant. short of the delivery capabilities of a Gas conservation and increased gas pro- Palmer compare with each other in tack- The alternatives for reducing gas pipeline connection to the North Slope. duction have already started to happen and, ling projected gas demand consist of the increased use of Imported LNG and coal gasification could so score highly under this criterion. shortages in the coal-fired electricity generation; the also produce significant amounts of ener- Electricity conservation also comes out region. increased use of hydropower; the use of gy. near the top. The implementation of vari- Harold Heinze, wind power; the use of nuclear power; the Within the next few years, alternative ous gas line proposals could not happen FORREST CRANE Angda CEO, use of tidal power; natural gas conserva- energy sources such as coal power, wind until more than six years in the future. explained at the tion; electricity conservation; and the use power and hydropower are only capable of Options such as hydropower, coal power March 13 Angda of technologies such as fuel cells to distrib- supplying much smaller amounts of ener- and nuclear power seem even more distant board meeting that ute electrical generation to the points of use gy, according to the study. because of the long lead times involved in Angda had hired an and allow the harnessing of co-generated developing the necessary plant and infra- out-of-state team that Harold Heinze heat. Prerequisites for success structure. could take an inde- The team evaluated the energy alterna- The next criterion, termed “prerequi- pendent view of the Cook Inlet situation. tives against each of eight criteria. By sites for success,” considered hurdles to the Investment Angda also wanted a relatively non-techni- doing a separate evaluation against each success of each energy alternative. An The study team next considered the cap- cal study that most people would under- criterion the team could show different alternative that can be implemented easily ital investments required for implementa- stand. ways of viewing the relative strengths and scores high under this criterion; an alterna- tion: An alternative requiring relatively low “The reason we hired them was to come weaknesses of the different options. tive involving an obstacle course of poten- capital investment scores high, while an up with a product that could be publicly “This is one way that you can consider tial obstructions scores low. alternative requiring major capital invest- portrayed to a fairly wide audience,” the alternatives from different perspectives Gas conservation, electricity conserva- ment scores low. Heinze said. … different things are important to differ- tion and increased Cook Inlet production Using this criterion, a group of alterna- ent people and stakeholders,” Dunmire come out on top under this criterion. 16 alternatives tives involving small-scale power genera- said. “Things like gas conservation and tion facilities floats to the top. These alter- Team leader Carolyn Dunmire told the And the team chose evaluation criteria increased gas production are actually hap- natives consist of hydropower, tidal power Angda board that in addressing a projected that it thought would cover the gamut of pening now because of the higher gas rates and distributed electricity generation. shortfall of gas supplies relative to gas people’s concerns relating to energy sup- that are being seen,” Dunmire said. Energy conservation and the import of demand the study had identified 16 energy plies. Options such as wind power and coal LNG would also require relatively low cap- alternatives for Southcentral Alaska. Some power score quite high because they have Energy service ital investment. alternatives could increase gas supplies, been successfully demonstrated in Alaska. Alternatives involving the construction while others would reduce demand. The The first evaluation criterion, termed However, these alternatives would require of pipelines score low under this criterion, study only considered alternatives that “energy service,” considered the total the construction of new infrastructure. although a spur line would be considerably might be implemented in the next five to 10 amount of energy that a particular alterna- The bullet line and enriched gas line cheaper than a direct pipeline from the years — that eliminated consideration of tive could provide. from the North Slope fall in the middle of North Slope (the study cites estimated potential mega-projects such as a Susitna Using that criterion, alternatives that the pack, because the viability of pipeline costs of $3 billion to $4 billion for a direct River hydro scheme. involve the direct delivery of increased vol- construction would require an estimated line, compared with $300 million to $900 “It’s so large and unlikely to get through umes of natural gas and other petroleum increase in industrial natural gas demand to million for a spur line, depending on the all of the political and environmental and products become clear winners. An 500 million cubic feet per day in the Cook route of the main North Slope gas line). funding hurdles,” Dunmire said. enriched gas line direct from the North Inlet region (based on data in a 2004 U.S. Increased Cook Inlet gas production and The alternatives identified for increas- Slope comes in at the top of the pack, with Department of Energy report, Petroleum gas production from other basins also score ing gas production consist of increasing a capability of delivering annually 360 bil- News has calculated that the combined low, presumably because of high explo- production from Cook Inlet gas fields; lion cubic feet of natural gas and 16.5 mil- capacity of the current industrial plants in ration and development costs. building a spur gas line from a main North lion barrels of LPG. A bullet line, deliver- the region is about 350 million cubic feet Slope gas export line; building a “bullet” ing just natural gas from the slope, comes a per day). see SPUR page A10 continued from page A7 Stevens said, they really don’t need to be Stevens said he objected to moving the ernor said, what we negotiated. What was here to make a profit. working draft. “I don’t agree with rates negotiated, about twice what industry is TAX proposed” in the committee substitute, currently paying, was a “fair tax rate” Ben Stevens opposes Senate Stevens said. along with incentives to stimulate explo- elsewhere for investments. Alaska gives Resources CS The committee adopted its working ration and stimulate getting more oil pro- them the advantage of being under the Senate Resources took up amendments draft, which raises the tax rate to 25 per- duction, as well as incentives for smaller American flag and they’d really rather be cent (from 20 percent in the administra- oil companies. here if the investment climate is right, but, to its committee substitute for Senate Bill 305 the afternoon of March 22 and Ben tion’s bill), reduces the transition provi- He said the PPT as proposed will sions and adds a progressive tax on top of “maximize returns to Alaska ... in the long the PPT. run.” Stevens also joined Sen. Ralph And, he added “you don’t tax your way Seekins, R-Fairbanks, in objecting to mak- to a gas line.” The assumption in a negoti- ing the tax effective April 1. Seekins said ation, he said, is that both sides are some- a retroactive tax was “not fair,” and said he what satisfied but not completely. would have trouble voting for any tax that The administration negotiated with the is retroactive to before the bill passes. oil companies, he said. The Legislature is The committee worked March 22 on now working on the proposal industry adopting technical amendments. accepted. Senate Resources Chair Tom Wagoner, If the bill that comes out of the R-Kenai, said he hoped to have a complet- Legislature is within the realm of the 20 ed working bill back from drafters by the percent tax rate, we’ll move to the gas con- end of the day Friday, March 24. tract. The governor said he can’t speak for Governor: goal of tax long-term what industry will be willing to accept: If Gov. Frank Murkowski told members it fails, he said, it will be because the of the press March 23 that he thought Sen. agreement which was basically accepted Ted Stevens’ support of the PPT was evi- has been violated to a degree to which it’s dent from his remarks to the Legislature. no longer acceptable. He encouraged legislators to recognize If we don’t get a favorable PPT, the gas that the “objective is not to get the highest line is a moot point and what we walk out maximum tax on oil.” That is not, the gov- with is a tax on oil, Murkowski said. PETROLEUM NEWS • WEEK OF MARCH 26, 2006 A9

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B8 Alaska for over 50 years, provides Frontier Flying Service UAA Department of Engineering transportation and logistics services in Udelhoven Oilfield Systems Services G-M Unique Machine domestic and international markets Unitech of Alaska from four operating business lines: liner Great Northern Engineering Univar USA services, logistics services, petroleum Great Northwest Usibelli services and marine services. In Alaska, Hawk Construction Consultants U.S. Bearings and Drives Crowley provides energy support; con- H.C. Price VECO tract towing and transportation; tanker Hilton Anchorage Welding Services assist and escort; salvage and emer- Holaday-Parks ...... B8 WesternGeco gency response, and petroleum trans- Hotel Captain Cook ...... B4 Wiggy's-Alaska portation, distribution and sales. Hunter 3-D Worksafe Bruce Harland graduated from the Industrial Project Services WSI-Total Safety ...... A5 U.S. Merchant Marine Academy and Inspirations XTO Energy obtained his MBA from Seattle Jackovich Industrial & Construction Supply ...... A11 University. He joined Crowley in 1984 JEMS Real Estate as Anchorage cargo supervisor and has Judy Patrick Photography Kenai Aviation held progressively responsible manage- Kenworth Alaska ment positions with the company in Kuukpik Arctic Catering Alaska, Seattle and Houston. Harland Kuukpik/Veritas ...... B3 earned the Thomas Crowley Award in Kuukpik - LCMF 1995. He and his wife Karen and their All of the companies listed above advertise on a regular basis son and daughter now live in Seattle. Lasser Inc. with Petroleum News A10 PETROLEUM NEWS • WEEK OF MARCH 26, 2006 continued from page A8 and nuclear power rank very low because she said. are looking at and what happens with regard they involve imported technologies. to a North Slope gas line, the team has con- SPUR Imported LNG falls to the bottom of the Environmental impact cluded. list because of a presumed large negative The team also evaluated the alternatives The feasibility of early implementation Monthly utility bill impact on the state’s economy. by assessing any environmental impacts that will determine the viable options in the near Development and production costs ulti- are probably unavoidable, after taking into term — energy conservation coupled with mately translate into bills from energy util- Uncertainty account compliance with environmental increased local gas production seem the ities to energy consumers. How much The study team then considered the laws and other environmental impact miti- obvious short-term alternatives. might each of the energy alternatives uncertainties associated with the various gation requirements. Looking a little further into the future, impact a consumer’s monthly utility bills? energy alternatives. Alternatives with a On this basis, energy conservation coal gasification seems a good option that Gas and electricity conservation would clear route forward score high on this cri- comes out ahead. could keep industrial facilities operating, as actually reduce these bills; all other options terion, while alternatives clouded with “Things like (energy) conservation well as providing electrical power. However, would ultimately result in bill increases, the uncertainty score low. would likely have a net positive environ- the success of this option depends on prov- study concluded. Looked at from this perspective, gas mental impact, because you’re using the ing the process and demonstrating the cost- Relatively low-cost energy production and electricity conservation come out as same amount of fuel more efficiently,” effectiveness of using Alaska coals. systems such as coal power, wind power clear winners. Alternative energy sources Dunmire said. Moving into more of a long-term view, and hydropower would only trigger a fairly such as hydropower, coal power and wind On the other hand, increased gas produc- the various gas line options come into play modest increase in utility charges. On the power, that involve technology proven to tion within or adjacent to the region, and as a means of delivering relatively large other hand, rates for gas delivered through work in Alaska, also score fairly high. coal power, all score relatively low under quantities of energy. Coal and wind power a spur line would depend on Lower 48 nat- Gas pipeline options fall in the middle this criterion because of the necessary also seem to have a place in this longer-term ural gas prices. The price impact of a direct of the pack because of uncertainties industrial developments, such as gas fields. perspective. line from the North Slope would depend on regarding costs and construction time- Other options, including alternative But, if a North Slope gas line is built, a the extent to which industrial gas usage frames. energy sources and the various gas line gas spur line tops the list of options for could support the economics of the line. “Things like the spur line are fairly options, fall in the middle of the list. Southcentral Alaska, Dunmire told the The study team saw increased gas pro- uncertain, depending on the costs … and Angda board. That line could deliver rela- duction from Cook Inlet or production the main line has to go in,” Dunmire said. Conclusions tively large volumes of gas and would cost from other gas basins as having quite a high Nuclear power also lands somewhere So what happens when you meld togeth- considerably less than a direct line to negative impact on utility bills, because of near the middle of the list — issues regard- er all of the options and criteria? Are there Southcentral Alaska from the North Slope. the need for high gas prices to encourage ing a site license in a seismically active any clearly preferred options for future “It provides a lot of energy service for a exploration for new gas reserves. region would seem to counterbalance the energy supplies in Southcentral Alaska? medium level of investment,” Dunmire Imported LNG came in on the bottom of reliability and affordability of a small- That depends on the timeframe that you said. the list under this criterion, because of scale nuclear reactor. operating costs and the dependency on The team gave increased gas production world LNG prices. from the Cook Inlet and other basins low continued from page A1 project could be economic at oil prices scores under this criterion because of of only US$25 a barrel. Impact on Alaska citizens uncertainties regarding the amount of eco- INSIDER Trading on the TSX Venture nomically recoverable natural gas that Exchange, the company has seen its Energy options would have other Hawk, is bullish on the prospects of might be discovered. shares range from 13 cents to 87 cents impacts on Alaska citizens. These impacts producing 200 million cubic feet per Viewed from an uncertainty perspec- over the past 52 weeks. Losses have include levels of employment; permanent day along the Mackenzie pipeline route tive, tidal power seems an improbable totaled over C$1 million in the three fund dividend levels; the levels of state rev- and plans to open discussions with option, the team thought. Dunmire com- years to April 30, 2005. enues; and the use of internal Alaska ener- Imperial Oil, the Mackenzie lead part- mented that although the massive tidal The company has other coal interests gy resources and technologies. ner, about becoming a shipper. At this flow in the Cook Inlet appears enticing as in British Columbia and mineral inter- Looked at from this point of view the point Imperial has had no contact with an energy source, no one has yet demon- ests in Chile and Mexico. various options for increasing Alaska gas West Hawk, but is open to exploring strated a tidal power generation system on West Hawk management believes production, including the North Slope possibilities with any potential shipper. a large commercial scale. In addition, silt coal gasification is in the “early stages pipeline options, looked good, because they Hart has indicated West Hawk is and winter ice in the waters of the inlet of benefiting from the enormous move- all involve significant Alaska employment eying plans to build coal gasification would present significant challenges for a ment in U.S. policy to derive 75 per- and increased state revenues. Energy con- complexes in four phases at a cost of tidal generator — no-one has done a good cent” of its petroleum needs from North servation ranks fairly low. Power generation C$400 million-$600 million per phase. feasibility study for tidal power in Alaska, American sources. options such as wind power, tidal power Calculations at this stage indicate the —GARY PARK continued from page A1 And some have already moved in that ment to handle the projected demand, direction, including industry giant EnCana rattled the industry in February Ziff analysts now put finding and GAS EnCana and closely followed junior when it slashed US$500 million from a development costs in the Western Anderson Energy. capital budget of US$5.7 billion-$6 bil- Canada basin — the largest single per thousand cubic feet in 2004 — double lion in response to the fast-rising costs of five years earlier — its message took on component of gas-supply costs at F&D Western Canada basin drilling rigs and support services. new meaning earlier this month when 45 percent — at C$17 per barrel costs C$17 per barrel Anderson, under the chairmanship of AECO/NGX spot prices and the near- of oil equivalent compared with industry icon J.C. Anderson, announced month contract price stumbled close to Ziff analysts now put finding and March 17 that low gas prices and high rig C$6 in 1995. C$6 per gigajoule (a thousand cubic feet development costs in the Western Canada rates had forced it to slash C$12 million equals 1.05 gigajoules). basin — the largest single component of from a C$70 million capital budget. their helms. The simple message from those trends gas-supply costs at 45 percent — at C$17 Fueling the mood of unease, gas-heavy J.C. Anderson built his previous cre- is that producers will likely cut their per barrel of oil equivalent compared with Shiningbank Energy Income Fund over- ation, Anderson Exploration, into budgets, Simon Mauger, manager of gas C$6 in 1995. turned its earlier decision to hike its Canada’s sixth largest independent pro- services at the Calgary-based energy con- Although many producers have hiked monthly cash distributions to 30 cents ducer over more than 30 years before sell- sulting firm, told a Ziff seminar March their capital spending plans and service from 23 cents and lowered the payouts to ing out to Devon Energy for C$5.3 billion 15. companies are churning out new equip- 25 cents, blaming the current gas roller- in 2001, then going back to his roots by coaster. launching a new junior E&P company. The fall in commodity prices is also a Profico’s chief executive officer is factor in a decision by privately held Clayton Woitas, who was CEO at high- Profico Energy Management, Canada’s flying Renaissance Energy when it was largest junior producer at 105 million acquired by Husky Energy for C$4.3 bil- cubic feet per day from its Saskatchewan lion in 2000. properties, to cancel a sales process which Mauger said the highest-cost supplies had been expected to fetch a bid of about will get hit the hardest as prices turn down C$2 billion. at some point. Anderson and Profico merit close attention because of the experience at see GAS page A11 PETROLEUM NEWS • WEEK OF MARCH 26, 2006 A11 continued from page A10 spending on research into exploration and Middle East and US$2.50 in Asia-Pacific. Canada’s commitment to the North extraction methods to offset the risk- He said other negatives in the Canadian American Free Trade Agreement which GAS averse mood as F&D costs have climbed. gas industry include a focus on short-term requires it to keep U.S. exports and domes- Russum estimates that Alberta, results, a reluctance to take on risk, a tic consumption in proportion and the Foothills, B.C. feeling cost crunch Canada’s energy powerhouse, could face hands-off approach by governments to growing need for gas to extract oil, gener- Of the eight strategy areas Ziff has a rapid decline in gas output from 14 bcf developing an overall energy plan; ate electricity and meet industrial order. carved out of the Western Canada basin, per day in 2000 to 9 bcf in 2020 and less two are feeling the cost crunch — the than 6 bcf by 2024. Foothills area, which extends down the Just to hold the line on current output, continued from page A1 The worry for Western Canada’s gas spine of the Canadian Rockies has experi- Alberta would have to complete 17,000 LNG producers is that offshore gas could be enced cost escalation, with acquisition conventional wells a year or 25,000 aver- delivered to North America for less than age Horseshoe Canyon wells, assuming the cost of producing the gas on the costs now slightly higher than F&D costs, told a Ziff seminar. base production is declining by 22 percent continent. while the British Columbia Plains is a vic- Consistent with the concerns previ- a year. However, Gwozd does not expect all tim of higher F&D costs, making it ously expressed by Imperial Oil execu- While conceding that price forecasts of the LNG import terminals proposed cheaper to buy than explore. tives, he said North American produc- are difficult, Russum is in no doubt that for North America will be built, virtual- On the growth front, Ziff expects 2,500 ers should be “very wary of the poten- activity is driven by climbing prices, not ly ruling out the two facilities planned to 3,000 coalbed methane wells annually tial of LNG to overrun them.” shrinking production. for the northern British Columbia coast in the Calgary-to-Edmonton corridor Depending on where the imports Russum noted that researchers have because of the economics. until 2014, while tight gas should double originated, he estimated that regasified underscored the challenge facing Canada, Ziff believes it is more likely LNG over the same period to 1.2 billion cubic LNG could reach the Gulf of Mexico where reserve replacement costs were terminals in the works for eastern North feet per day. for prices ranging from US$2.49 per C$19.09 per boe in 2005, compared with America will go ahead to offset declin- Speaking to a Canadian Energy thousand cubic feet to US$4.50, with US$8.40 (about C$7.30 at current ing Western Canadian output, rising gas Research Institute conference, David the average price likely to be US$3.50. exchange rates) in 2002. consumption in Alberta’s oil sands and Russum, a technical specialist with AJM Gwozd said LNG liquefaction costs That puts Canada in an unfavorable higher demand in Ontario as that Petroleum Consultants, echoed the theme for a 1 bcf per day terminal would be light when staked up against other 2002 province’s coal-fired gas plants are that record drilling is unable to replace US$1 per thousand cubic feet, or lower, numbers of US$7.10 in the United States, phased out. production. while regasification would cost about US$6.50 in Europe, US$5.30 in South —GARY PARK He pointed the finger at insufficient 50 cents. and Central America, US$3.10 in the continued from page A1 D.C., agreed. aged consultation (by Arctic Power) with ranks of GOP members, Hood said. “Considering the Senate didn’t have the Alaska delegation.” Just as they did last year, 24 moderate ANWR the votes to pass the budget resolution at Hood said Arctic Power’s efforts in House Republicans sent a letter to Rep. noon the day of the 2005 reflected the Jim Nussle, R-Iowa, who chairs the energy exploration and development in vote, I call that ANWR opponents, led by Sen. planning and coordi- House Budget Committee, asking that the president’s budget proposal sent to Senate vote historic nation with the dele- ANWR drilling be left out of the House Congress in February, calling for a first and miraculous,” Maria Cantwell, D-Wash., gation that Stevens version of the budget resolution. lease sale in 2008 and a second in 2010. Hood said. bypassed an attempt to spike wants to ensure hap- “He is going to have to fashion a pack- The budget proposal estimated lease sales In addition to a ANWR drilling language in favor pens. “It has been a age that will attract bipartisan support and would generate $8 billion in bonus rev- green light from the of trying to bring down the entire cooperative, collec- that’s where ANWR could play a pivotal enues, including $7 billion from the 2008 House on the budg- budget resolution if ANWR tive team effort since role,” Hood said. “There are a lot of con- lease sale. The revenue would be split 50- et resolution, which instruction was included. I set foot in Arctic servative Democrats who support ANWR 50 with the State of Alaska under a prior sets spending and Power’s office,” he drilling.” agreement. revenue levels for said. Hood joined 2006 being an election year also will the FY07 budget, Congress also must the Arctic Power team early last year. have a moderating influence on extreme Senate vote ‘miraculous’ approve an additional budget reconcilia- views in Congress, he predicted. “They Alaska’s two senators lauded the 51-49 tion measure containing the ANWR lan- Tough sledding ahead can’t attack entitlement programs the way Senate vote as a first step toward opening guage. President Bush can then sign the Though the pro-ANWR Senate vote they did last year,” he said. “This increas- ANWR to development. They said the legislation into law. gave optimism a shot in the arm, es our chances, but it’s still a long way legislation includes language instructing observers say all bets are off on the out- from a slam dunk. It’s going to be very the Senate Energy Committee to raise $3 Funds, with strings attached come of the House deliberations. difficult. billion, which could result in prompt In his annual address to the Alaska Getting the House to approve a budget “That being said, I am optimistic our action on the legislation. Legislature March 22, Stevens told state resolution, let alone one including chances are better this year than they were “Oil and gas exploration is crucial to lawmakers to allocate additional funds for ANWR drilling, is going to be very diffi- last year,” Hood said. “That Senate vote our nation’s defense and our domestic Arctic Power to help fight for ANWR’s cult because of divisiveness within the was mouth-to-mouth resuscitation, and energy supply. We believe this is the passage. we’re going to live to fight another day.” largest concentration of oil and gas in “In a question and answer period fol- North America. It must be explored and lowing his talk, Sen. Stevens said the developed,” said Alaska senior Sen. Ted Legislature should give Arctic Power Stevens. additional funds, but perhaps they should “This is a critical first step to victory put restrictions on the funding,” said for Alaska,” said Sen. Lisa Murkowski. Stevens’s aide Courtney Boone. “Later in “Sen. Stevens and I know we still have a a press conference, the senator said he few hurdles to clear, and we are commit- thinks Arctic Power should have funding ted to seeing this through to the end.” but it should come with guidelines from Jerry Hood, a pro-ANWR lobbyist the Alaska Legislature. And he encour- working for Arctic Power in Washington, A12 PetroleumNews_MC_peanuts2.ai 2/22/2006 10:51:34 AM PETROLEUM NEWS • WEEK OF MARCH 26, 2006 PETROLEUM NEWS Volume 11, No. 13 WEEK OF www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska March 26, 2006

