Oil companies lease on Alaska Peninsula

Shell Offshore Inc. was the high bidder on 33 of 37 tracts

Posted: Thursday, October 27, 2005

ANCHORAGE - The first sale of state oil and gas leases in 22 years on the Alaska Peninsula generated 37 bids Wednesday, with a major oil company winning the most.

Shell Offshore Inc., part of Shell Exploration & Production Co., was high bidder on 33 tracts, all centered near Port Moeller, the site of a seasonal fish processing facility, and southeast of Nelson Lagoon, a community of about 75 people 580 miles southwest of Anchorage.

Hewitt Mineral Corp. of Ardmore, Okla., was high bidder on four tracts in the same area.

The sale will allow Shell "to build a position in Bristol Bay," said Annell Bay, regional vice president of exploration in the Americas. "We believe the area has significant natural gas potential."

The sale came with the backing of communities in the Aleutians East, Bristol Bay and Lake and Peninsula boroughs, where most residents depend on the abundant sea life to support commercial fishing but local officials want to diversify the economy.

Local support for the sale contributed to preparing lease details in two years rather than the usual three, said Mark Myers, director of the Alaska Division of Oil and Gas. The communities want local energy supplies and a stimulus to the economy, he said. Gov. Frank Murkowski also has pushed for putting lease sales on a fast track, he said.

The state and communities worked out restrictions to protect the environment but still make drilling viable, Myers said. The leases ban offshore drilling.

Petroleum reservoirs offshore may only be tapped through onshore directional drilling. The leases call for setbacks from streams and other sensitive areas.

Hewitt Mineral President Jim Dolman described his company as a 90-year-old small resource development firm with holdings in south Oklahoma and north Texas. Hewitt contracts out drilling and operations, Dolman said.

A company geologist liked what he saw in Alaska Peninsula tracts.

"We thought maybe it would be worth taking a look at," Dolman said.

Myers said the Oil and Gas Division expected relatively cautious bidding.

"There is a significant amount of risk," Myers said. "This is a long-term project because there is no infrastructure."

Shell and Hewitt bid on tracts that have the oldest rocks, hundreds of millions of years old, Myers said. The older rocks are more likely to have been in a marine environment and are more likely to be petroleum sources that contain both oil and gas, Myers said.

Younger rocks in the sale area, estimated to be about 60 million years old, have greater potential as reservoirs for trapping gas, Myers said.

Overall, the area's prospects are considered best for natural gas, Myers said, and share characteristics of Cook Inlet, where Anchorage gets its natural gas.

The state offered 1,047 tracts covering about 5.8 million onshore and offshore acres, an area about the size of New Hampshire. The sale acreage available stretched from the Nushagak Peninsula in the north, down the north side of the Alaska Peninsula, to an area north of Cold Bay.

The bids generated $1,267,985. The minimum bid was $5 per acre.

Shell submitted identical bids of $5.02 per acre generating $28,911 per tract on its 33 successful bids.

Hewitt bid $21.14 per acre, and a total of $121,767 each, for two tracts. It bid $6.11 per acre for two other tracts.

The 10-year leases have a fixed royalty rate of 12.5 percent.

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