JUNEAU Barents Sea exploration well a bust Resources kills clawback House Finance to start on governor’s production profits tax bill in late March BY KRISTEN NELSON Petroleum News Heavy oil not in bill

ouse Resources began Rep. Ralph Samuels, R-Anchorage, co- hearing House Bill 488, chair of House Resources, told committee H the governor’s proposed members March 17 after the bill was voted out production profits tax, of committee that he regretted that there the PPT, on Feb. 21. On weren’t heavy oil provisions in the bill. March 17 the committee Rep. Norm Rokeberg, R-Anchorage, chair- voted out an amended com- man of House Rules, the bill’s last stop before mittee substitute. The PPT it hits the House floor, told reporters March 20 would replace the state’s sev- that he is working on a standalone bill that would dovetail with the production profits tax erance tax on oil and gas. The Rep. Jay Ramras present tax, with its economic and would be directed at heavy or challenged limit factor, the ELF, has not captured profits for oil production on the North Slope. The semi-submersible deepwater rig Eirik Raude the state at high oil prices. The state receives the He said the bill would dovetail with the PPT and provide additional tax credits for heavy oil A closely watched oil exploration well project in the most oil and gas revenues from royalties, which are recovery, particularly new technology such as Barents Sea was a disappointment, with no recoverable petro- set in lease terms. Royalties, along with property leum, the Norwegian Petroleum Directorate said March 22. see BILL page B10 The Arctic offshore well was drilled by the state-controlled see TAX page B11 Norwegian oil company Statoil ASA about 75 miles off YUKON Norway’s northern tip. Norway is looking to the Barents Sea for oil and natural gas to maintain flow levels that make the Nordic nation the world’s third-largest oil exporter, after Saudi Arabia and Russia. Aboriginal leader’s quest The exploration well was drilled by the offshore rig Eirik Raude in 775 feet of water. The directorate said traces of Youthful Liard chief works with government to hold summer Yukon land sale hydrocarbons were found, but not in a reservoir of oil or natu- ral gas. BY GARY PARK Liard McMillan, chief of the Liard First Statoil has a 70 percent interest in the field, with the other For Petroleum News key Norwegian oil company, Norsk Hydro ASA, having the Nation, told an Arctic gas symposium in other 30 percent. he spluttering attempts to get the Yukon on a Calgary that his community is committed —THE ASSOCIATED PRESS solid oil and gas track night get boosted into to “aggressively” leading development in T life by one of the territory’s aboriginal regions, the southeast Yukon. which is promising a land sale this summer. Oil prices steady: inventory vs. jit- Liard McMillan, chief of the Liard First Nation, The 28-year-old leader urged business and gov- told an Arctic gas symposium in Calgary that his ters over recent supply disruptions ernment leaders to establish ties ahead of resource community is committed to “aggressively” leading Crude oil prices steadied March 21 as traders weighed development with the Liard First Nation, which development in the southeast Yukon. expectations of further U.S. oil inventory increases against has established its own development company. He said the first nation will “assert its sover- anxieties over recent supply disruptions in Nigeria and the He said the first nation is preparing for a pilot eignty and take the lead in oil and gas activities” on impact of international pressure on Iran over its nuclear pro- land disposition in the Kotaneelee area, where traditional lands whether or not it has reached a gram. Devon Canada operates three producing natural settlement on outstanding land claims with the Light sweet crude for April delivery on the New York Canadian government. Mercantile Exchange slid just 2 cents to $60.40 a barrel in see LIARD page B10 afternoon trading. The contract, which is set to expire when the market closed March 21, dropped $2.35 on March 20. COOK INLET But May Brent crude futures on London’s ICE Futures gained 13 cents to $61.47 a barrel. see PRICES page B7 Forest talks Alaska gas Resource, Lower 48 pricing, excess of demand over supply motivation to invest State issues ACMP determina- BY ALAN BAILEY tion for Kenai gas storage “When we Petroleum News started 18 Alaska’s Division of Oil and Gas has issued a proposed months ago Alaska Coastal Management Program determination for gas t Forest Oil Corp.’s 2006 analysts’ conference on March 16 we had an storage in the Marathon Oil Co.-operated Kenai gas field. company CEO Craig Clark confirmed an Alaska strategy onshore that he had outlined to shareholders in November 2005: acreage In January Marathon applied for a state gas storage lease A position within the Sterling formation pool 6 C1 and C2 sands of the Forest wants to expand its Alaska onshore natural gas pro- that was Kenai field. The company wants to establish a gas storage duction. He told the analysts that his company sees Cook Inlet about 30,000 facility that encompasses about 7,531 acres of the pool 6 onshore natural gas as one of its “up and comer” areas where acres. Today sands. The reservoir lies in a mix of state, Cook Inlet Regional there is current production, but where further exploration is need- we have an onshore acreage Inc. and Marathon subsurface land, as well as in multiple tracts ed. Alaska’s Susitna Valley fits within the company’s pure explo- position that’s 101,000 (acres) — 96 percent of that’s undevel- of other privately owned subsurface. The lease would only ration areas, termed “flyers,” Clark said. oped. ... “We basically got rid of apply to state land within the gas storage facility. “The critical asset to this (Alaska) business unit is … gas everything we had and acquired acreage and our inability anywhere else in the world to replicate almost all new land onshore.” — Leonard Gurule, Forest senior VP see ACMP page B7 those kind of acreage sizes and have a market that was there and for Alaska see FOREST page B9 B2 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

NORTH SLOPE BP mulls options following federal order Company says corrosion in line at Prudhoe may be related to viscous oil; federal order mandates plan for this line, two others

BY RACHEL D’ORO The company must make necessary Associated Press Writer modifications within three months.

P Exploration (Alaska) Inc. is BP studying options reviewing a federal order that calls

BP officials are studying their options UNIFIED COMMAND B for sweeping changes in response to on how to proceed, according to company the record crude oil spill on Alaska’s spokesman Daren Beaudo. North Slope, a company spokesman said “We haven’t decided on what action, if March 21. any, to take,” he said. Among problems noted in the correc- The company has until the end of the tive order from the Pipeline and week to request a hearing on the matter, Hazardous Materials Safety said James Wiggins, a spokesman for the Administration was the “ineffectiveness federal agency. of the leak detection system to identify “It’s part of the process available to the leak” in the Prudhoe Bay transit line. them,” he said. “We’ve got good reasons The five-page document also noted for requiring certain things. The pipeline that a post-spill inspection of the 30-year- failed.” old pipeline found several flaws, includ- The company already runs an unparalleled job of staying on top of corrosion, said Larry The order also calls for repairs of six Dietrick, director of spill prevention and response for the state environmental conserva- ing an area of the 0.375-inch wall worn anomalies found in the line after the spill tion department. This year, BP’s corrosion inspection budget for the North Slope is $71 mil- ultra thin by internal corrosion. was discovered. The worst flaw was a spot lion, up from $50 million spent in 2004. Officials believe where the wall thick- crude was leaking for BP: Viscous oil may be to blame duction. The order also calls for repairs ness had worn down Under the federal order, BP must sub- at least five days from to 0.04 of an inch. The federal agency did not address of six anomalies found in the mit a corrosion management plan for this a small corrosion hole what BP suspects as a significant factor Among other line and two other transit lines, which in the line before the line after the spill was in the rapid corrosion first found last fall measures, BP must only carry crude and not viscous. spill was discovered discovered. The worst flaw inside the thick arctic-grade carbon-steel run maintenance pigs The company already runs an unparal- March 2 by a worker pipe, which leads eventually to the trans- was a spot where the wall — electronic equip- leled job of staying on top of corrosion, who smelled the oil. Alaska oil pipeline. thickness had worn down to ment put through a said Larry Dietrick, director of spill pre- Crews are cleaning Beaudo said the corrosion may be 0.04 of an inch. pipe to check wall vention and response for the state envi- up the two-acre spill, related to the fact the pipeline is increas- conditions — on the ronmental conservation department. This which is estimated at ingly carrying viscous oil, a hard-to- three lines. Since the year, BP’s corrosion inspection budget for up to 267,000 gallons. Slowed by bitter pump heavy crude being tapped as the oil spill, critics have slammed BP for last the North Slope is $71 million, up from cold weather, they have recovered 63,546 field is drawn down. Separation chemi- running a pig through the ruptured line in $50 million spent in 2004. gallons — or 1,513 barrels — of crude. cals used on viscous oil may interfere 1998. But any input from the federal pipeline The pipeline safety agency, part of the with corrosion-inhibiting additives that Officials with the Alaska Department agency is welcome, he said, if it leads to a U.S. Department of Transportation, said are put in the pipeline, Beaudo said. of Conservation said the spill will lead to better system following the largest crude BP must review the leak detection system “What we believed happened to this fines against BP and possibly stricter reg- spill ever on the North Slope. on the affected line as well as two other line is unique,” he said, adding that corro- ulations for such transit lines, which have “The real issue is to properly identify crude transit pipelines in Prudhoe, 250 sion inhibitors will now be injected been subject to little government scrutiny the cause and properly get a fix on this so miles north of the Arctic Circle. directly into the line once it resumes pro- in the past. it doesn’t happen again,” he said. GULF OF MEXICO Kerr-McGee sues Interior over some GOM royalties Kerr-McGee has filed a federal- court lawsuit against the U.S. Department of the Interior, claiming the department has violated the law by demanding the Oklahoma City- based oil company make royalty pay- ments from some properties in the Gulf of Mexico. The suit was filed March 17 in the Western District of Louisiana. It is in response to the Interior Department’s claim, made about two months ago, that Kerr-McGee and 40 other oil and natural gas producers made improper claims of more than $500 million in royalty relief in 2004. Kerr-McGee is one of only a few of the companies that have balked at paying its royalties. The company said it has set aside about $108 mil- lion in case it must pay the royalties. The company said the federal Deep Water Royalty Relief Act of 1995, which was designed to encour- age deepwater drilling, protects them from having to pay the royalties. The Interior Department counters that producers must pay royalties if mar- ket prices climb above certain limits. A Kerr-McGee attorney said the case will last about 18 months —THE ASSOCIATED PRESS PETROLEUM NEWS • WEEK OF MARCH 26, 2006 B3

JUNEAU Senate Resources ups ante for PPT Committee substitute increases production profits tax rate from 20 to 25 percent, keeps Cook Inlet oil under present tax BY KRISTEN NELSON nies are concerned about the state’s overall fiscal direc- Brian Wenzel, vice president of finance and Petroleum News tion. Wenzel said tax rates weren’t the only thing affecting administration for ConocoPhillips Alaska ... enate Resources, like House Resources, introduced investment: Prospectivity is low in Alaska, he said, and said a tax increase for industry of more than a committee substitute for the governor’s produc- costs are high. Fiscal policy, he told committee members, $2.4 billion over the present severance tax S tion profits tax, Senate Bill 305. Senate Resources’ is one of the levers the state Legislature has in trying to that is possible under the committee substitute committee substitute increases the tax from 20 per- push more projects over the line. He encouraged the would maximize short-term state revenue and cent to 25 percent of net profits and adds a progressivity committee to look at opportunities to increase produc- tax, but keeps existing Cook Inlet oil production at the tion, which results in more royalty, production tax, prop- put long-term revenue at risk. existing tax rates, basically zero severance tax. The tran- erty tax and corporate income tax as more oil moves sition provision was reduced to portions of capital down the pipeline. not support additional tax. expenditures in the most recent three years, and the peri- Wagoner asked Wenzel if ConocoPhillips would But, he said, because of substantive changes in many od during which those deductions invest more in Alaska under the governor’s bill. areas the company could not support the bill in its entire- could be claimed was stretched to Compared to the committee’s higher tax proposal, 25 ty. seven years. percent compared to 20 percent in the governor’s bill, He said Chevron agrees with many of the points the Industry representatives told the Wenzel said he would expect more investment over the large producers made on the committee substitute March committee March 18 that they long term at 20/20. That represents something the three 18. couldn’t support the committee major North Slope owners — ConocoPhillips Alaska, He said Chevron feels that the balance of the original substitute. BP Exploration (Alaska) and ExxonMobil Production — bill is gone. He also said Chevron’s Brian Wenzel, vice president of agreed on with the state, he said. sense is that the original bill was finance and administration for Getting to that agreement was difficult and he said he highly negotiated, which often ConocoPhillips Alaska, told the expects a large influx of investment if we can hold onto results in the best deal. Chevron committee ConocoPhillips Alaska Sen. Tom Wagoner that four-way agreement. He also said he thinks the gov- wasn’t at the table, he said, so this is “absolutely opposes” the committee ernor’s bill stands on its own as a fair balance: more rev- only his sense of the original bill. substitute for SB 305 and said if enacted it would enues to the state and more investment opportunities. The increase to 25 percent on adversely affect investment. He said a tax increase for tax from 20 percent is a clear disin- industry of more than $2.4 billion over the present sev- BP: investment the issue centive for further investment, erance tax that is possible under the committee substitute Angus Walker, BP Exploration (Alaska)’s commercial Zager said, as is changing the would maximize short-term state revenue and put long- implementation date to April 1, Chevron’s John vice president, told the committee that North Slope pro- Zager term revenue at risk. He said the committee substitute duction is declining, and with an investment level of $1 especially with the high interest destroys the balance of the original bill, which had max- billion to $1.5 billion a year decline can be held at about rates and penalties for guessing wrong on tax payments. imizing production as its goal, and which would also 6 percent a year. The Department of Revenue’s latest The 11 percent interest charged by the state has been an have maximized state revenues and jobs. forecast, he said, shows a 3 percent decline, a rate of issue for years, he said, and tips the balance in favor of decline that can’t be maintained the state on audits which often don’t happen until two CS tax increase $1.8-$2.4 billion without an investment of $2-$3 bil- years after the tax is paid, often resulting in an interest Committee Chair Tom Wagoner, R-Kenai, said he lion a year. payment larger than the additional tax payment. didn’t believe the committee substitute was too much The real question, he said, is Zager said the consultants will leave and Alaskans more punitive than the governor’s bill. Wenzel said he what would it take to double invest- will be left to deal with the decisions and urged legisla- disagreed. ment? Under the House Resources tors to vote in the best interests of Alaska. He said over The $1 billion increase under the governor’s bill was committee substitute Alaska would the coming years investors will vote with their dollars, a significant tax increase but in the context of what have the highest marginal tax rate in and more, less or the same investments will be made. industry intended to do in the future it could step up to the United States, Walker said, and A lot of variables affect investment, Zager said, that level, Wenzel said. The committee’s substitute, he the House Resources committee including future prices, prospectivity, technology and said, could be an increase of more than $2 billion. In fiscal terms. substitute taxes at a lower rate than BP’s Angus Walker response to a question from Sen. Ralph Seekins, R- the Senate Recourses committee Industry has told the Legislature it has stepped over Fairbanks, Wenzel said the range of the increase under substitute. the line with the increases proposed, he said. Originally the committee substitute would be $1.8 billion to $2.4 Richard Owen, production manager and vice presi- industry said it could live with the governor’s proposal, billion. dent for ExxonMobil Alaska Production, told the com- even though it was a huge increase in taxes. Seekins asked if the rate under the committee substi- mittee that the 20 percent tax rate and 20 percent credit “It was tough to swallow,” Zager said of the original tute was punitive and Wenzel said it was too high and proposed by the governor may not be low enough to tax bill. would result in less investment over the long term than allow challenged developments to be funded, but does Chevron cannot support the committee substitute, he the state would get with the governor’s proposal. allow the company to move forward with the investments said, and urged the committee to return to the original Sen. Fred Dyson, R-Eagle River, asked why there it can currently see before it. bill, with changes for Cook Inlet. wasn’t more investment on the North Slope at today’s lower tax and Wenzel said that was one of Chevron: carving out Cook Inlet a plus Pioneer: original proposal a balance ConocoPhillips’ concerns also. Given current investment John Zager, general manager of Chevron in Alaska, Pat Foley, manager of lands and external affairs for levels, Wenzel asked if this was really the right environ- told the committee March 19 that Chevron applauded the Pioneer Natural Resources Alaska, told the committee ment for a tax increase. The credits are supposed to pro- elimination of current Cook Inlet oil production from the vide an incentive for investment, he said, but the compa- committee substitute because it believes Cook Inlet can- see PPTpage B5 B4 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

BEIJING Putin commits to gas for China Countries have not yet reached agreement on oil pipeline China wants, but Russia will finance feasibility study; no timetable yet for construction to deliver Siberian oil BY MIKE ECKEL ply gas from eastern Siberia as well as But the commitment might be a Associated Press Writer fields off the far east island of Sakhalin, while a western route would send gas from politically motivated promise that ussian President Vladimir Putin Russia’s west Siberian fields. Moscow can’t keep, because announced plans March 21 to step up A Gazprom source who spoke on condi- western Siberian (natural gas) R energy supplies to China with a new tion of anonymity told The Associated reserves are already stretched thin, gas pipeline network opening within Press that the western route would cross a according to Valery Nesterov, oil five years, but there was no word of an section of the Russia-Chinese border to the agreement on a separate pipeline sought by west of Mongolia from the Altai region and and gas analyst with the Troika Beijing to deliver Siberian oil to its explod- was tentatively slated to come on line in Dialog investment bank in Moscow. ing economy. 2011. A Russian minister said Moscow would The Interfax news agency quoted a help develop a more perfect system of finance a feasibility study for the oil Russian official visiting China as saying the peace,” he said. pipeline and can’t offer a construction pipeline could cost up to US$10 billion, but timetable until the study is done. Dow Jones Newswires said that it could Western reserves The announcements came after Putin cost between US$3 billion and US$5 bil- already stretched thin and his Chinese counterpart, Hu Jintao, met lion. Putin said gas for the new pipeline for the fifth time in less than a year and Moscow and Beijing want to spur would come from fields in both eastern and pledged to promote political and trade ties investment and double last year’s US$29 western Siberia. between the former Cold War enemies, billion in trade by 2010. But the commitment might be a politi- which say their relations are at their best China gets Russian oil by rail cally motivated promise that Moscow can’t point ever. keep, because western Siberian reserves are Beijing wants to secure access to China is a leading buyer of Russian oil, already stretched thin, according to Valery Russian oil and gas, while the two sides which for now is delivered by railway tank Nesterov, oil and gas analyst with the Troika have built up a political alliance to counter- car, and is the top foreign customer for Dialog investment bank in Moscow. balance U.S. dominance in global affairs. Moscow’s arms industry. “I don’t see where Russia in the foresee- The pipeline network will deliver up to Many observers had expected news able future can pile up these resources,” he 80 billion cubic meters (2.8 trillion cubic about the 4,100-kilometer (2,550-mile) told The Associated Press. feet) of gas annually, Putin told reporters. Siberian pipeline to the Pacific coast. Both Nesterov said the announcement might Tokyo and Beijing have maneuvered hard Two routes for gas be meant to strengthen Moscow’s bargain- to secure a favorable routing. ing position with European gas buyers who “Two routes have been determined — an “There can be no talk of `when’ until a might want to find other suppliers after its eastern one and a western one,” Alexei feasibility study is completed,” said Viktor spat with Ukraine over prices. Miller, the chief executive of Russia’s OAO Khristenko, Russia’s minister of industry “Russia is saying it has markets. In a Gazprom gas monopoly, was quoted as say- and energy. way, it’s a form of pressure on Europe,” he ing by the NTV television channel. In a 13-page statement, Putin and Hu said. Miller said the eastern route would sup- pledged to promote links between their Miller insisted that Europe would energy, telecoms, transportation and other remain Gazprom’s main export market. industries. “The European market was, is and will Putin endorsed China’s claim to Taiwan, be the main market for Gazprom. The com- the self-ruled island that Beijing says it part pany will always honor in full the long term of its territory. contracts that we have today and the con- “The sides express decisive support for tracts that we will sign.” one another’s policies and actions in the Putin was accompanied by a 90-member questions of defending state sovereignty, delegation of leaders of Russia’s state- unity and territorial integrity,” the statement owned Rosneft oil company and Gazprom said. “Russia will continue the policy (sup- gas monopoly, as well as aircraft, telecom- porting) ‘one China’ declared by the munications and other industries. Chinese government ... and Taiwan is an China and Russia have pledged commit- indivisible part of China.” ment to a “multipolar world” and last year Putin tried to assuage concerns about warned other nations against attempts to deepening Russian-Chinese ties. dominate global affairs and interfere in sov- “Our relations serve not only as factors ereign nations’ domestic matters. for geopolitical stability,” he said in a The Hu-Putin meeting comes after speech Tuesday evening to Chinese and Washington released a foreign policy Russian dignitaries in the Great Hall of the review the week of March 13 that expressed People, the seat of China’s parliament. dismay at rollbacks in democratic reform in “They demonstrate an example of open Russia and warned China against denying international partnership, which is not personal and political freedoms. directed at any third country and serves to PETROLEUM NEWS • WEEK OF MARCH 26, 2006 B5

continued from page B3 Anadarko: not enough drilling MEXICO CITY PPT Mark Hanley, Anadarko Petroleum’s Alaska public affairs manager, said the focus needs to be investors have a common theme: while the gover- on the forecast for declining production. The orig- Alliances needed for deepwater nor’s initial proposal was a balance everyone could inal bill, he said, represented “a tenuous truce A recent deep-water oil discovery in the Gulf of Mexico could accept, the balance is now being tipped to the dis- between companies.” For Anadarko while there be followed by similar finds, especially if Mexico begins to allow advantage of many of the investors. was a tax increase, there was some downside pro- alliances with companies experienced in deepwater exploration, The investment-friendly nature of the original tection and some improvement in exploration eco- the head of Mexico’s state oil monopoly said March 16. proposal is going away, he said, calling the $73 mil- nomics. “Not to invest in deep water would not only be irresponsible, lion exemption in the original bill significant. He Anadarko wants to find more oil and stop the it would also mean we couldn’t maintain oil production in the urged the committee decline in production, medium and long term,” said Luis Ramirez, chief executive of to find a mechanism and that’s where the Petroleos Mexicanos, or Pemex, at a news conference. to replace it. Start-up For Anadarko, removing the $73 million from focus needs to be, On March 14, President Vicente Fox announced that the costs are enormous, the 20/20 proposal had the same effect as a 25 Hanley said. exploratory “Noxal 1” well had yielded the discovery of a deep- he said, and the giant percent tax and a 20 percent credit, while Even under today’s water oil deposit that he said could exceed reserves at the off- fields that opened the eliminating the $73 million from a 25/20 tax system there isn’t shore Cantarell deposits, Mexico’s largest oil field. North Slope aren’t enough North Slope Cantarell has produced more than 11.5 billion barrels of oil proposal has the same effect for Anadarko as a there to be found any- 30 percent tax and 20 percent credit. Most of drilling going on, and since 1979, and is still expected to yield 1.9 million barrels a day more, leaving the a new system needs this year. companies fighting our projects would look worse than under the to improve explo- Ramirez said the new area has a potential of 10 billion barrels around the edges to present system, “so I think you’ll find we’ll drill ration beyond the of crude oil equivalent. He said the Noxal exploratory well has find smaller fields. fewer wells.” —Mark Hanley, Anadarko present system, he perforated 3,200 meters (10,500 feet) into the seabed at a depth Foley also said he Petroleum’s Alaska public affairs manager said. The $73 million of 935 meters (3,000 feet), finding gas and liquids. The well will was worried by the deduction was very seek crude oil at 4,000 meters (13,100 feet). progressive nature of important to smaller the tax in the committee substitute: costs increase producers and new players. For Anadarko, remov- Noxal discovery called new oil province dramatically at higher oil prices, and Pioneer found ing the $73 million from the 20/20 proposal had the “The Noxal well has discovered a new oil province in Mexico its drilling costs for Lower 48 same effect as a 25 percent tax and a 20 percent in deep water. That is its significance,” Ramirez said. The final development wells increased credit, while eliminating the $73 million from a evaluation will be modified as new wells are drilled, he added. 50 percent last year and 25/20 proposal has the same effect for Anadarko as Ramirez said Pemex will need to drill another five to seven expects another large jump a 30 percent tax and 20 percent credit. Most of our wells to complete the delimitation of the deposits and make vol- this year. projects would look worse than under the present ume calculations, which should be done in the next two years. The state’s fiscal policy system, “so I think you’ll find we’ll drill fewer Only then can Noxal be considered a production project, and needs to make it easier for the wells,” Hanley said. investment requirements estimated, he added. smaller guy to get in the The credits are an incentive to invest, he said, Cantarell began declining this year and will decline more rap- game, he said. but it’s not one to one, it’s about four to one, so idly in subsequent years, Ramirez said. But he added that offi- Dyson asked if fuel rates credits to accompany a 25 percent tax rate would cials still expect to extract more than 8 billion barrels all togeth- Anadarko’s Mark were driving the increase in Hanley have to go up to 40 percent. He said it’s not exact- er from the oil field. drilling expenses and Foley ly linear, but somewhere around 25/40 keeps the In 2004, Pemex estimated a potential for reserves of up to 54 said no, it was higher day rates, what the compa- exploration incentives the same. billion barrels in its Gulf region, more than half of that under nies have to pay those who own drilling rigs, Hanley said Anadarko was still waiting for deep water. because the number of available rigs is limited. details on the committee’s progressivity plan, but it —THE ASSOCIATED PRESS Operating expenses also go up, as labor rates and would take more of the high side. the cost of capital for operating fields also increase, he said. B6 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

ARCTIC NASA: polar ice loss adds to rising sea levels NASA study of Greenland, Antarctic ice sheets shows net loss over 10 years; not enough ice loss to account for sea level rise BY ALAN BAILEY The NASA scientists used satellite Petroleum News maps from two European Space ccording to a PR Newswire report Agency satellites and previous and an item on the National NASA airborne mapping to A Aeronautics and Space measure the rate at which the Administration web site, a NASA thickness of the Greenland ice study of the massive ice sheets covering Greenland and Antarctica has found a net sheet is changing. Similarly, the loss of ice between 1992 and 2002. In the researchers used nine years of first comprehensive inventory of ice losses elevation mapping over much of over a complete decade, the NASA scien- Antarctica to determine changes in tists have confirmed that climate warming ice thickness there. is releasing water locked in the ice, the reports say. “If the trends we’re seeing continue and caused a rise in sea level but doesn’t fully climate warming continues as predicted, the account for the total sea-level rises that have polar ice sheets could change dramatically,” actually been observed. said survey lead author Jay Zwally of “The study indicates that the contribu- NASA’s Goddard Space Flight Center, tion of the ice sheets to recent sea-level rise Greenbelt, Md. “The Greenland ice sheet during the decade studied was much small- could be facing an irreversible decline by er than expected, just 2 percent of the recent the end of the century.” increase of nearly three millimeters a year,” The NASA scientists used satellite maps Zwally said. “Continuing research using from two European Space Agency satellites NASA satellites and other data will narrow and previous NASA airborne mapping to the uncertainties in this important issue.” measure the rate at which the thickness of And although this particular survey con- the Greenland ice sheet is changing. cluded with 2002 data, more recent NASA Similarly, the researchers used nine years of observations have reported a speed up of ice elevation mapping over much of Antarctica flow into the sea from several Greenland to determine changes in ice thickness there. glaciers. The results from Greenland showed that “The melting of ice at the edges of the exceptionally heavy snowfalls in the interi- ice sheet is also increasing, which causes or more than counterbalanced large ice loss- the ice to flow faster,” Zwally said. “A race es along the southeastern coast, thus leading is going on in Greenland between these to a net increase in ice. In Antarctica an out- competing forces of snow build-up in the flow from the west of the continent resulted interior and ice loss on the edges. But we in a major loss of ice. All of this evidence is don’t know how long they will be approxi- consistent with computer models predicting mately in balance with each other or if that a warming climate, the researchers say. balance has already tipped in favor of the recently accelerating outflow from gla- Bigger loss in Antarctica ciers.” than Greenland gain NASA is now using the ice, cloud and Because there was more ice lost from land elevation satellite, known as ICESat, to Antarctica than gained in Greenland, a net make highly accurate laser-based elevation mass of 20 billions tons of water was measurements of the ice sheets. released from the polar ice caps to the The researchers have published their oceans. That amount of water will have findings in the Journal of Glaciology at http://www.igsoc.org. CARACAS, VENEZUELA Venezuela looks at privatization contract Venezuela’s oil minister has given lawmakers a proposal to turn privately run oil fields into partnerships controlled by the South American country’s state-run oil com- pany. The energy and oil minister announced that Oil Minister Rafael Ramirez gave the government’s proposal for a new contract to lawmakers on March 16 and said that min- istry officials planned to release details of the document in the coming days. Nancy Perez, vice president of the National Assembly’s energy committee, said Ramirez must personally deliver the contract model to the committee before it can begin formal discussions. A year ago, Venezuela announced that oil firms operating 32 oil fields under con- tract must become minority shareholders in new “mixed companies” controlled by the state-run oil firm Petroleos de Venezuela SA, or PDVSA. Congress must approve gen- eral guidelines for the new ventures. Ramirez has said the National Assembly, which is controlled by political parties that support President Hugo Chavez, must modify several articles in the 2001 Hydrocarbons Law before creating the so-called “mixed companies.” The Chavez administration plans to group the 32 fields into 19 separate companies. PDVSA would have stakes of 60 percent or more in each venture, according to Ramirez. The original contracts were signed during three licensing rounds in the 1990s under a previous, more business-friendly government. The Chavez administration claims the previous terms violated Venezuelan because they gave private companies preferential tax rates. —THE ASSOCIATED PRESS PETROLEUM NEWS • WEEK OF MARCH 26, 2006 B7

continued from page B1 posed ACMP determination. continued from page B1 “Prices seem to be in a trading The division has specified a series of PRICES ACMP environmental mitigation measures for range between $57 and $64. the project and has issued advisories on They are having difficulty The Division of Oil and Gas has found Gasoline futures declined by less possible permitting requirements. moving beyond either of those that the proposed gas storage lease is con- Marathon’s proposal for gas storage in than a penny to $1.826 per gallon, while sistent with the ACMP and expects to heating oil futures rose by more than 2 borders,” Peter Beutel, president the Kenai gas field is a response to dwin- issue a best interest finding and final con- dling gas supplies in the Cook Inlet area cents to $1.762 on colder weather in the of consultant Cameron Hanover sistency determination soon. No one has Northeast. Natural gas futures climbed said in a report. — gas storage enables natural gas to be raised any issues that would indicate stored during periods of low demand to 7.1 cents to $6.95 per 1,000 cubic feet. inconsistency with the ACMP. However, Agip Oil Co. unit March 17, disrupting help meet peak winter demand. Unocal Supply disruptions — and the poten- the division will address in its best inter- the flow of oil. Agip confirmed that the (now owned by Chevron) already oper- tial threat of U.N. Security Council est finding some comments that it incident was “an act of sabotage” ates gas storage in the Swanson River and action against Iran — were offset by received in opposition to the project, divi- caused by an explosive charge placed Pretty Creek fields. fears of a supply glut, despite strong sion Petroleum Land Manager Pat Galvin near the river. —ALAN BAILEY global petroleum demand. said in a memorandum about the pro- U.S. petroleum data the week of The company said March 20 that its March 13 showed that oil stockpiles had production in Nigeria would drop by climbed to their highest level since the about 13,000 barrels per day while it end of May 1999. repairs the pipeline, thought to have been sabotaged by Meeting demand militants seeking “Prices seem to a greater share of be in a trading range the country’s oil between $57 and wealth. $64. They are having Repairs on the difficulty moving Tebidaba-Brass beyond either of pipeline in the those borders,” Peter Niger Delta, will Beutel, president of begin the week consultant Cameron of March 20 and Hanover said in a should be com- report. pleted by the end Vienna’s PVM of March, Eni Oil Associates sug- said in a state- gested gasoline was ment. Normally headed upward in the the line carries short term, noting 75,000 barrels “strong demand per day. ahead of the U.S. driv- Nigeria, a source ing season and in the Middle East” and of coveted light, sweet crude oil, is concerns about refinery outputs meet- Africa’s top oil exporter and the fifth- ing demand. largest crude supplier to the U.S. Subscribe to Petroleum News Nigerian rebels struck an oil pipeline —THE ASSOCIATED PRESS operated by Rome-based Eni SPA’s Call 907-522-9469 B8 PETROLEUM NEWS • WEEK OF MARCH 26, 2006

ALASKA

UNIT COMMAND Pipe corrosion big threat in Alaska Prince William Sound Regional Citizens’ Advisory Council executive director says deteriorating pipelines a concern

BY MATT VOLZ “In general, the changes that have Associated Press Writer occurred in Prince William Sound arch 24 marks 17 years since the in terms of oil transport since Exxon Valdez tanker ran aground 1989 have been phenomenal. I feel M in Alaska’s Prince William Sound, much more confident that we causing the worst oil spill in would be able respond to an oil American history. Its effects are still felt by fishermen and the Alaska Natives who spill today.” —Nancy Bird, Ultrasonic preparation of corroded pipe live off the land. president and chief executive of “You can still go and pick up a rock the Prince William Sound Science and find what looks like fresh oil,” said Center John Devens, executive director of the Prince William Sound Regional Citizens’ state that has grown rich on oil since Advisory Council. crude began flowing from the North Many of the lessons of 1989 — when Slope via the pipeline in the 1970s. 11 million gallons of crude oil oozed The leak in the transit line has caused from the grounded tanker creating a slick some observers to worry about the condi- that moved across 470 miles of shoreline tion of the entire pipeline system. — have been applied. “I think many of us are seriously con- The oil tankers that ship Alaska’s cerned about the aging and the deteriora- crude to the West Coast have become tion of the pipeline and the facilities” stronger, most with double hulls and Devens said. “We know that corrosion is redundant operating systems for safety. becoming a factor.” Two escort vessels now guide the tankers out of Prince William Sound. More Main line almost 30 equipment, such as containment boom, The main pipeline, which stretches from are housed nearby to respond if a spill Prudhoe Bay in the North Slope to Valdez happens again. in Prince William Sound, will be 30 years “In general, the changes that have old in 2007. Less than half the oil is flow- occurred in Prince William Sound in ing now than at peak production, but the oil terms of oil transport since 1989 have industry and state officials figure on at been phenomenal,” said Nancy Bird, pres- least another 30 years of life out of the ident and chief executive of the Prince pipeline. William Sound Science Center. “I feel Devens said with that kind of expecta- much more confident that we would be tion, the amount spent on maintaining the able respond to an oil spill today.” pipeline should be increased. Mike Heatwole, spokesman for Alyeska Risks have shifted onshore Pipeline Service Co., which operates and But 17 years after the disaster, the maintains the Trans-Alaska Pipeline potential for danger appears to have shift- System, said his company has all the fund- ed onshore. Corrosion in the aging oil ing necessary to keep the pipeline running supply system is seen by some as a grow- safely. Alyeska has an annual budget of ing threat, as evidenced by a leak this $350 million for operations and mainte- month on the North Slope, the second- nance and another $100 million for capital largest spill in the state’s history. projects, he said. A transit line upstream of the main “We are ready to handle oil flow for the pipeline operated by BP Exploration next 30 years,” Heatwole said. “We’re mak- (Alaska) Inc. for five days or more leaked ing the necessary investments to do that.” up to 267,000 gallons of crude from a This month’s North Slope oil spill was small hole onto the frozen tundra of caused by corrosion in the transit line, Alaska’s North Slope. according BP PLC officials. The corro- State environmental regulators say the sion may have been due to the water and spill will lead to fines and possibly sediments that are carried with the vis- stricter pipeline regulations in Alaska, a cous oil, said company spokesman Daren Beaudo. PETROLEUM NEWS • WEEK OF MARCH 26, 2006 B9 continued from page B1 FOREST ready to go into,” Craig said. Forest’s senior vice president for Alaska, Leonard Gurule, described the company’s Alaska strategy in some detail. Gurule touched briefly on the company’s small working interests in the Prudhoe Bay unit and Point Thomson field, on the North Slope, but spoke mainly about the company’s activities in Southcentral Alaska. Clark described Forest’s North Slope investments as “a seat at the table for throughput.” Cook Inlet oil In Cook Inlet, Forest holds a 47 per- cent interest in two non-operated oil fields, Trading Bay and McArthur River, Gurule said. These fields produce from The Kustatan production facility and camp for the Redoubt Shoal oil field. five 1960’s vintage, offshore platforms on,” Gurule said. “This refocus is really that require lots of equipment and are the result of a strategic business study that manpower intensive, he said. we did a little over 18 months ago.” The company operates and has a 100 That study identified three reasons for percent working interest in the Redoubt ALASKA a strategy of looking for oil and gas Shoal and West McArthur River oil onshore, he said. fields. Potential Alaska state and federal oil and “The first reason was that the cycle Gurule stressed times from exploration to first production gas lease sales the efficiency with were much shorter than for what we were which Forest oper- Agency Sale and Area Proposed Date looking for offshore,” he said. “The sec- ates its one offshore ond reason was that the gas market was DNR Cook Inlet Areawide May 24, 2006 platform at Redoubt going from an oversupplied market to an DNR North Slope Foothills May 24, 2006 Shoal. There is a undersupplied market … The third reason permanent crew of BLM NE NPR-A Sept. 27, 2006 was that land and competition onshore on just two people on BLM NW NPR-A Sept. 27, 2006 the northwest side of the Cook Inlet is rel- the platform — a DNR Beaufort Sea Areawide October 2006 Forest Oil CEO Craig ative light — you can get access to land day man and a night DNR North Slope Areawide October 2006 Clark told the ana- and it’s not extremely expensive.” man, he said. lysts that his compa- The results of this new strategy have DNR Alaska Peninsula Areawide February 2007 Technicians go out ny sees Cook Inlet been bearing fruit. The company now DNR North Slope Foothills Areawide February 2007 to the platform onshore natural gas as one of its “up operates the West Foreland and Kustatan occasionally to MMS Sale 202 Beaufort Sea March 2007 and comer” areas gas fields, and has a 30 percent working check the instru- where there is cur- DNR Cook Inlet Areawide May 2007 interest in the Three Mile Creek gas field, mentation and rent production, but DNR Beaufort Sea Areawide October 2007 where further all on the west side of the inlet, Gurule equipment. exploration is need- said. DNR North Slope Areawide October 2007 And the company ed. Alaska’s Susitna The West Foreland No. 1 well tested at MMS Chukchi Sea 2007 has been applying Valley fits within the company’s pure 3.8 million cubic feet per day and the BLM NE NPR-A 2007 waterflood in this exploration areas, West Foreland No. 2 well tested from a BLM NW NPR-A 2007 field. termed “flyers,” he combined rate on two different zones at “At the Redoubt said. DNR Alaska Peninsula Areawide February 2008 15 million cubic feet per day, Gurule said. Shoal unit we installed a pilot waterflood DNR North Slope Foothills Areawide February 2008 The Kustatan No. 1 well tested at 1.8 mil- last year,” Gurule said. “That waterflood lion cubic feet per day, he said. DNR Cook Inlet Areawide May 2008 seems to have stabilized production and And Forest’s gross gas production has DNR Beaufort Sea Areawide October 2008 we’re looking at continuing with that in increased from zero to 15 million cubic DNR North Slope Areawide October 2008 the future.” feet of gas per day over the past 18 On the other hand, “a pretty strong nat- DNR Alaska Peninsula Areawide February 2009 months, he said. ural aquifer” supports production from DNR North Slope Foothills Areawide February 2009 In addition, most of the opportunities the West McArthur River field, he said. DNR Cook Inlet Areawide May 2009 that the company has discovered onshore “We are looking at that to see whether in the last year and a half have been gas, DNR Beaufort Sea Areawide October 2009 we can enhance the recovery by having Gurule said. DNR North Slope Areawide October 2009 some additional water injection in that Exploration success has resulted in MMS Sale 209 Beaufort Sea 2009 field,” he said. part from exhaustive geologic studies of Forest also owns 40 percent of the MMS Sale 211 Cook Inlet 2009 the west side of the inlet. For example, Cook Inlet Pipeline Co., the owner of the DNR Alaska Peninsula Areawide February 2010 Forest has looked at information from all Cook Inlet pipeline and Drift River DNR North Slope Foothills Areawide February 2010 of the wells that have been previously marine terminal that export liquids from drilled in the area. DNR Cook Inlet Areawide May 2010 oilfields on the west side of the Cook “We’ve mapped all of the horizons that DNR Beaufort Sea Areawide October 2010 Inlet. we see in the Cook Inlet … across the DNR North Slope Areawide October 2010 Natural gas west side of the Cook Inlet,” Gurule said. MMS Sale 212 Chukchi Sea 2010 Forest has also acquired about 800 MMS Sale 217 Beaufort Sea 2011 Although Forest is continuing its Cook miles of seismic and reprocessed it, MMS Sale 219 Cook Inlet 2011 Inlet oil production, the company really Gurule said. sees onshore natural gas as a growth “Out of that reprocessing and interpre- MMS Sale 221 Chukchi Sea 2012 opportunity in the Cook Inlet region. “This is the area that we’re focusing in Agency key: BLM, U.S. Department of the Interior’s Bureau of Land Management, see FOREST page B10 manages leasing in the National Petroleum Reserve-Alaska; DNR, Alaska Department of Natural Resources, Division of Oil and Gas, manages state oil and gas lease sales onshore and in state waters; MHT, Alaska Mental Health Trust Land Office, manages sales on trust lands; MMS, U.S. Department of the Interior’s Minerals Management Service, Alaska region outer continental shelf office, manages sales in federal waters offshore Alaska.

This week’s lease sale chart sponsored by: PGS Onshore, Inc. B10 PETROLEUM NEWS • WEEK OF MARCH 26, 2006 continued from page B9 there,” Gurule said. “Two months later we’ve looked at that and mapped some ning low. Today, the natural gas reserves- and currently we’re shooting a 25-square structures,” Gurule said. to-production ratio in the Cook Inlet FOREST mile 3D seismic on that acreage.” Forest has identified “some pretty big region is six, compared with a gas structures” and has identified four reserves-to-production ratio of 50 imme- tation what we found was about 27 leads The Susitna Valley prospects in the southern block and diately after the construction of the indus- and prospects,” he said. “Those leads and Forest holds two exploration license another three prospects in the northern trial plants, Gurule said. prospects are basically why we’re holding areas in the Susitna Valley, north of the block, Gurule said. The structures are “The market’s in transition from an the acreage that we have here.” Cook Inlet. asymmetric, generally with three-way dip oversupply to an undersupply,” he said. Major acreage change “The continuous acreage is about closures, bounded by faults on either side. Natural gas prices reflect that transi- 857,000 acres: North to south that’s 44 “Today we’re out there shooting an tion. Historically gas prices in the Cook In fact the company’s new strategy and miles; east to west that’s 34 miles,” additional 125 miles of 2D seismic (in the Inlet have been lower than in the Lower subsequent investigations have resulted in Gurule said. southern block). … We’re shooting that 48. However, a new gas supply contract a significant shift in its acreage position These two blocks form the largest seismic to firm up to a drill hole site,” before the Regulatory Commission of — the company has followed a policy of exploration blocks in Alaska, he said. Gurule said. Alaska is based on Henry Hub Lower 48 only holding onshore acreage with leads Gurule talked about two old explo- But Forest wants to find a partner for and prospects. prices, Gurule said. ration wells, the Kahiltna Unit No. 1 and the Susitna Valley exploration. “When we started 18 months ago we Gurule also cited a Cook Inlet natural the Trail River Unit No. 1, in the area of “We don’t plan to do this alone,” gas supply and demand chart from a 2004 had an onshore acreage position that was the exploration licenses. Those wells about 30,000 acres,” Gurule said. “Today Gurule said. “We’re talking to a couple of U.S. Department of Energy report. That found alternating layers of coal and sand, companies.” chart indicated that gas demand would we have an onshore acreage position he said. That is important because it indi- that’s 101,000 (acres) — 96 percent of outstrip supply in 2007, that there would cates a similar geologic situation to Cook Southcentral gas potential be curtailment of gas use by industrial that’s undeveloped.” Inlet, where coals in an appropriate tem- Most of the current Cook Inlet oil and consumers and that by 2012 supply would That’s a turnover in acreage of about perature window have generated biogenic gas fields date back to exploration done in not meet commercial and residential 98 percent he said. gas. And that gas generation has resulted the 1960s. And Gurule sees Forest’s gas demand. Commercial and residential “We basically got rid of everything we in some large gas fields, Gurule said, cit- discoveries on the west side of Cook Inlet demand has been growing at between 2 had and acquired almost all new land ing Cook Inlet fields such as the 4,500 as supporting a view that there is signifi- percent and 4 percent per year, Gurule onshore,” Gurule said. acres and more than 2 trillion-cubic feet cant resource potential in medium sized said. In addition to holding its re-jigged Kenai field. fields that the 1960s exploration failed to “Supply won’t be able to fill that acreage position, Forest is shooting new The Susitna basin contains multiple find. That earlier exploration focused on demand — there will be a large need for seismic this year. stacked pay zones, as in the Cook Inlet gas supply in the Southcentral Alaska “We’re shooting about 100 miles of 2D basin, Gurule said. searching for oil in large structures and market,” he said. seismic … to con- “Those sediments (in found some large gas fields in the firm the leads and the Susitna basin) from process. But there is a statistical gap in And Gurule said that, with Forest’s prospects that we “Supply won’t be able to fill the mid-range of the discovered gas field acreage position and ability to operate at that demand — there will be a those two wells are have into a drillable buried within this win- sizes — Forest’s new discoveries fit right low cost, the company is in a particularly or mature status,” large need for gas supply in dow of biogenic gas into that gap, Gurule said. strong position to help meet those future Gurule said. the Southcentral Alaska generation,” he said. “… But the discovery of natural gas in the supply needs. In particular he sees the And success in market.” —Leonard Gurule, From a technical stand- 1960s led to a gas glut in the Cook Inlet company’s workforce, including a cadre the company’s Forest senior VP for Alaska point there’s no doubt in area and the construction of LNG and fer- of “oil and gas finders,” as a key asset in drilling in the West my mind that biogenic tilizer export plants on the Kenai progressing the company’s Alaska agen- Foreland area has gas has been generated Peninsula. da. resulted in the acquisition of some new in the Susitna basin. The only question is “The (gas) market was oversupplied. “We’re well positioned … because we acreage and a focused exploration pro- where did it go and can we find it.” There wasn’t an interest in gas. Gas was have quality people that have a proven gram there. There is about 700 miles of old 2D bypass play … because it was a byproduct track record,” Gurule said. “Based on that success we picked up at seismic on the Forest acreage. of oil exploration,” Gurule said. the end of ’05 … another 9,700 acres … “Only about half of that (seismic) we That situation has completely changed. Editor’s note: See related story about on the West Forelands Peninsula that we thought was any good,” Gurule said. “We The Kenai Peninsula industrial plants Escopeta’s jack-up rig in this issue, which think will yield some similar results to took that half, had it reprocessed and were expanded after construction; the includes information on Forest Oil’s off- what we’ve had with those three wells Cook Inlet natural gas reserves are run- shore Corsair prospect. continued from page B1 McMillan said that means ensuring partner Canada Southern Petroleum, Canada on potential solutions, but it the spoils of resource development on which receives a net 3.8 million cubic warned there were no assurances that the LIARD traditional lands reach the Liard mem- feet per day. decline could be turned around. bers. But declines at the I-48 well and to a However, Canada Southern said in gas wells, serviced by a Duke Energy He said the first nation believes it has lesser extent at the B-38 well mean that February that 2005 drilling at Kotaneelee pipeline. a legitimate right to portions of royalties volumes from the overall field dropped and northeast British Columbia con- McMillan said the objective is to hold that originate with land claimed by the 29 percent over a four-month period last tributed to a 39 percent increase in year- a land sale in the next four months, pend- Liard people. year. end reserves to 2.27 million barrels of oil ing an agreement with the government of I-48 fell from June to October from equivalent. Yukon Premier Dennis Fentie, who is Mixed results at Kotaneelee 7.2 million cubic feet per day to 720,000 The company’s proved gas totaled prepared to moving forward outside the Currently, the Kotaneelee field, with cubic feet per day. 9.63 billion cubic feet, with a further 3.36 federal land claims process. original gas-in-place of 400 billion cubic Canada Southern blamed the problem bcf listed as probable reserves, more than He said the Liard First Nation is will- feet, is a mixture of encouraging news on liquid loading and said discussions doubling the value of both to C$49.9 mil- ing to seek a level of certainty with the and continuing difficulties. were taking place with operator Devon lion. industry, but is determined to see The L-38 well which came on stream accountability and transparency during in May 2005 is flowing at about 16.5 mil- development to give assurances to his continued from page B1 Rokeberg said he didn’t want such a lion cubic feet per day with little or no community’s grassroots members. bill to get wrapped in a bill that might formation of water, according to junior BILL be adopted by reference for the gas line. He said he wants to see discussion CO2 flooding and thermal or steam on additional credits for frontier oil and flooding of heavy oil deposits. The 20 billion barrels of heavy oil on the North challenged oil, heavy oil and perhaps Slope is the future of Alaska in terms of carbonate areas like Lisburne and pos- maintaining flow through the pipeline, sible Liberty. he said. —KRISTEN NELSON PETROLEUM NEWS • WEEK OF MARCH 26, 2006 B11 continued from page B1 and gas — the gross profits — while the portion of the tax from $50 to $45. The decision making on prices in the $30s and proposed production profits tax or PPT is amendment was defeated, with both $40s, the goal with the progressivity ele- TAX a tax on net profits. The transition provi- Ramras and Samuels arguing the impor- ment in the committee substitute was to sions allowed companies to charge Alaska tance of settling on a get as far away as taxes and state corporate income tax — investments over the last five years off tax that would not possible from that and the present severance tax — are Resources co-Chair Ralph against taxes in the future. The adminis- deter future invest- decision-making regressive: they take a greater proportion Samuels, R-Anchorage, said at a tration had estimated the value to compa- ment. area, Samuels said. of profits at low oil prices than at high. press briefing after the vote that nies at about $1 billion. Ramras said get- If the tax is too The Murkowski administration has pro- The committee had already reduced ting more oil in the he thought the biggest change the high, he said, the moted the PPT as progressive, taking a the transition provision from investments pipeline was his committee made to the bill was the companies won’t larger proportion at high oil prices and a over the last five years to investments highest priority and addition of a progressivity element leave — they have smaller proportion at low prices. over the last three, and spread the recov- making sure that the too much invested in Resources co-Chair Ralph Samuels, R- in addition to the 20 percent PPT ery over more years, substantially reduc- economics were the state. But they Anchorage, said at a press briefing after on net profits. ing the value of the provision. there to produce the can take some of the vote that he thought the biggest last barrel of oil, those projects that change the committee made to the bill Kapsner had just lost on an amend- ment to make the effective date of the tax rather than just the next barrel of oil, came are on the bubble and not spend that was the addition of a progressivity ele- second, with a new tax paradigm his third money. ment in addition to the 20 percent PPT on Jan. 1, rather than the April 1 date in the committee substitute. Making the tax priority. He said Jim Bowles, president of And while production won’t “drop like net profits. The progressivity added in the ConocoPhillips Alaska, visited with com- a rock” it will begin to decline, he said. committee substitute kicks in at a West retroactive to Jan. 1 was described in the discussion as unfair. mittee members and talked about the part- Once the oil is gone you wish you’d Texas Intermediate price of $50 a barrel nerships in the North Slope’s legacy fields, taxed it more, Samuels said, but if the tax and imposes a 0.3 Kapsner said the transition provision was also a retroactivity issue. and how investment opportunities had to is too high there is the risk some oil will percent tax on the meet the investment profiles of all three never get developed. gross. Rep. Harry Crawford, D-Anchorage, said the state has under collected taxes for major companies in order to be funded. The committee There is an enormous amount of oil left Next stop: Finance also voted 5-4 (with a number of years, with the companies in small fields on the North Slope, many The bill goes next to House Finance Samuels and co- making profits in which the state should within legacy fields controlled by all three and then to House Rules. Chair Jay Ramras, have shared. The state needs to raise its producers, Ramras said, and he wants to Finance is busy with the fast track sup- R-Fairbanks, among taxes to be in the range of international make sure that Alaska gets the last barrel plemental and the operating budget and the dissenters) to government take, he said. of oil possible — as well as a gas line — as Finance co-Chair Mike Chenault, R- remove the transi- Seaton said he did not believe that the Rep. Ralph Samuels North Slope production gradually changes Nikiski, said March 20 that the committee tion provisions, transition provision would influence deci- from today’s 100 percent oil to a blend of may not take up HB 488 until as late as what has been called the clawback, which sions going forward, investments which oil and gas and ultimately to largely natu- March 29, when the House is expected to would have allowed companies to take tax the Legislature hopes to increase with the ral gas. finish with the operating budget on the credits for investments made in recent PPT, and said he intended to vote in favor Samuels said he’s concerned about the floor. years. of it. tradeoff where projects start to fall off the Chenault said he wasn’t sure how many Samuels said the committee’s biggest Samuels and Ramras both voted bubble for investment. He said he didn’t members of House Finance got to sit in accomplishment was the work it did in against this amendment, which passed 5 believe all of the numbers of any of the with House Resources or listen to that tes- educating everyone on Alaska’s produc- to 4. economists — the Legislature’s, the timony, so the Finance plan is to start with tion tax system. administration’s or the oil companies’ — the governor’s original proposal and what Ramras called it a four-week invest- Most agreed on change to net profits but didn’t want to leave any money on the the intent of that bill was and then roll in ment seminar on Alaska’s resource wealth Crawford cast the only dissenting vote table. If investment declines, he said, and what Resources did and get a consensus of and said he believed the committee when the bill was moved out of committee. productivity declines, it hurts the entire Finance members as to whether that is the moved the debate away from the adminis- He said March 16 in committee discus- state. way to go and what other options Finance tration’s emphasis on a 20 percent tax and sion that he believed the state was putting The companies won’t say what their has. a 20 percent credit. People heard this all its eggs in the basket of high oil prices decision-making point is, he said, noting Chenault couldn’t say when Finance described as 20/20, Ramras said, and mis- with a net profits tax. Crawford said he that he wouldn’t disclose that information would finish with the bill, or even if it takenly believed it was a wash for the believed the net profits tax wouldn’t pro- in his own business. would get out of the committee before the companies. tect the state at low prices. In 1986-89 bat- Assuming that companies base their Legislature’s Easter recess in mid-April. The PPT has both a 20 percent tax rate tles over what to do about taxes legislators on net profits and a 20 percent credit decided to give up some of the high end of against the gross for investments. oil prices to protect the state at the low end. The committee amended the CS by He said he believed the Legislature removing gas from the progressivity por- could have fixed the existing system with a tion of the bill. graduated severance tax. Crawford is con- Rep. Kurt Olson, R-Kenai, said in a cerned that accountants can find a creative statement that the amendment “helps to way to get out from under a net profits tax. protect production in the inlet by holding Our foundation is rotten with a net prof- the tax rate steady by removing gas from its tax, he said: “The whole concept is a pig the progressivity portion of the bill.” The and we’re putting perfume on the pig.” impact of the PPT on Cook Inlet is a con- Seaton proposed an amendment to cern. The basin has declining oil produc- change the trigger for the progressivity tion and gas production which isn’t being replaced rapidly enough to support all existing uses. Ramras said he believed gas should be taxed progressively, along with oil, but said he was supporting the amendment because he was hesitant to see oil and gas progressivity tied together in the same formula, since prices of the commodities are affected by different events. He said he would like to see gas progressivity tied to an appropriate gas indicator such as Henry Hub. Rep. Paul Seaton, R-Homer, said he supported the amendment but wanted to look at progressivity on gas and under- stood that Samuels was going to ask Econ One Research for information on how a gas progressivity provision might be structured. That information would be forwarded to Finance, the bill’s next com- mittee of referral. Transitions dropped from bill The committee also voted in favor of an amendment by Rep. Mary Kapsner, D- Bethel, to drop transition provisions from the bill. The current severance tax on produc- tion is a tax on the wellhead value of oil B12 PETROLEUM NEWS • WEEK OF MARCH 26, 2006 2 Model posits Alaska diamonds Fairbanks geologist talks about process that creates diamonds

3 Drilling at Donlin Creek resumes World’s largest gold producer scrutinizes project 10 B.C. mine model for Pebble Success at Kemess bodes well for future of Alaska project

A special supplement to Petroleum News WEEK OF QUARTZ VEIN March 26, 2006 SARAH HURST 2 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006

The eclogite model for diamonds in Alaska. Courtesy David Szumigala.

G ALASKA Geologic model posits Alaska diamonds Fairbanks geologist David Szumigala envisages processes that might have occurred to create the valuable gems far from kimberlites BY SARAH HURST deep-seated ultramafic rock, consisting For Mining News essentially of garnet and pyroxene. Rutile, kyanite, and quartz are typically present. ust because Alaska is nowhere near Various diamonds and indicator min- any of the world’s kimberlite erals have been discovered on rare occa- J provinces, doesn’t mean that geolo- sions in widely disparate areas of the gist David Szumigala is giving up state. Most of the diamonds were found hope on finding diamonds in the state. accidentally during placer mining, “Thinking conventionally doesn’t mean although there is also a lode diamond that you are right!” is Szumigala’s exploration project under way currently at approach to the problem. Without the Shulin Lake in Southcentral Alaska. presence of kimberlite, he had to draw up an alternative geological model that “Thinking conventionally doesn’t would explain how diamonds could theo- mean that you are right!” retically be formed here. In what Szumigala calls his eclogite —Geologist David Szumigala model, carbon-rich sediments get sub- ducted (sucked down a trench) 150-200 kilometers. The carbon is converted to Crooked Creek find in 1980s diamonds and magma formed at these The first three documented macrodia- Map of known and rumored locations of diamonds in Alaska. Courtesy David Szumigala. depths capture the diamonds and trans- monds in Alaska were found by three dif- the Circle mining district in the early International Mining Symposium in ports them to the surface in areas of vol- ferent operations about one to two miles 1980s, Szumigala told the Arctic Fairbanks March 16. There would have canic arcs. Eclogite is a coarse-grained, apart from each other at Crooked Creek in been no reason for the three operators to collude in a scam and draw unwanted attention to their discoveries, he pointed out. One of the diamonds was a 0.33-karat white octahedron, another was a 1.4-karat pale yellow dodecahedron, and the third was a 0.8-karat twinned dodecahedron. “We know that this was an alluvial occurrence, not sure whether it’s Pleistocene or Tertiary, it’s still pretty poorly understood what the gravels in that area are,” Szumigala said. The diamonds were recovered during normal clean-ups in concentrates derived from Ross sluice boxes. At the time of their discovery the state concluded that the lode source was probably located to the north of the Crooked Creek location. Goodnews Bay find in 1970s The U.S. Geological Survey also docu- mented microdiamonds that were found in with the platinum at Goodnews Bay in the 1970s. “Once again, these are alluvial dia- monds, but they’re in a totally different place in Alaska, so it’d be very difficult to say that those are both the same source,” Szumigala said. Goodnews Bay is on Alaska’s southwest coast, in the Bethel area. The handful of other alluvial dia- monds that have been found in Alaska were also scattered around the state, and there is even a “diamond rumor map” which is about as authoritative as it sounds. At Shulin Lake a joint venture team has been conducting a drill program for the past few years and transparent fragments of larger diamonds have been found, as well as indicator minerals like purple gar- net. The lode source is still elusive, but drilling is due to resume this spring. Szumigala isn’t the only person in Alaska who believes in going against the grain. G PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 3

G SOUTHWEST ALASKA ALASKA Drilling at Donlin Fort Knox gold keeps Alaska green Alaska vendors reaped a share of $110 million spent last year to keep the open pit Fort Knox gold mine humming night and day, according to Lorna Shaw, com- Creek resumes munity affairs director of mine owner Fairbanks Gold Mining, a subsidiary of Kinross Gold Corp. World’s largest gold producer scrutinizes Yukon-Kuskokwim The money went primarily to buy labor, power, and fuel, Shaw said, adding that project; plans site visits this spring; wind power being studied even the small items are essential — items like toilet paper, for instance. “We’ve got 400 people out there,” Shaw said. “Consumable paper products — BY ROSE RAGSDALE for the region. that’s a lot of toilet paper; it can shut us down, literally.” For Mining News The mine is located just north of Fairbanks on the road system, but it’s far from Bright future envisioned manufacturers — just below the Arctic Circle — so advance planning is a must, s Barrick Gold Corp. announced Current plans call for spending more Shaw said in remarks at the Pac Com meeting in Anchorage Feb. 22. completion of its multibillion-dollar than $30 million on drilling, feasibility Shaw said the most of the mine’s vendors must keep an expanded stock of inven- A acquisition of Placer Dome in mid- studies and permitting at Donlin Creek in tory on hand in Fairbanks or elsewhere in state to respond quickly when the mine March, managers of the Donlin 2006, according to NovaGold. needs parts or re-supply. The mine keeps about $10 million of inventory stocked in Creek project charged forward with work “We hope to complete the pre-feasibil- its own warehouse, and vendors stock about $10 million more, she said. on several fronts at the southwestern ity study, start permitting and begin the Alaska gold deposit. feasibility study this year,” Foo said. 300,000 ounces last year Toronto-based Barrick launched a hos- Barrick officials initially focused on The mine produced 300,000 ounces of gold last year, Shaw said. It takes a lot tile takeover of Placer Dome on of hauling, crushing and grinding to produce that amount of gold. The company Halloween, but later won approval from Placer Dome’s active mines, but recently moved an average of 180,000 tons of material per day in 2005, Shaw said. It Placer Dome’s board for a $10.4 billion scheduled site visits to Donlin Creek with- processed 55,000 tons of ore. deal that created the world’s biggest gold in the next few weeks, according to Foo. There is much wear and tear on equipment, and the equipment is big. There are miner. Placer Dome spent $14 million at two giant shovels backed up by loaders so big a single tire costs $43,000 — if you The combined company owns 26 active Donlin Creek in 2005 on drilling, pre-fea- can get them. The boom in industrial activity worldwide has created a tire short- mines and is the world’s largest gold pro- sibility engineering design and environ- age. ducer. It expects to gain at least $200 mil- mental baseline data collection. Over The company’s 20 haul trucks range from 85 tons to 240 tons, each taking six lion a year cost savings through the acqui- 27,000 meters were drilled in support of tires. The tires are $20,000 each, six per year per truck sition. moving the project to feasibility. In addi- “Without tires we can’t run,” Shaw said. “We’re running tires as long as we can.” With the purchase of Placer Dome, tion, continued collection of baseline and The ore transport conveyor belt is a mile long, and it used three rolls of replace- Barrick assumes management of the environmental assessment data was com- ment belt in 2005. Ore crushers need new liners every year. Donlin Creek project in the Yukon- pleted for submission of permitting docu- Anywhere steel meets rock, there is expense. The cost of wear metal for ground Kuskokwim region under terms of a joint ments in 2006. Drilling has continued to engaging tools approached $1 million at the mine last year, Shaw said. venture agreement with Vancouver, B.C.- confirm the geologic model and demon- Fort Knox has 794 vendors in Alaska, and it’s looking for more, Shaw said, based junior NovaGold Resources. strate expansion potential with more than adding that there will always be some far away suppliers. For carbon to soak gold 3 million ounces of gold recently added to from solution, plant operators prefer certain roasted coconut shells from Sri Lanka. Ownership change on tap the resource. —STEVE SUTHERLIN That agreement called for Placer Donlin Creek, which has total estimat- Dome, 30 percent owner and operator of ed reserves of 28 million ounces, is the project, to earn another 40 percent expected to produce more that 1 million ownership interest in Donlin Creek. The ounces of gold a year, according to process of acquiring that 40 percent stake NovaGold. and becoming majority shareholder as Contact North of 60 Mining News: well as operator at the project should be Wind power looks promising Editor: Sarah Hurst [email protected] complete this month, Stan Foo, general Though diesel is the preferred fuel Phone: 907.248.1150 • Fax: 907.522.9583 manager of the Donlin Creek project said source for power generation at Donlin Address: P.O. Box 231651, Anchorage, AK 99523 March 17. Creek, Foo said project managers like the NovaGold, meanwhile, praised idea of augmenting diesel with wind power Barrick’s rapid progress with its transition North of 60 Mining News is a monthly supplement of the weekly team at Donlin Creek and the steady generation. The company has been studying newspaper, Petroleum News. It will be published in the fourth or fifth week of every month. advancement of the project toward a pro- the feasibility of constructing a wind farm duction decision by November 2007 under in the hilly terrain near the project site. ADDRESS terms of the agreement. “We had four towers set up along various Dan Wilcox CHIEF EXECUTIVE OFFICER ridge tops, but we had problems with icing P.O. Box 231651 Foo said Barrick is very interested in Mary Lasley CHIEF FINANCIAL OFFICER Anchorage, AK 99523-1651 and very high winds with two of them,” Foo Donlin Creek, and is currently looking at Kay Cashman PUBLISHER & EXECUTIVE EDITOR all aspects of the project. said. “We made repairs, and we’ve collected EDITORIAL Kristen Nelson EDITOR-IN-CHIEF Core drilling at Donlin Creek resumed six months of data.” Anchorage in February with four diamond drills on To be valid, the study requires a full-year Sarah Hurst EDITOR (Contractor) 907.522.9469 site and the exploration camp running at of data collection, but Foo said the compa- Susan Crane ADVERTISING DIRECTOR Canada [email protected] full capacity with 60-70 people on site at ny is very encouraged about its prospects Steve Sutherlin ASSOCIATE EDITOR BOOKKEEPING & CIRCULATION a time and total employment of 120. for generating wind power at the site. Curt Freeman COLUMNIST Ninety percent of the workers at Donlin “We hope to provide up to 40 percent 907.522.9469 Gary Park CANADIAN CORRESPONDENT Circulation Email Creek are local residents and shareholders of the project’s total power needs of 75-80 Allen Baker CONTRIBUTING WRITER [email protected] of Calista Corp., the Native corporation megawatts with wind power,” he added. G Rose Ragsdale CONTRIBUTING WRITER ADVERTISING Amy Spittler SPECIAL PUBLICATIONS EDITOR 907.770.5592 Advertising Email CONTRACT PHOTOGRAPHER Judy Patrick Photography [email protected] Forrest Crane CONTRACT PHOTOGRAPHER CLASSIFIEDS Steven Merritt PRODUCTION DIRECTOR 907.644.4444 Tom Kearney ADVERTISING DESIGN MANAGER Mapmakers Alaska CARTOGRAPHY FAX FOR ALL DEPARTMENTS 907.522.9583 Heather Yates CIRCULATION MANAGER Dee Cashman CIRCULATION REPRESENTATIVE Tim Kikta CIRCULATION REPRESENTATIVE Several of the individuals listed above are independent contractors

NORTH OF 60 MINING NEWS is a monthly supplement of Petroleum News, a weekly newspaper. To subscribe to Petroleum News and receive the monthly mining supplement, call (907) 522-9469 or sign-up online at www.PetroleumNews.com. The price in the U.S. is $78 per year, which includes online access to past stories and early access to Petroleum News every week. (Canada/Mexico subscriptions are $165.95; overseas subscriptions are $200) Or, just purchase the online edition of Petroleum News, which also includes the mining supplement and online access to past stories, for $49 per year. 4 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006

G YUKON Yukon placer mining: Fewer, but better Over past century operators have consolidated, brought in more advanced equipment to increase efficiency of production BY SARAH HURST came over, Yukon Exploration, and put For Mining News together a “Cat” show in the Sixtymile, as well as running a dredge successfully for 10 he people, the technology and the reg- years. In 1975 the price of gold began to rise ulations have changed dramatically in and more small operations entered the plac- T the past 100 years or so since the er industry. “Bulldozer and sluice box tech- Klondike Gold Rush, but placer min- nology, they used a lot of water stripping ing in Canada’s Yukon is still thriving. Mike and ground sluicing ... small average pro- McDougall, president of the Klondike duction; it was primarily family based,” Placer Miners Association, and Bill McDougall said. There was very limited Lebarge from Yukon Geological Survey exploration work at the time. provided some insights into the state of the The decade from 1985 to 1995 saw fur- industry during a joint presentation to the ther changes, with increased use of screen Arctic International Mining Symposium in decks and advances in gold-saving technol- Fairbanks March 14. ogy, partly thanks to work funded by the A total of 70,322 crude ounces of gold Yukon government that improved riffle and (2.2 million grams) was produced by Yukon sluice box performance. “We saw the New placer miners in 2005, slightly less than the Zealand-style trommels coming in from 76,152 crude ounces (2.4 million grams) Mike McDougall is a Yukon placer miner as well as an administrator. Courtesy Mike New Zealand,” McDougall said. “We also McDougall. produced in 2004. The value of the gold saw an influx of New Zealand miners as produced in 2005 was US$29.9 million, an Around 450 people were directly employed Approach changing they found the environmental regulations increase from the previous year’s $25 mil- at 128 placer mines in 2005, which are within New Zealand difficult to meet.” “So how do we look for these placer lion because of the higher mostly family-owned and Auger drills were also used more for explo- deposits? Well, traditionally we just dug a price of gold. operated, although there ration and deposit evaluation. Operators hole in the ground with a bulldozer and had Yukon placer production An integrated regulatory has also been Russian formed joint ventures to share equipment a look around,” McDougall said. “We’re is measured in crude ounces regime for Yukon placer investment in Yukon and move large amounts of overburden. moving away from that. Mining land use because the gold is not nec- mining was announced in properties recently. “We also saw, of course, the hydraulic exca- regulations demanded that we reclaim the essarily pure gold as it In Alaska 65 people vator coming in and much more efficient April 2005, developed by ground, so we’re moving into less impactive would be if produced at a were employed at placer material handling, cheaper cost of opera- the mining industry, First methods, using excavators for test pitting, hard rock mine. In Alaska mines in 2005, David tion,” McDougall added. Nations and the using Auger drills.” The small Auger drills no such distinction is made Szumigala of the state From 1995 until recently there was a are useful in frozen ground but nearly use- between troy ounces and government of Yukon, Department of Natural drop in the price of gold and there was a less in thawed ground, McDougall added, so crude ounces. The value of and the regime is to be Resources’ Division of corresponding decrease in the number of the much more expensive reverse circula- a crude ounce is not consid- implemented in 2007. Geological and operators, as well as consolidation of com- tion drills have to be used in the latter case. ered less than the value of a Geophysical Surveys told panies. The Sixtymile area went from 16 “We’ve also done some scientific testing troy ounce because placer Mining News. An esti- operators down to five. There were also with radio tracers to make sure that our gold nuggets can sell for prices that are mated 27,500-28,000 ounces of gold were large increases in production volumes due drills are recovering what we think they higher than the official gold price, even produced in 2005, almost the same as the to technology: 350 loose cubic yards of are,” McDougall said. “There’s some chal- though they are not pure gold. amount in 2004. Production is likely to be material could be moved in an hour, up lenges with it, but properly managed the Approximately 87 percent of Yukon’s under-reported, though, because the Alaska from 50-75 cubic yards. Marginal areas drill is still a very useful tool.” Placer min- placer gold was produced in the Dawson figures are based on the voluntary answers now became productive, and technogenic ers could also consider using geophysical mining district, which includes the to a questionnaire, while in Yukon miners deposits were also mined more frequently. surveys to search for minerals, Lebarge told unglaciated drainages of several rivers. The owe a royalty to the government and pro- the symposium. remaining gold came from the glaciated duction figures must be reported. Recent regulatory changes Many of the areas being mined today Mayo and Whitehorse mining districts. Regulation of Yukon’s placer mining have been mined already in the past, and industry has been extremely convoluted at these are known as technogenic deposits. times, especially in the 1970s and 1980s There are also bench deposits — tertiary when there was a great deal of confusion gravels along existing creeks and rivers — and duplication of permitting and inspec- and modern river valleys. “Our problems in tions by different government departments. the unglaciated areas, of course, are access,” “The regulators were also frustrated, McDougall said. “Permafrost is still a big they had no way to control the mine waste thing, a lot of the ground is frozen, a lot of or the environmental effects of placer min- it’s covered with frozen mud, but the advan- ing, and relations between the regulators tages are high grades, and often low over- and the miners were very strained,” burden.” McDougall said. The technogenic deposits are gold-bear- The Yukon Fisheries Protection ing tailings or areas that have been covered Authorization of 1988 issued discharge by tailings from previous operations, where standards for placer miners, classified there is placer gold that was missed by the creeks and rivers and provided a measure of early dredges. There are special considera- certainty for the industry. Subsequently, a tions at these deposits as they are filled with memorandum of understanding between water and they have to be stripped very federal departments allowed a single carefully, McDougall said. agency to inspect placer mines on their Sixtymile Valley: Changes since 1892 behalf. In 2002 the Department of Fisheries and Oceans temporarily withdrew its sup- Taking the Sixtymile Valley area as an port for placer mining regulations, but the example, McDougall described the changes minister later reversed his decision on con- that have occurred since the first group of dition that a new regime was developed. 350 people started mining there with pans An integrated regulatory regime for and shovels in 1892. By 1910 the North Yukon placer mining was announced in American Trading and Transportation Co. April 2005, developed by the mining indus- had a hydraulic concession and developed a try, First Nations and the government of ditch and installed a dredge, signaling the Yukon, and the regime is to be implement- start of capital exploration. Extensive ed in 2007. “The basis of the regime was to exploration work took place in the 1930s, be the idea of adaptive management with a and one company brought a used strong monitoring component,” McDougall Washington Iron Works dredge up from said. The new regulations recognize that the Idaho to Dawson City, but World War II greatest amount of sediment is coming intervened before it could be used. After the from natural sources or poorly-managed war another company freighted the dredge mine sites, not from settling ponds. “That to Sixtymile, but failed to make money and was a bombshell for us, so we’re going to the company went into receivership. improve our on-site management prac- In the 1950s a company from Alaska tices,” McDougall added. G PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 5 6 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006

G NORTHWEST ALASKA Ambler shuffles forward to development Doug Nicholson supervising advanced Rock Creek project at Nome, also pleased with progress at a much more remote location BY SARAH HURST 309), Kobuk (population 109) and For Mining News Shungnak (population 256). There is no Want to know more? road connecting the villages but If you’d like to read more about the Ambler project in northwestern Alaska, go ovaGold Resources is heading NovaGold is discussing the possibility of to Petroleum News’ Web site archives at www.PetroleumNews.com to find stories towards the Center of the Universe a road with local residents, Doug that have been published in Petroleum News or its monthly North of 60 Mining this year. No, the Vancouver-based Nicholson, the company’s Alaska general N News publication, commonly referred to as simply Mining News. These articles junior won’t be mining in outer manager, said at the Arctic International either feature or mention the Ambler project. space; it turns out that the Center of the Mining Symposium in Fairbanks. The Universe is in Alaska — which will come road would also service any mine that 2005 as no surprise to some residents of the might be developed in the area. • Dec. 25 Mining news update: A mad scramble behind the scenes 49th state. Astronomers may disagree “Part of our agreement with Rio Tinto • July 24 Mining news update from Curt Freeman: Alaska mineral industry about the accuracy of the name, but geol- was that we go in and clean up remnants cooks this summer ogists believe that the Center of the of the historic exploration campaigns — • March. 27 Alaska mining news update from Curt Freeman: Investment up sig- Universe deposit could contain healthy there’s quite a bit of old drill steel, vehi- nificantly for 2004 reserves of copper, cles, a lot of stuff left around on the • Feb. 27 No winter hiatus: 2005 Alaska plans advanced, some already in full lead and zinc. Arctic strip and Arctic itself,” Nicholson swing NovaGold plans a told the symposium. NovaGold’s contrac- 3,000-meter drill tor, Remote Site Services, has removed 2004 campaign at the around 240,000 pounds of material, haul- • Oct. 31 Exploration efforts continue at record pace deposit this year, as ing it to the airstrip at Dahl Creek and fly- • Oct. 31 A gem of a deposit in northwest Alaska part of its larger ing it out for disposal. About 600 old fuel • Sept. 12 Drills produce “exceptional” results at Galore Creek in remote British Ambler project in drums still contained 3,000 gallons of Columbia northwestern fuel. The contractor pumped out the fuel, • Sept. 12 Fires kick up throughout Alaska in August Alaska. cut up and crushed all the barrels and The Ambler prop- Doug Nicholson, NovaGold’s Alaska flew them out. erty consists of 379 general manager Boeing 747s to fly in and out of the proj- resource or the potential gas pipeline. “As square kilometers Transportation study ect. “If you can reduce to a metal on-site, everybody knows, environmental con- including patented lands and State of looked at logistics it actually does not look all that bad,” cerns today rule,” Nicholson said. “So Alaska claims covering a precious metal- NovaGold hired NANA DOWL, a sub- Nicholson said. “Once it’s on an airplane (we asked) what was the potential for rich, volcanogenic massive sulfide or sidiary of the regional Native corpora- as metal, really, there’s no limit to it, you looking for some sort of renewable-type VMS district. In 2004 NovaGold signed a tion, to do a transportation study that can take it right out of Arctic and it can go resource that we could use to help supple- joint venture agreement with Rio Tinto looked at the logistics of getting things right to the smelters in Japan.” This would ment or generate more power on-site. that gave the junior the right to earn a 51 into and out of this remote area. Road, solve the problem of the effect on subsis- Also we wanted to take a look at what the percent interest in Ambler, although Rio rail, air and rivers were examined, includ- tence resources of people from outside possibility was for creating power for the Tinto retains the option to take back the ing any combination of those routes, with coming in, but going to metal on-site region, and being able to share power controlling interest if the project moves a total of 57 different alternatives being requires much more power generation. with the three villages.” towards development. evaluated. “Part of the The cost of fuel in Kobuk and Shungnak The study identified two potential sites The most promising charge to NANA DOWL currently is just over $6 a gallon, so a for a hydroelectric power facility which prospect discovered on “If you can generate 25 or 30 megawatts of wind was, don’t throw any- diesel-powered plant would be expensive, could be used for at least six months of the property so far is the according to Nicholson. the year and supplemented with diesel power and 25 megawatts thing out or rule anything Arctic deposit, which out. I didn’t want to be power, and possibly also wind power. according to NovaGold of hydro, you’re making a pre-judgmental in going Concentrate on site “The wind blows a lot, so there’s good ranks among the largest significant in-road into the into it,” Nicholson said. To produce concentrate on-site, 35 to potential,” Nicholson said. NovaGold and richest VMS amount of diesel The study estimated a 40 megawatts of power for a 5,000- to plans to put up 30 monitoring stations — deposits in the world generation that you have cost of $2 million a mile 10,000-tons per day operation would be 100-foot towers with small wind genera- based on total in-situ to build a road or $4 mil- enough. To reduce the concentrate to a tors on them — to start collecting wind metal value and in-situ to have on-site.” —Doug lion a mile for a railroad. metal, 80 to 100 megawatts of power data. “If you can generate 25 or 30 value per ton. The con- Nicholson, NovaGold “Subsistence would probably be required. “It’s a sub- megawatts of wind power and 25 tained precious metals in Alaska general manager resources are a very sen- stantial investment. Compared against megawatts of hydro, you’re making a sig- this resource total more sitive subject, so we’re building roads, though, at $2 million a nificant in-road into the amount of diesel than 817,000 ounces of gold and 62 mil- sensitive to that and we’ve been out and mile, or railroads at $4 million a mile, it generation that you have to have on-site,” lion ounces of silver, while the base met- talking with the folks in the region, we’ve may make sense,” Nicholson said. Nicholson added. als total 3.2 billion pounds of copper, 4.2 laid this out for them, talked to them Shaw Engineering conducted a power In addition to the drilling program and billion pounds of zinc and 640 million about what our plans are, and solicited study for NovaGold’s project. Again, all logistical research, NovaGold will begin a pounds of lead. their input into this,” Nicholson said. “It’s the options were considered, including mine scoping study and conduct environ- Ambler, Kobuk, Shungnak nearest a sticky subject.” diesel, wind, putting a power plant on the mental baseline and metallurgical test In the late 1970s and early 1980s Dalton corridor or on-site, and using the work this year. The company expects that The three nearest communities to the Kennecott did a study that looked at using as-yet undeveloped North Slope coal it will be at least 10 years before a mine is Ambler property are Ambler (population operational at Ambler. G PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 7

G INTERIOR Fort Knox performs well for Kinross Primary gold producer reports nine-month loss, higher reserves; considers capital improvements at Interior Alaska mine

BY ROSE RAGSDALE per ounce for a total of $516 million. The a power line around the perimeter of the For Mining News average spot gold price was $432 per Looking ahead, the company pit at Fort Knox to extend the existing ounce. estimated capital spending in 2006 power distribution grid to improve the inross Gold Corp., owner of the Cost of sales increased in 2005, due to at about $285 million, with $115 mine’s dewatering program. Fort Knox gold mine near the inclusion of 100 percent of the million for sustaining capital and As mining progresses, workers are K Fairbanks, reported a 27 percent Paracatu mine — up from 49 percent in descending deeper into the pit, and keep- $170 million for capital jump in proven and probable 2004 — and higher costs across the com- ing the ground dry is becoming increas- reserves at year-end 2005 to 24.7 million pany’s operating mines with the exception expansions, primarily at Fort ingly important, Shaw said. ounces of gold. The year-over-year of Fort Knox, Kinross said. Knox and three other mines. “The 2005 dewatering rate was about increase from 19.4 million ounces in The higher operating costs resulted 467 gallons per minute, and we anticipate 2004 marks the fifth mainly from stronger Brazilian, Chilean pursuing the possibility of building a an increase to 750 gallons per minute in consecutive year of and Canadian currencies against the U.S. heap leach facility and constructing a 2006,” she said. As a part of the zero-dis- reserves growth. dollar and higher prices for energy, fuel power line to serve the mine’s pit dewa- charge facility’s design, the water is held Digging its way and other supplies, the company said. tering program. in containment until it is recycled in the out of an accounting Faced with rising commodity prices, processing of ore. Fort Knox has 23 tangle that began Gold output rises in 2005 the company is taking a hard look at alter- dewatering wells that are currently serv- nearly two years The share of gold equivalent ounces native processing methods to improve iced by eight diesel-powered generators. ago, Kinross posted sold for the first nine months of 2005 was mine efficiencies, according to communi- “This improvement will not only the reserves figures similar to the corresponding period of ty affairs director Lorna Shaw. increase reliability, but we expect to in February along 2004. Kinross reported increased gold “We are currently evaluating a 160- reduce annual operating and maintenance with financial LORNA SHAW production at 100 percent-owned Fort million ton capacity valley fill heap leach spending by approximately $300,000,” results for the first Knox and five other mines in which it located at the far north end of the tails Shaw said. nine months of 2005. holds at least partial ownership interest. impoundment in the Walter Creek Construction is planned to begin this The third-largest primary gold produc- But this was offset by lower production drainage,” Shaw said. “The lower cost spring, she added. er in North America reported a net loss in resulting from the shutdown of two mines would allow us to process currently Kinross said Ryan Lode is no longer the first three quarters of 2005, including and decreased output at three other mines. planned ounces at a greatly reduced rate.” being included in Fort Knox’s reserves or a non-cash foreign currency impact on “Kinross’ reserve base and average Fairbanks Gold is continuing to evalu- resources because the company has elect- future tax liabilities. mine life have grown steadily over the ate the heap leach project to determine its ed not to make further option payments Toronto-based Kinross, which had past five years and are reaching new economic feasibility. “We won’t actually on that property. Meanwhile, the nearby been unable to file financial reports since highs,” said Kinross President and CEO begin the heap leach permitting process True North and Gil deposits have been the third quarter of 2004 due to queries Tye Burt. “Our 2005 exploration program until the project is deemed economic,” reclassified to resources due to changes from U.S. regulators, posted a net loss of has been successful in growing our Shaw said. in cost assumptions at Fort Knox, the $61.7 million, or 18 cents a share, for the reserve base at year-end 2005 to 24.7 mil- Ground clearing could begin this year, company said. period that ended Sept. 30. lion ounces, compared with the 19.4 mil- and if Fairbanks Gold moves forward, the Kinross is the seventh largest gold pro- The results included a non-cash for- lion ounces reported at year end 2004, project could begin in 2007, she added. ducer in the world. With nine mines in eign currency impact on future tax liabil- including replacing depletion from the Canada, the United States, Brazil, Chile ities totaling $22.9 million and a write- gold produced in 2005.” Power grid extension planned and Asia, Kinross employs more than down of $36.8 million on the Aquarius Kinross said it plans to produce 1.44 Fairbanks Gold also proposes to build 4,000 people worldwide. G property in Ontario, which Kinross sold million ounces in 2006 at total cash costs to St. Andrew Goldfields in December. of about $285 to $295 per ounce. For 2004, the gold producer posted Kinross achieved its target in 2005 for restated net earnings of $24.9 million, or full-year production of 1.6 million ounces 7 cents per share, for the same period. of gold equivalent and expects total cash Questions from the U.S. Securities and costs of about $275 to $280 per ounce, Exchange Commission into the compa- the company said. ny’s accounting treatment of its 2003 pur- Capital expenditures for 2005 totaled chase of two North American gold min- $165 million. ing companies delayed results. Since Kinross reported preliminary Capital projects on tap at Fort Knox 2003 and 2004 results late last year, it has Looking ahead, the company estimat- had to restate the results several times due ed capital spending in 2006 at about $285 to accounting changes. million, with $115 million for sustaining Kinross said revenues for the first nine capital and $170 million for capital months of 2005 rose 10 percent to $535.5 expansions, primarily at Fort Knox and million from $487.6 million a year earlier three other mines. as gold prices rose and sales grew. Among significant capital projects this The company sold 1.2 million ounces year, Fairbanks Gold Mining Inc., the of gold during the nine months that ended Kinross unit that operates Fort Knox, is in September at a realized price of $430

To advertise in North of 60 Mining News: Call Susan Crane • 907.522.9469 8 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006

G INTERIOR Pogo bounds up steep learning curve Teck-Pogo management confident challenges can be met as Alaska’s newest mine heads for full production; more miners needed

BY SARAH HURST Having waited a long time to see Pogo worried about the possibility of giving too For Mining News The largest visible gold here is the mine and endured a three-hour early much gold away, as they provided 100 size of a match head, according to morning bus ride from Fairbanks, the pounds of quartz chunks to the group as n the early days of exploration at a Jack DiMarchi, Teck-Pogo’s chief geologists in the group were keen to souvenirs. To extract an estimated 3.7 property near the small town of Delta geologist. spend as much time underground as pos- million ounces of gold from 7.7 million I Junction in Interior Alaska, a bunch of sible. About another three hours, as it tons of ore over a 10-year mine life, a geologists who’d had a few too many turned out. “To a geologist it’s like a lengthy journey through the mill’s Pogo in mid-March coincided perfectly beers began jumping up and down. They cathedral down there,” one said on his processes is required. with the beginning of operations. As a may have been jumping for joy, imagin- reluctant return to the surface, “a cathe- result, the 30 places on the tour were ing a rich gold vein beneath their feet, or dral of quartz.” That is certainly true: Drift and fill mining booked up months in advance and there more likely they were jumping to keep even to the completely un-geological eye was a long waiting list of people hoping The drift and fill method of mining is warm, as this region is one of the coldest there is a clear line separating the white- somebody would drop out. A total of 15 being used here. Drifts are horizontal tun- on the planet in winter. Someone nick- and-rust quartz from the gray wall rock. people could go underground at one time, nels 15 feet square that lead off the main named the strange dance the Pogo dance, On the other hand, the sparkling dots loaded into a windowless metal box on decline. At the end of each of the two and the name stuck. Today in the same in the quartz could be gold or could be wheels. Once the vehicle arrived at its shifts per day, blasting takes place. To spot, Pogo mine is producing its first gold pyrite; the miner who drove us down there destination (in one case after backing sev- blast one block of about 250 tons of ore, bars, a joint venture between Canadian wasn’t too sure. The largest visible gold eral hundred feet out of the portal to avoid 60 holes have to be drilled. This is con- mining major Teck Cominco and Japan’s here is the size of a match head, accord- an oncoming truck) the visitors had plen- siderably less ore than in other methods Sumitomo. ing to Jack DiMarchi, Teck-Pogo’s chief ty of freedom to walk around in the mud of mining such as long-hole stoping, An Alaska Miners Association tour of geologist. Apparently the company isn’t and chip off pieces of the valuable rock. see POGO page 9

G GUEST COLUMN ‘What doesn’t kill us makes us stronger’ BY J.P. TANGEN internalize the environmental costs it There was a time, within the Guest Columnist Mining must bear as an expense of doing busi- memory of many still alive, when & the law ness. Like Mom and Pop, Pogo will sell was reminded of the famous quota- a man with a pan could go onto its gold into a global market. Through tion by Friedrich Nietzsche last week the creeks and if lady luck smiled J.P. Tangen technology and intensive capital invest- I when I had occasion to visit the on him he could find a little has been prac- ment Pogo will compete toe-to-toe with recently completed Pogo mine near “color” upon which to build an ticing mining operations around the world. No matter Delta. This impressively huge, modern law in Alaska that the environmental and other social facility will mine gold and pour bars for operation. since 1975. He standards of such offshore operations are the next decade without spilling a drop of can be reached J.P. TANGEN not up to par with our own. wastewater, while providing 230 or more time, mom and pop placer miners who While raising the bar domestically, we quality jobs for the people of eastern characterized the earlier conferences. at [email protected] or visit his Web have sadly stifled a small sector of our her- Alaska. It is a tribute to how technology While there are still some around, they site at www.jptangen.com. His opin- itage. If progress is measured by those who has combined with public policy to are a dying breed, squeezed out of exis- ions do not necessarily reflect those have been stepped upon, it is fair to say that advance Alaska’s economy without tence by the incessant regulatory of the publishers of Mining News adversely impacting the environment. demands of an insensitive government and Petroleum News. the mining industry has made great (if For those who are keeping count, this and the encroachment of newcomers into unwilling) progress in the past two Of course, this poor fellow did not is major mine number five. Five model the country. decades. realize that when he washed his gold with Alaska operations proving once again that There was a time, within the memory For those who look to the past it is a the river water, he was offending the aes- miners can do it right. My pride in the of many still alive, when a man with a pan tragedy, for those who look to the future, it thetic sensitivities of those who followed industry, however, was tempered by could go onto the creeks and if lady luck is a ray of bright hope. As new mines come him into the wilderness. (Wilderness was another observation I made last week. smiled on him he could find a little on line in Alaska, they too will be safe and spelled with a small “w” in those days.) Preceding the visit to Pogo there was a “color” upon which to build an operation. sound operations. The world needs, and in conference in Fairbanks sponsored by the He didn’t realize that the fish which hap- fact demands, the commodities with which A few stakes in the ground and a loca- pily swam past his outfall thought that local branch of the Alaska Miners Alaska is blessed, and the mining industry tion certificate filed with the local mixing zones were somehow hazardous Association. The Fairbanks Branch has is ready, willing and able to produce them recorder, and he was in business. With a to their health. been hosting these biennial conferences here and now. grubstake and a lot of hard work, he could Nietzsche’s observation is sadly true, for decades, but recently the demography Congratulations to Pogo on a job well build a cabin and buy some “yellow iron” and its callous scar is borne directly by has changed. (as Caterpillar products are sometimes done. Our hats are off to those who have This year, almost conspicuous by their the least of us. In a very large sense, how- known), and maybe even make enough to ever, it is borne by us all. Pogo can ably gone before and made your project possi- absence, there were very few of the old feed a family. ble. G PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 9

Computer modeling collides with hard reality No matter what advanced computer modeling tools geologists have at their dis- SARAH HURST posal, real underground exploration and mining will always prove them inaccurate to some extent. This is especially true at Pogo, a geologically complex deposit in which three different potentially economic veins have been identified. The ore zone at Pogo covers an area that measures 3,500 feet by 2,000 feet, with an average ver- tical thickness of 12 feet, although in places it is up to 30 feet thick. A total of 13,000 feet of underground development is already in place at the mine, with three portals, at 1,525, 1,690 and 1,875 feet above sea level. The L1 vein and the smaller L2 vein 450 feet below it are going to be mined, while the L3 vein, 350 feet below the L2 vein, requires further exploration. “We’re getting ready to start drilling this thing. It’s completely wide open to the southeast,” Jack DiMarchi, Pogo’s chief geologist, said during a presentation at the March Arctic International Mining Symposium in Fairbanks. The pressure of having to send ore to the mill has focused geologists’ minds at Pogo. “We’re past the time where we have the benefit to kind of scratch our head over these problems and take a week to figure them out,” DiMarchi said. The veins are hosted within shallow-dipping shear zones that began life as thrust faults. In between the three main quartz veins there are many parallel smaller veins. “There’s been a lot of deformation internal to the vein,” DiMarchi said, referring to the L1 vein. “After the vein was in place it continued to be deformed over time.” Small-scale faults cause problems Problems arise when miners run into small-scale faults. These faults can’t be detected ahead of time, DiMarchi explained, so they weren’t built into the model and are having a significant impact on production. Sometimes it isn’t even clear which direction the drilling should go. “We can’t use the normal procedures to decide what to do here. What it requires actually is bringing in the mine survey group,” DiMarchi said. The aim is to find a control point farther along, somewhere where the geologists know their model is right. Ultimately these challenges cause The quartz vein at Pogo is an average of 12 feet thick, but is up to 30 feet thick in some higher dilution (contamination of ore with barren wall rock) and higher costs. places, while visible gold is no bigger than a match head. Many large-scale faults were built into the model before construction began, but not all of them could be discovered in advance of mining. When an additional large fault was found recently, it changed the design of the stopes because it was no longer possible to drive straight through the fault on a level grade to the vein. The vein was 40 feet higher on one side of the fault than the other, so the stopes had to SARAH HURST change direction, and it was more costly to drive them through the fault. Permitting and construction caused a hiatus in exploration outside the known deposit, but for 2006 Pogo has an exploration budget of $2.7 million and 35,000 feet of helicopter-supported drilling is planned, as well as geophysical surveys. “It’s the only place I’ve ever been in Alaska where you can walk around on ridges and see visible gold in rocks, where there’s no historic production, there’s no historic trenching, there’s no cabins, there’s no evidence that there was ever any work done there,” DiMarchi said. —SARAH HURST

The dry stack tailings facility is at one of the windiest locations on the mine site. continued from page 8 Gold made into sludge POGO All that remains on the production side is for the gold to be made into a sludge which progress more quickly. The temper- that is melted in the furnace and then ature underground is a comfortable of 44- poured to form a gold bar. But that still 45 degrees. leaves the much larger volume of tailings At the time of the tour, the mill was to be dealt with. And in Pogo’s case the shut down. One employee said it has been working about 12 hours out of every 24. see POGO page 10 Pogo’s first gold bar was produced on Feb. 12 and about five more were pro- duced in the subsequent month. Unsurprisingly, the company would like to get up to full speed as soon as possible and start making money to off-set the $347 million capital cost of the mine. “We’ve got start-up issues, maintenance, that’s what we’re here for — it’s a learning curve,” said Karl Hanneman, the mine’s manager of public and environmental affairs. An 11-foot diameter conveyor tube that will bring ore from the mine to the mill is not yet in operation, so ore is being trucked to the mill instead. As in most metals mines, ore is first crushed and ground to a 50-micron average size in a huge SAG mill and ball mill. It then goes through a gravity circuit and flotation cells that produce a 10 percent concen- trate, meaning that the concentrate is 10 percent of the weight of the ore. The con- centrate is reground and run through a cyanide leach circuit, with a carbon in pulp process to pull the gold out of the solution. The source of the carbon is burnt coconut shells, which have the right phys- ical properties to be resistant and handle the process without breaking down. 10 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006

G BRITISH COLUMBIA B.C. mine offers model for Alaska’s Pebble Safety, environmental success at copper-gold Kemess South Mine in northern British Columbia bodes well for future of Alaska project

BY ROSE RAGSDALE sion of the Kemess at Mackenzie, B.C. mine has resulted in some relaxing of regu- For Mining News South Mine. Royal Oak The concentrate is lated monitoring programs and willingness Mines brought the mine currently sold to of regulatory agencies to work with Kemess orthern Dynasty Ltd., would-be to production in 1997, Falconbridge Ltd. and Mines, the company said. developer of the Pebble project, is but ran into financial dif- transported by rail to a Northgate also has worked to improve its N convinced that the huge copper-gold ficulty. Investors smelter in Quebec. environmental reputation by aggressively mineralization in southwestern acquired the project in A major contribu- pursuing mine reclamation practices and by Alaska can be accessed and brought to mar-

2000 and Northgate took LTD. EXPLORATION NORTHGATE tor to the northern being proactive in addressing environmental ket in an environmentally benign manner over as owner and opera- B.C. economy, issues, it said. that promises economic prosperity for the tor. Kemess South Mine The company also conducts a compre- region. The Kemess South has pumped about $25 hensive fisheries compensation program at Part of its confidence stems from Hunter deposit is flat-lying and million a year into the Kemess Mine. Fish ladders have been con- Dickinson Inc., the management team that has uniform gold and region annually since structed by Kemess Mine to increase avail- guides the Canadian junior mining compa- copper grades through- 2002. able fish habitat and fish populations near ny. Hunter Dickinson has a track record of out. These characteristics “Northgate has done the mine site and these have far exceeded working to develop successful, modern cop- make the ore reserve rel- an excellent job improv- mandated goals, Northgate said. per-gold deposits. One such venture is the atively insensitive to ing mine and mill facili- Kemess South Mine, one of two large cop- changes in metal prices. The deposit con- ties, and improving operating efficiencies,” Lower risk, cost in modern mining per-gold projects in British Columbia to its tains three principal types of ore: a primary- said B.C.’s Ministry of Energy, Mines and Despite the modern, safe techniques it credit. The other is the Gibraltar mine. sulphide hypogene ore; a copper-enriched Petroleum Resources in a synopsis of min- uses, Kemess still contends with public mis- The Kemess South Mine has achieved secondary sulphide ore; and, an oxidized ing in the Western Canadian province. perceptions about copper mining. success since 2000 under the management leach cap ore. Currently, the hypogene ore “No one in the industry does things today of Northgate Exploration Ltd. It is in the makes up about 85 percent of the ore body. Environmental success the way they did 20 or 30 years ago, but we mountains of north-central British Kemess South has a conventional mine The Kemess Mine continues to operate are being judged by the sins of our fathers,” Columbia and is part of an extensive miner- plan with 15 meter benches and 45 degree in compliance with all of its operating per- one Canadian official observed. alization about 267 miles northwest of slope angles. Two electric cable shovels, a mits and successfully produces de-sulphur- Today, the Kemess Mine is considered a Prince George. Kemess South is a large hydraulic shovel, and a loader supply ore ized tailing sands for use in its tailings stor- low-risk, low-cost core asset from which gold-copper porphyry containing proven and waste to a fleet of 15 Euclid haulage age, a process that has resulted in consider- Northgate hopes to expand its operations. In reserves of 87 million tonnes. The Kemess trucks, which move ore to the primary able cost savings and a dramatic reduction in the fourth quarter of 2004, it posted produc- mining and milling complex consists of the crusher and waste rock to storage dumps. mine tailings that require underwater storage tion of nearly 95,000 ounces of gold at a Kemess South open pit mine and a 52,000 Current mining capacity is about 50 million in its tailings impoundment to be safe. record cash cost of $59 per ounce, along tonnes per day mill. tonnes per year, 19 million tonnes of which Northgate officials say they have devel- with record output of 24.7 million pounds of is ore. oped a culture of continual improvement at copper . The company expects continued Kemess origins The gold-copper concentrate, which con- Kemess that has been applied to ensure that strong production 2006 and proposes to Hunter Dickinson is credited with the tains 20-25 percent copper and 50-150 compliance with relevant legal requirements expand operations by developing the successful discovery, engineering and per- grams per tonne of gold, is trucked in bulk are met or exceeded. The implementation of Kemess North deposit. G mitting to a financing and production deci- about 250 miles by gravel road to a rail spur the continual improvement programs at the

continued from page 9 dinosaurs squeeze the water out of the tailings to make a fairly even surface, and ground and see the deep footprints left by tailings to produce a filter cake contain- additional material is folded in “like miners who tramped around in it when it POGO ing only 15 percent moisture. raisins in a pudding,” as Hanneman puts was even wetter. The filtered tailings go to the dry stack it. “The properties of the material make it tailings pose specific challenges. Two tailings facility on a windy slope by the very impermeable,” he added. Dry stack Stench would signal evacuation giant Larox filters that emit periodic side of a mountain. A dozer shovels the tailings allow Pogo to avoid high-pitched roars like wounded Tour participants were having to maintain and mon- given a safety briefing itor a tailings pond for years “We’ve got start-up before going underground or decades after closure. A issues, and kitted out with hard hats dam creates a speed bump to maintenance, that’s and lamps, safety goggles, catch water that comes down what we’re here for steel-toed boots, fluorescent from the valley, and a diver- vests and belts with self-res- — it’s a learning sion ditch above the tailings cuers to convert carbon facility enables the mine to curve.” —Karl monoxide to carbon dioxide divert as much water around Hanneman, in case of emergency. There the property as possible, in manager of public are phones at various places accordance with EPA and environmental inside the mine and if an requirements. affairs at Pogo evacuation becomes neces- The mine’s permits call sary, a stench will be activat- for zero discharge of water. ed — a really strong garlic The water that is removed by and rotten egg smell. To ensure miners the filters contains a high level of arsenic. recognize the smell, it’s activated as a test It goes to the water treatment plant, where every six months, though fortunately not the arsenic is converted to iron arsenate, on the day of the tour. which is bright red, but very benign. Pogo still requires more underground Cement is then added and the muddy miners, and although it’s relatively easy to mixture is pumped back underground to send new recruits to the nearby Delta fill the mine’s workings with paste. The Mine Training Center, it’s harder to find tour group was able to climb up onto the experienced miners. Teck-Pogo makes no flat, slippery surface of the paste under- secret of the fact that it has been poaching employees from Alaska’s other mines and those mines have on occasion poached some back. One obvious example is geol- ogist Paul Jensen, formerly of Fort Knox gold mine in Fairbanks, whose name is now on an office door at Pogo. Local company Taiga Ventures provides the buses that transport workers from Fairbanks or Delta Junction to Pogo, up the 50-mile winding mountain road built for the mine by Alaska Interstate Construction. It’s a good road and it will need to be. The Pogo story has only just begun. G PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 11

G INTERIOR ALASKA Railroads could unlock Alaska minerals Lack of infrastructure in Alaska makes it difficult to access remote areas; two proposed railroads could change the scenery By Sarah Hurst the Arctic coal, which is estimated to be For Mining News one-quarter of the entire coal reserves of the United States. It has never been mined wo Alaskans prominent in the mining because as yet it is uneconomical. industry have spent years nurturing A vital factor in planning the railroad T dreams of railroads. Both presented would be obtaining acceptance of the idea their visions at the Arctic by the Native residents of the area, International Mining Symposium in according to Borell. “One of the major Fairbanks the week of March 13. fears of a lot of the Native population in Professor Paul Metz, a geologist at the far western Alaska, in the northwest in University of Alaska Fairbanks, wants to particular, is that they’re going to see see a rail link from Alaska to Canada. Winnebagoes come driving down the Steve Borell, executive director of the highway, gravel road be it, and shooting Alaska Miners Association, hopes that their caribou and moose,” Borell said. “I one day a railroad from the Brooks Range think over time they’re going to realize to Norton Sound will be built, providing that a railroad doesn’t provide that kind of access to the vast reserves of coal on the hazard to their way of life.” North Slope. The Alaska-Canada rail link proposal, Coal mines would be needed which Metz has supported since writing a The railroad would require numerous report about it for the Department of other infrastructure components, includ- Transportation in 1996, is also a pet proj- ing one to five large coal mines, a mine- ect of Alaska Gov. Frank Murkowski, 2,700 miles by rail, which is 700 miles mile railroad from the Brooks Range to mouth coal-fired power plant, a storage who has been promoting it in conjunction shorter than the current surface route to Norton Sound at Nome by himself, with- area at Nome and a conveyor and trestle with his efforts to build a natural gas Seattle and on to Whittier or Seward by out the benefit of millions of dollars in from the storage area to a deepwater port. pipeline. In 2000 Murkowski, then a U.S. sea. Fort funding. A mining engi- Additional rail spurs could be built to Red senator, sponsored a bill that authorized McMurray in There are several possible neer, Borell began the Dog and to the Ambler district. $6 million for a 24-member bilateral Rock and gravel quarries on village Alberta, the destinations for the proposed rail research when he was tak- commission with 12 members from the hub for the ing a class in project man- and regional Native corporation lands link to connect with the existing United States and 12 from Canada to Athabasca oil agement at the University could also be developed in the area, study the benefits of sands, is locat- Canadian railroad. The closest of Alaska Anchorage. Borell said. However, the Jones Act a rail connection ed at almost points are in British Columbia, at Northwestern Alaska is requires that any product moving from a from Fairbanks to the center of Fort Nelson or to the small home to Red Dog — the U.S. port to a U.S. port must be transport- Canada. The com- the proposed community of Chipmunk south of world’s largest zinc mine ed on a U.S. vessel, which could poten- mission never met, rail link. Dease Lake. — as well as the Ambler tially rule out the possibility of exporting but in October 2001 “There’s more district, where copper gravel from Nome to San Francisco Murkowski asked oil in the could potentially be because there are no U.S. vessels in exis- Metz and his col- Athabasca tar sands than there is conven- mined. But the key to the rail project is leagues to undertake tional, proven oil reserves in the rest of see RAILROAD page 19 an economic analy- Paul Metz from the the world put together,” Metz said. “The sis ahead of seating University of Alaska entire economy of North America is the commission. Fairbanks is going to be affected by the utilization of Metz and his researching the Alaska-Canada rail that resource over the next 100 years.” team also received link. $15 million from the Skagway would be safe from quakes U.S. Army to Enhancing the trade relationships research and pro- between the United States and Canada duce an EIS for rail would be worth the estimated $7 billion and other surface cost of the railroad, Metz believes. “In the access from not-too-distant future the port of Seattle is Fairbanks to nearby going to reach its capacity,” he said. The training grounds and rail link would connect the White Pass to Delta Junction 80 railroad, which runs from Yukon to the miles away, where Alaska port of Skagway, with the rest of the missile defense Alaska Miners the Alaska and Canadian railroad sys- installation is locat- Association tems. “It would provide us with another ed at Fort Greely. Executive Director Steve Borell propos- port of access in the Gulf of Alaska,” That EIS is expected es building a rail- Metz said. Unlike ports in Southcentral to be complete by road from the Alaska, Skagway is far enough away from the end of the year, Brooks Range to Norton Sound. seismic hazards to avoid significant dam- and Metz’s report to age from an earthquake like the one that Gov. Murkowski is due to be submitted in devastated Anchorage in 1964, he added. June. It takes about one-third as much ener- Several possible Canadian links gy to transport goods by rail as it does to haul them by truck, according to Metz, There are several possible destinations and this will be a crucial factor in the for the proposed rail link to connect with future as the price of fuel continues to the existing Canadian railroad. The clos- rise. We should look at the long-term pic- est points are in British Columbia, at Fort ture and not the immediate rate of return Nelson or to the small community of for a railroad, Metz urged. When the rail- Chipmunk south of Dease Lake. “We’re road was built at Fort McMurray in 1921 in the process of generating a huge the community only had a handful of res- amount of data,” Metz said. “The most idents, he pointed out. “If we’re going to important aspect of this study is to define predicate or constrain this investment in a the right questions so that we can get the rail connection to the rest of North right answers when the project is com- America on proven mineral reserves, we pleted.” probably will never build a railroad,” The issue isn’t about connecting Metz said. If 10 million tons of freight on Fairbanks to British Columbia, it’s about the railroad could be guaranteed, it would connecting Fairbanks to the whole of be economic today, he added. North America by surface transportation, Metz emphasized. The distance to Borell looking at route from Nome Chicago, where many of Alaska’s manu- By contrast with Metz, Steve Borell factured goods come from, would be has conducted his study of a possible 400- 12 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006 PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 13

G SOUTHWEST ALASKA Don’t call Alaska’s Pebble project isolated Stephen Hodgson: Logistical challenges seem daunting, but deposit is relatively close to its Asian markets, only 85 miles from tidewater BY STEVE SUTHERLIN Com conference in Anchorage Feb. 23. “We put about 22 drill holes into it last upgraded from about half a percent cop- For Mining News “It’s a big advantage for us,” he said. year and outlined 1.8 billion tons based per or less that it is in the ground, to a “Alaska offers that advantage, on a cutoff rate of .6 percent copper concentrate containing about 25 to 30 tephen Hodgson, vice pres- not a disadvantage.” equivalent, but to put it more simply percent copper,” Hodgson said. “The ident of engineering for The company’s recent dis- Pebble East has added about 50 percent plant as we currently have it laid out S Northern Dynasty Mines covery of a rich zone of miner- more gold to our resource and doubled would process about 250,000 tons per Inc., says he often hears alization east of its originally the amount of copper,” he said, adding day.” people who don’t live in Alaska proposed open pit mine has that the east zone appears richer than the Hodgson sad the ore would be taken talk about the isolation of his entirely changed the way the earlier discovery to the west. out of the pit and crushed to about six company’s Pebble mine company is looking at its proj- “More important than size is the fact inches in size and fed with water into two prospect, but he doesn’t consid- ect, Hodgson said. that it contains twice the value per ton parallel semi-autogenous mills, each 44 er Pebble to be isolated at all. “Because of the discovery of that Pebble West does, and that gives us feet in diameter, containing thousands of “Pebble is probably one of “Pebble is probably Pebble East, all of our concepts some opportunity to look at things that steel balls. the least isolated major copper one of the least iso- about how we are going to we didn’t have the opportunity before and The ore would be crushed down to projects in the world,” he said. lated major copper develop the project are under- this is the reason why were deferring the one-half inch in diameter, and ground to projects in the “We’re at low elevation, about world.” —Stephen going a lot of rethinking” he completion of our feasibility study.” talcum powder size suitable for the floata- 815 feet above sea level, and Hodgson, vice presi- said. “Pebble was already a sig- tion process. only 85 miles from tidewater.” dent of engineering nificant mining project, but Plan for plant on plateau Hodgson said in floatation, three sets for Northern Northern Dynasty’s Pebble Dynasty Mines Inc. with Pebble East it became part Pebble’s current plan calls for a crush- of additives are mixed with the ore. One gold-copper-molybdenum of some pretty elite company.” ing and processing plant to be located on conditions slurry to enhance the separa- deposit, near Iliamna in southwestern Adding the east zone to the original a plateau above the proposed pit. tion of minerals. Another additive creates Alaska, is close to concentrate markets in resource makes a much larger mine possi- “Pebble ore would be fed to a plant and Asia. Hodgson told an audience at the Pac ble, Hodgson said. see PEBBLE page 14

G INTERIOR Usibelli starts Jumbo Dome permitting One hundred million ton Jumbo Dome resource estimate has Alaska’s Usibelli hunting for new coal markets BY STEVE SUTHERLIN Bull Ridge. “It’s the flagship of our current mining Gold Run Pass mine. Gold Run Pass is a Petroleum News operation,” Denton said. satellite pit, he said. Flagship of operation Two Bull Ridge is one of four mines “We always keep one or two satellite sibelli Coal While Jumbo Dome promises ample the company currently has permitted for pits either in operation or permitting,” Mine Inc. has future coal supplies, the reign of Two Bull production, Denton said. Ten percent of U seen the Ridge is hardly over. the company’s production comes from the see USIBELLI page 14 future, and the future — its Jumbo Dome project — is bigger and better than anything the company has mined in the past, says “The export market, Steve Denton, while it’s something Usibelli vice presi- that we’re in, is a very difficult market dent of business to stay in.” —Steve development. Denton, Usibelli Jumbo Dome Coal Mine vice pres- ident of business promises to be an development improvement over Two Bull Ridge, the mine that currently produces 90 percent of Usibelli’s coal production, Denton told an audience at the Pac Com meeting Feb. 22 in Anchorage. Based on initial samples, the company thinks the moisture content of the Jumbo Dome coal is higher, but the usable coal seam is thicker, with ash and sulfur con- tent lower than the coal at Two Bull Ridge. “The net effect of it all is that we expect the quality to be somewhat better in the Jumbo Dome area than what we are accustomed to right now,” Denton said. “In the Two Bull Ridge area about the top eight or 10 feet of coal we have to waste because its high sulfur and high ash. We don’t see that in the Jumbo Dome area. “That full 38 feet of thickness is prob- ably recoverable at least to the extent that we physically can with the equipment.” Jumbo Dome mine is seven miles northeast of Two Bull Ridge. Usibelli expects to obtain permits for a road to Jumbo Dome this year, Denton said. Jumbo Dome is a very large resource, probably in excess of 100 million tons, he said, adding that the deposit is especially attractive because of its comparatively low overburden. The company anticipates a stripping ratio of 3-to-1 at Jumbo Dome, vs. a 5-to-1 stripping ratio at Two 14 MINING DIRECTORY PETROLEUM NEWS • WEEK OF MARCH 26, 2006 continued from page 13 In 2005 the company developed a joint venture arrangement with Homer Electric PEBBLE to investigate how to provide power to the mine. the bubbles of the froth. A third additive Currently the companies have chosen a — a long polymer — has one end that plan that calls for installation of three adheres to the copper mineral, and anoth- 130-megawatt natural gas fired genera- er end that is hydrophobic and repels tors at Nikiski, across Cook Inlet from the water. When mix air is blown into the proposed Pebble port site, Hodgson said. tank, the polymer sticks to the bubbles Two generators would operate continu- and floats to the top. Copper, the heavy ously, and another would be on standby. mineral, is bonded with the polymer and “The reason we picked Nikiski is that actually floats to the top. is a brown field site, making it easier to Molybdenum is separated in a similar, permit,” Hodgson said. “There’s gas sup- separate process. ply already to Nikiski and there’s also an “What is left other than the concentrate LNG port.” is sent out to the tailings pond in two The companies see the Nikiski lique- streams. The first is about 80-90 percent fied natural gas export plant operated by of the material that is fed into the plant — ConocoPhillips as a potential source of we’ve found that to be benign,” he said. supply if gas supplies become scarce from “The second is potentially reactive, and Cook Inlet fields; a move that would that will be stored underwater to preclude require the LNG plant to be converted that reaction from happening.” into an import facility. As much as 70 percent of the gold “There’s lot of discussion in from the raw ore will end up in the con- Anchorage about the potential for the centrate, he said. Cook Inlet fields to deplete,” Hodgson Non-reactive rock is used to construct said. “With the LNG export facility at the impoundment structures at either end Nikiski, the possibility exists to import of the valley, Hodgson said gas to Nikiski and fire the station from “As we currently designed it, through there. the operation we don’t plan on discharg- “The next step is to build a 230 ing water,” he said. megawatt transmission line to Anchor Electricity needed Point, connect it into the existing grid on the Kenai, build 45 miles of parallel sub- The power needs for a mine of this size marine cable, and then 120 miles from the are substantial. Hodgson said the opera- western coast of Cook Inlet to the site — tion would draw 275 megawatts, actually four miles of which is submarine cable, The companies see the Nikiski liquefied natural gas export plant operated by requiring about 300 megawatts after fac- ConocoPhillips as a potential source of supply if gas production from Cook Inlet continues toring in line losses. to fall. According to Northern Dynasty’s Stephen Hodgson the possibility exists to convert see PEBBLE page 19 the export facility to an import facility for power for Pebble.

continued from page 13 “We do have a shipping advantage to Chile that we don’t have to Korea, so USIBELLI we’re anxious to see that grow,” Denton CHRIS AREND said. Denton said. “We’ll use that to help the South Korea is getting most of its coal quality situation when we get into some from South Africa and Australia, he said, lower quality coal.” adding that those countries are fairly low- Poker Flats mine, the company’s flag- cost mature industries that are adding to ship a decade ago, is in the reclamation export capacity. The United States was process now, Denton said. once a major supplier to Korea, out of its Usibelli’s total coal production in 2005 Los Angeles export terminal — now shut was about 1.4 million tons, Denton said, down completely. adding that the com- The price competi- pany has about 25 tion in the Korean million tons remain- Jumbo Dome mine is seven miles market is fierce. ing in Two Bull northeast of Two Bull Ridge. “Indonesia is an Ridge that are per- Usibelli expects to obtain permits emerging competi- mitted for mining. for a road to Jumbo Dome this tor with very low “We expect that year, Denton said. mining costs,” we’ll find quite a Denton said. few million more in “In Indonesia, the successive ridges as we continue up they only have to make three passes with the valley,” he said. the shovel to move the coal seam,” Search for markets Denton said. “The logistics are how to move the coal, not how to move the over- The U.S. military is Usibelli’s largest burden.” coal consumer, followed by exports to Usibelli’s costs are higher. Usibelli haul truck Korea. The next big user is the Golden “The export market, while it’s some- Valley Electric Association, a Fairbanks- thing that we’re in, is a very difficult mar- based utility that serves 90,000 cus- ket to stay in,” Denton said. “The export tomers. market challenge for Usibelli is strip five In 2004 Usibelli sent two boatloads of yards of overburden per ton of coal, load coal to Chile, and it exported two boat- and ship the coal 300 miles, and load it on loads again in 2005. The company is a boat for $20 per ton.” hopeful that Chile will become a growth market for Alaska coal. see USIBELLI page 19 PETROLEUM NEWS • WEEK OF MARCH 26, 2006 MINING DIRECTORY 15

G COLUMN Mining news update: Exploration and development preparations ramping up reparations for exploration and reserves at year-end stood at 82,172,000 quartz feldspar porphyry containing gold development activities ramped up The tonnes grading 0.74 grams gold per and associated silver, arsenic, molybde- P again in the last month as budgets author tonne, equivalent to 1,953,000 ounces. An num, tin and tungsten mineralization. were approved and committed on additional 48,862,000 Hole RI05-03 intersect- projects extending from Southeast Alaska The author tonnes grading 0.60 ed the best gold and sil- to the Seward Peninsula to Interior Curt Freeman, grams gold per tonne, Piper Capital announced that ver grade of 1.5 grams Alaska. Commodity and equity markets CPG #6901, is a equivalent to 948,000 major shareholder Hidefield of gold per tonne and for the metals mining industry have well-known geol- ounces, are classified Gold plc had acquired all of 44.5 grams of silver per remained strong in anticipation of contin- ogist who lives in as measured and indi- Piper’s rights to the Golden tonne over a 38 foot ued high demand and restricted supplies. Fairbanks. He pre- cated resources. The Zone and South Estelle gold interval including 3.0 pared this column CURT FREEMAN To put things into a global perspective, company also projects in the Alaska Range. grams of gold per tonne the Worldwatch Institute (www.world- March 22. Freeman can be reached by announced that it has over three feet. Hole watch.org) recently published informa- mail at P.O. Box 80268, Fairbanks, AK terminated its option RI05-03 cut the highest tion about the growing demand for goods 99708. His work phone number at agreement on the Ryan Lode project and silver grade encountered at 17.9 ounces Avalon Development is (907) 457-5159 and services in China and India, the that reserves at the True North and Gil of silver per ton over a three-foot interval and his fax is (907) 455-8069. His email world’s two fastest growing economies: If deposits were reclassified to resources below the main gold-bearing zone. Gold is [email protected] and his web site is China and India were to consume due to changes in mining cost assump- grades of less than 500 parts per billion www.avalonalaska.com. resources at the current U.S. per-capita tions. are common below 100 feet depth in all level, it would require two planet Earths Select Resources announced initial holes. Barrick Gold Corp. has assumed man- just to sustain their two economies alone! drill results from its Richardson gold Based on the drilling results, gold and agement of the Donlin Creek project fol- In case you don’t see what I’m driving at, project near Fairbanks. In November the pathfinder elements appear to be concen- lowing its acquisition of Placer Dome. I think this means we better turn up the company completed an eight-hole dia- trated in the upper part of the quartz Drilling recommenced on the project in heat and get some new projects in the mond drilling program totaling 3,052 feldspar porphyry system. All five holes February with four diamond drills on site. pipeline! feet. Drilling was concentrated on testing in the Democrat Mine area ended in Current plans call for 2006 expenditures altered quartz-feldspar porphyry hosted altered and mineralized quartz feldspar of approximately $30 million on drilling, Western Alaska gold targets over a segment of the porphyry indicating a larger intrusive sys- feasibility studies and permitting. Richardson lineament. Quartz feldspar tem than previously believed. Holes NovaGold Resources announced Linux Gold Corp. announced that a porphyry is the main host for gold miner- RI05-1 and 2 were drilled in the Camp Pit year-end details on its Rock Creek and $1.5 million exploration budget for 2006 alization at this area. Two holes tested the area and did not encounter significant Big Hurrah projects near Nome. Initial has been proposed for its Granite Camp Pit area, five holes were drilled in gold mineralization. Hole RI05-08 was budgets of US$16 million have been Mountain project on the Seward the Democrat mine area and one hole in collared 1,000 feet southeast of the approved for ongoing development work, Peninsula. The initial phase will consist the Democrat Pup area. Democrat mine in the Democrat Pup area. design, engineering, permitting and pur- of an airborne magnetic survey followed Holes RI05-03 through RI05-07, in the chase of critical equipment and consum- by diamond drilling of several targets Democrat mine area, encountered altered see FREEMAN page 16 ables, as well as a planned 10,000 meter defined by the 2005 sampling program as drilling program. Detailed engineering well as prospective targets identified by and permitting is planned for completion airborne magnetics. in mid-2006. In the event of a timely approval of permits and construction Interior Alaska start, development budgets of $37 million Kinross Gold announced year-end are anticipated for the remainder of 2006. 2005 resource updates from its Fort Knox NovaGold also announced that mine near Fairbanks. Proven and probable 16 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006 continued from page 15 shareholder Hidefield Gold plc had trenching will be conducted on other parts from 74 drill holes. Of these holes, 87 acquired all of Piper’s rights to the Golden of the property. percent encountered gold mineralization FREEMAN Zone and South Estelle gold projects in NovaGold Resources announced that equal to or greater than 0.12 ounces of the Alaska Range. The share and cash an updated resource estimate is in gold per ton, the cut-off for its mineral This hole drilled schist, did not intersect transaction is designed to consolidate progress for is Ambler volcanogenic mas- resources. In addition, 5,000 feet of core quartz feldspar porphyry and was barren. ownership of the projects in Hidefield, a sive sulfide deposit in the Ambler drilling was completed on its adjacent Midas Resources Ltd. announced that London-based exploration company with District. In 2005 over 3,000 meters of Jualin property. reverse circulation drilling had begun on assets in Argentina and Brazil. Plans for drilling was completed confirming addi- The company continues to drill at both its Uncle Sam gold project in the 2006 were not released. tional high-grade copper and precious properties and expects to update its min- Richardson district. The 16-hole, 2,000 metal mineralization. In addition, the eral reserves and mineral resources dur- meter program is designed to test six pre- Northern Alaska company announced that airborne geo- ing 2006. The company also indicated viously identified targets on the project. Little Squaw Gold Mining announced physical and ground follow-up work that it was expecting reinstatement of its Previous drilling by property owner that it has raised $2.3 million via a bro- helped identify the Center of the World U.S. Army Corps of Engineers permits Kennecott Exploration intersected both kered private placement in order to fund prospect, a new discovery which will be that were temporarily suspended in late low grade gold mineralization (11 meters exploration on its Chandalar gold project drill tested in 2006. The company hopes 2005. at 2.4 grams of gold per tonne and 8 in the Brooks Range. The company to complete a Preliminary Economic As a result of increased earthwork meters at 2.1 grams of gold per tonne) expects to complete about 12,000 feet of Assessment study in the second half of requirements, increased storm water man- along with higher grade intersections (6 reverse circulation drilling in 30 to 35 2006. agement programs, the costs associated meters at 10.6 grams of gold per tonne holes on 10 targets this summer. All these with challenges to the project’s permits and 5.5 meters at 4.9 grams of gold per targets have significant surface gold min- Little Squaw Gold Mining and the general increase in labor and tonne). materials costs worldwide, the company eralization. announced that it has raised $2.3 currently estimates the total cost of con- Alaska Range In addition, geologic mapping, a large million via a brokered private soil sampling survey and excavator struction to be approximately $190 mil- Piper Capital announced that major placement in order to fund lion. The project is expected to have an exploration on its Chandalar gold annual production rate of 100,000 ounces project in the Brooks Range. The and the estimated cash operating cost is company expects to complete expected to be $250 per ounce. The com- about 12,000 feet of reverse pany expects capital investment on the project to total approximately $77 million circulation drilling in 30 to 35 during 2006.

tier F ron N575A holes on 10 targets this summer.

tier N575Q F ron All these targets have significant OTHER surface gold mineralization. If you have not already seen it, log onto the Alaska Miners Association web- site (www.alaskaminers.org) and down- Southeast Alaska load a copy of the McDowell Group’s eco- Coeur d’Alene Mines announced nomic impact profile on the Alaska min- year-end results, including an update on eral industry. It is packed with informa- its Kensington gold project near Juneau. tion relating to the impacts that the min- During the second half of 2005, the com- ing industry has around Alaska. Even for pany began an extensive exploration pro- those of us died-in-the-wool mining fans, gram at Kensington designed to increase there is new and revealing information the size and geologic continuity of gold about how, how much and where these mineralization currently in indicated and impacts are improving Alaska’s economy G inferred mineral resources. The company and its residents. completed 34,000 feet of core drilling Companies involved in Alaska and DIRECTORY northwestern Canada’s mining industry

The Red Dog mine in northwest Alaska.

Mining Companies Specializing in heavy hauling. Equipment includes 85-ton Contact: Bill Ellis, Rob Retherford lowboy. or Dave Lappi, owners Phone: (907) 522-4664 • Fax: (907) 349-3557 Fairbanks Gold Mining/Fort Knox Gold Mine Aeromed International Email: [email protected] Fairbanks, AK 99707 Anchorage, AK 99503 A full service exploration group that applies earth sciences Contact: Lorna Shaw, community affairs director Contact: Brooks Wall, director for the mining and petroleum industries providing Phone: (907) 488-4653 • Fax: (907) 490-2250 Phone: (907) 677-7501 • Fax: (907) 677-7502 prospect generation, evaluation and valuation, explo- Email: [email protected] Email: [email protected] ration concepts, project management, geographic infor- Web site: www.kinross.com Web site: www.ykhc.org mation systems and data management. We also provide Located 25 miles northeast of Fairbanks, Fort Knox is Aeromed International is an all jet critical care air ambu- camp support and logistics, geologic, geochemical and Alaska’s largest operating gold mine, producing 340,000 lance fleet based in Anchorage. Medical crews are certi- geophysical surveys. ounces of gold in 2004. fied Flight Nurses and certified Flight Paramedics. Alaska Interstate Construction (AIC) Rimfire Minerals Corp. Air Liquide 601 West 5th Avenue, Suite 400 Vancover, BC V6C 1G8 Canada Anchorage, AK 99518 Anchorage, Alaska 99501 Contact: Lisa May, Mkt. Coordinator Contact: Brian Benson Contact: David Thomas Phone: (604) 669-6660 Phone: (907) 273-9762 • Fax: (907) 561-8364 Phone: (907) 562-2792 • Fax: (907) 562-4179 Fax: (604) 669-0898 Email: [email protected] Email: [email protected] • Web site: www.aicllc.com Email: lisam#rimfire.bc.ca Air Liquide sells, rents, and is the warranty station for AIC provides cost-effective solutions to resource develop- Web site: www.rimfire.bc.ca Lincoln, Miller, Milwaukee, Victor and most other welding ment industries. We provide innovative ideas to meet Gold and silver projects in Alaska, Yukon, BC and Nevada. equipment and tool manufacturers. each requirement through the provision of best-in-class Preferred partner of senior mining firms. Partnered with people and equipment coupled with exceptional perform- Alaska Airlines Cargo the world’s three largest gold producers. ance. Seattle, WA 98168 Usibelli Coal Mine Contact: Keola Pang-Ching, director, cargo sales Alaska Steel Co. Fairbanks, AK 99701 Phone: (206) 433-3122 • Fax: (206) 433-3225 1200 W. Dowling Contact: Bill Brophy, vp cust. relations Email: [email protected] Anchorage, AK 99518 Phone: (907) 452-2625 • Fax: (907) 451-6543 Award winning cargo services to more places, more often, Contact: Joe Lombardo, vice president Email: [email protected] • Web site: www.usibelli.com with more lift to, from, and within the state of Alaska. Phone: (907) 561-1188 Other Office Toll free: (800) 770-0969 (AK only) Alaska Cover-All P. O. Box 1000 • Healy, AK 99743 Fax: (907) 561-2935 Anchorage, AK 99507 Phone: (907) 683-2226 Email: [email protected] Contact: Paul Nelson, mgr. Usibelli Coal Mine is headquartered in Healy, Alaska and Full-line steel and aluminum distributor. Complete process- Phone: (907) 346-1319 • Fax: (907) 346-4400 has 200 million tons of proven coal reserves. Usibelli pro- ing capabilities, statewide service. Specializing in low tem- Email: [email protected] duced one million tons of sub-bituminous coal this year. perature steel and wear plate. Contact: Henry Brown Service, Supply & Equipment Phone: (907) 646-1219 • Nat. Ctr. (800) 268-3768 Arctic Controls We are the Alaska dealers for Cover-All Building Systems. Anchorage, AK 99501 Steel framed, fully engineered, LDPE fabric covered, Ace Transport Contact: Scott Stewart, president portable buildings in 18 to 270 foot widths and any Anchorage, AK 99502 Phone: (907) 277-7555 • Fax: (907) 277-9295 length. Contact: Henry Minich, owner Email: [email protected] Phone: (907) 243-2852 • Phone: (907) 229-9647 (cell) Alaska Earth Sciences Fax: (907) 245-8930 • Email: [email protected] Anchorage, AK 99515 see next page 18 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006

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Visit us at www.PetroleumNews.com PETROLEUM NEWS • WEEK OF MARCH 26, 2006 NORTH OF 60 MINING 19 continued from page 14 Third, project components will be spread over 100 “We have operating supplies like bulk fuel and pro- miles between the mine, the port and across Cook Inlet cessing chemicals that require special handling, and the PEBBLE to the Kenai Peninsula. The large mine and its compo- concentrate, besides the value, must also be handled nents require extensive re-supply. carefully from an environmental perspective,” he said. the rest is all overland transmission.” Finally, the environment and residents of the area In its current design the mine will need 140,000 tons The power situation is being further assessed, must be kept in mind, and incorporated into plans for the per year of lime. One option the company is exploring Hodgson said, adding that many options have been stud- mine, Hodgson said. for lime would be to haul it in 30,000-ton or 40,000-ton ied. Hodgson said during constructions materials could be bulk carrier ships, to be broken into smaller barge loads Pebble logistics staged at the Port of Homer, on the east side of Cook at Homer or Kodiak. Inlet, or at Kodiak Island, then barged across the inlet to The company is also looking for lime in the area. Hodgson said the logistical challenge, and the scale of the Pebble port. Several Native corporations have potential lime sources Pebble development is massive, but lessons can be in the area of the mine and the company is investigating learned from previous projects in Alaska. Services into Iliamna that possibility, Hodgson said. “In many ways Pebble has attributes parallel to other The company has benefited from the airport as well as If ore concentrates are sent to port by pipeline, the large projects that Alaskans have successfully built,” he the existing roads and barge service at Iliamna. water return line could potentially be used to transport said. “The process plant is akin to that at Red Dog, and “We can take advantage of the excellent airport facil- lime to the mine, Hodgson said. Pebble has similar access and product handling issues, ities at Iliamna,” he said. “Two cross 5000-foot strips are Northern Dynasty is proposing to build two eight- however the scale is more comparable to that of several capable of handling planes as large as Hercs, and small inch pipelines in a trench, one bringing concentrate to projects on the North Slope.” jets.” the port, while the other carries the filtrate water back to Hodgson said Northern Dynasty has four major con- Northern Dynasty has conducted exploration with the mine. siderations to keep in mind for Pebble logistics. helicopters from the Iliamna airport for the last four A concentrate pipeline isn’t a given, however. The First, access must be established quickly. years, Hodgson said, adding that the contractor used company is continuing to evaluate concentrate haulage “Pebble is a green-field site, and we need to establish existing barging service and roads to mobilize to as an option. access as quickly as possible to minimize the overall Iliamna. Road haulage may be just a part of the concentrate project schedule,” he said. “We believe that a similar approach will allow us to transport plan. An icebreaking ferry is a possibility to Second, the length of the construction season must be establish a beachhead here and commence construction potentially eliminate sections of the road, Hodgson said. maximized. along the road while we are establishing a permanent A transportation study last year identified a number It is also important, given the comprehensive con- port,” Hodgson said. of options to solve needs for construction transport, re- struction plan, and construction quantities, to obtain con- In addition to the significant quantities of materials to supply, and ore concentrate shipping. tinuous access or as close as we can to that,” he said. “We build and operate the mine, there will be numerous “We’ll assemble the final configurations by fitting the do have seasonal constraints but we anticipate that we pieces of equipment 100 tons or larger to move, he said. components together like Lego bricks,” Hodgson said. G can get at least 11 months access to the port.” continued from page14 utility has 25 megawatts of capacity in Blue sky Healy; they also have 25 megawatts which Talks between the Homer Electric If talks between Usibelli and Agrium USIBELLI they purchase from Aurora Energy, Association and the Alaska Inc. bear fruit, the market for coal in Usibelli Coal Mine’s sister company. Industrial Development and Export Alaska will be greatly expanded. Agrium, Despite the challenges, recently the “We’re currently in plans to revitalize Authority about restarting the facing natural gas shortages in the Cook export business has been increasingly and expand (the Aurora) plant,” Denton shuttered Healy clean coal project Inlet area, is looking at coal as a source worthwhile for Usibelli, largely due to said, adding that the work will result in an plant have raised the company’s for gas to feed its Kenai nitrogen fertiliz- other changes in Asian markets. China is output increase. hopes that more coal power er plant. The companies are jointly study- consuming so much coal that the country Talks between the Homer Electric is almost becoming a net importer, a big ing a coal-to-gas project, dubbed the Blue Association and the Alaska Industrial generation will fire up soon. part of what’s driving the increases in fuel Sky project, which would call for 4 mil- Development and Export Authority about prices worldwide, Denton said. Higher lion tons per year of coal at full operation. restarting the shuttered Healy clean coal plant in the Matanuska Valley, but it has prices, and the elimination of China as a “Agrium seems to be very committed project plant have raised the company’s not filed a permit; Anchorage-based competitor for Pacific Rim markets, ben- to following through on this,” Denton said hopes that more coal power generation Chugach Electric has studied a coal plant; efit Usibelli. The project would use coal from Healy will fire up soon. and Anchorage Municipal Light has no “In 2004, a lot of the export purchasers and from a mine at Beluga, on the west “I’m optimistic that that’s going to plan to build one, as far as Denton knows. were purchasing a lot of things on the spot side of Cook Inlet. Beluga coal would be work, it seems to be a willing operator “It absolutely flabbergasts me that market — a lot of competition, overca- barged to Kenai from Beluga, while and a willing seller deal between Homer there is no utility in the Railbelt right now pacity, it was easy for them to just go out Healy coal would be barged from Electric and AIDEA,” Denton said. “It’s a that is permitting a coal plant,” Denton and purchase a boatload at a time of coal, Anchorage. much different environment than has said. “I don’t know if they’re waiting for and get a good price on it. Well things The Blue Sky plant would burn the existed for the clean coal project for many somebody to hit them twice with a rubber have changed. coal in a low oxygen environment, feed- years, after the obvious acrimony that’s mallet, or what, but there’s no permit out “Now the prices are much more ing with air to produce a syngas feed- existed between Golden Valley Electric there. volatile and there is a great inclination for stock, which is a hydrogen and carbon and AIDEA.” “From the time you start permitting to customers to start looking at term con- rich gas ideal to feed the Agrium plant, Other coal-fired power generation is the time you get a plant in place, if you do tracts — maybe a year, six months, or two Denton said. The companies are hoping much further from completion. a real good job of it, you can do it in seven years.” for a startup in 2010 or 2011. G Denton said the Matanuska Electric or eight years — probably more like a 10- Home-growing markets Association has plans to build a coal-fired year timeline.” Usibelli is already in the business of providing coal for electricity generation in Alaska’s Railbelt. Golden Valley is the only utility that has coal-fired electricity generation. The continued from page 11 RAILROAD tence that are capable of making that haul. Building the railroad without crossing any of the national parks and other con- servation units in the region would be another serious challenge, but it can be done, Borell believes. Arctic Slope Regional Corp., which owns the land where the coal is located, would also have to be persuaded that several coal mines are preferable. “The folks from Arctic Slope Regional Corporation, what they want is one mine with about three to four hundred employ- ees, that’s what they want, they don’t want five mines with four hundred each,” Borell said. “But one mine a railroad won’t make, I don’t believe it, and I don’t know if five mines will do it, but it gives you a chance.” G 20 NORTH OF 60 MINING PETROLEUM NEWS • WEEK OF MARCH 26, 2006