By Katharine Sandiford -- Small, Calgary-based energy company Northern Cross bets on the Yukon.
Somewhere in Northern Alberta, a flatbed truck appears to take a wrong turn. Although a common sight passing through towns like Fort McMurray and Grande Prairie, this truck, carrying a fifty tonne oil and gas drill rig, makes an odd move, turning north on the Alaska Highway. It slips into queue behind the long line of RVs, retail supply trucks and passenger vehicles bound for Yukon and Alaska.
As it makes its way deeper into the Yukon wilderness, the truck becomes a spectacle to those few people along the way who might see it pass. Most likely don’t recognize the machine it carries: Those who do likely assume it’s Alaska-bound. But the truck turns north on the Klondike and then up the Dempster highways to finally drop its load over 2,200 kilometres from the start of the Alaska Highway, on a boggy, tundra moonscape only a few dozen kilometres from the Arctic Circle. The drill rig is set in place beside a yet-to-be-assembled 40-man camp – wall tents, ATCO trailers, and packing crates full of supplies for the winter.
In a matter of weeks, the flurry of activity will begin. Northern Cross Yukon Ltd., a junior Calgary-based energy company, is getting set to start their multi-year, multi-million dollar oil and gas exploration project in one of the most inaccessible and under-explored regions of Canada – the North Yukon. Last June, when they were awarded 13 permits covering over 500,000 hectares of land scattered across the remote Eagle Plain region, Northern Cross took a lot of people by surprise.
Far from markets, decades from a tie-in to a pipeline, questionable reserves, and even more uncertain finances: Many are wondering how Northern Cross is going to pull this off.
The company has a range of plans, from selling fuel out of an on-site micro-refinery to consumers in local markets – cheaper power for new mines or communities in the territory – to trucking liquefied natural gas or oil south, to waiting for a big pipeline. It all depends, of course, on how much – or how little – black muck or stinky gas they suck out of the ground.
You might as well call it the middle of nowhere. Eagle Plain is known to the few that drive the Dempster Highway as that flat stretch of rolling bog, the boring stretch of road somewhere between the photo-friendly Tombstones and the rolling tundra beauty of the Ogilvie range, 600 kilometres from Whitehorse and only 30 kilometres from the Arctic Circle. It’s a vast, rolling, half-frozen land of mostly moss, lichen, shrubs, swamps and the stunted spires of black spruce. The ground is pockmarked with the scars of melting and freezing permafrost.
“Yukon is what we do,” says Brian Avery, president of Northern Cross. The company’s only assets are their drilling rig, camp, 13 leases and an old Significant Discovery Lease (SDL) they picked up in the late nineties. “The Yukon’s all we have.”
By the same token, Northern Cross is all the Yukon has. Their latest lease buy-up marks the most interest ever shown by the oil and gas industry in the territory’s history. They’re the only company to ever commercially produce any of their wells – 30,000 litres from their SDL were ceremoniously burned in the Whitehorse diesel plant in the late nineties. And these latest permits are the first handed out in the territory since 2002 – a year when only one permit was awarded. Other energy companies have shown interest in the Yukon, a few permits picked up here and there, but only a few were drilled. In 2005, Devon Energy ran some exploration drilling on its Eagle Plain leases, came up short, capped and sold the wells.
Oil and gas fans in the Yukon love Northern Cross. Employees at the Yukon’s oil and gas division are so enthusiastic about the company you might call them groupies. “Northern Cross is exciting for the Yukon in that they are trying to stimulate local development,” says Brian Love, director of the government’s oil and gas shop. “The beauty of Northern Cross is that they are small enough of a company that they don’t have to wait around for a pipeline to be built to develop, to monetize, this resource. This allows us to get on with the development of our own resources, in particular, local use of oil from their wells and/or local use of the natural gas while we wait for these pipelines.”
At least that’s what the plan is. Avery says the company is hoping to start drilling this November on its three leases closest to the Dempster Highway, for ease of access, cost efficiency, and proximity to their 2D Seismic. The first phase sees three years of exploration work, moving slowly from spot to spot, assessing and readjusting plans as they go along. Although they hope to strike oil, they expect to find gas. “It is key that we’re not expecting to hit all the wells. This is exploration, there’s some risk involved,” says Avery. “We are not a huge company so we have to manage our capital resources. We intend to drill, learn, drill some more, and learn some more. We will probably do some seismic as well. After we get the first three or four wells under our belt and understand what the seismic is telling us, then maybe we can go a little quicker.”
Starting late this fall, Northern Cross will hire between 40 and 60 people to run around-the-clock rotations on the rig. They’re also gearing up to construct an all-weather road into their old Chance SDL wells, work slated for this winter. There are proven oil resources there – just how much will determine the company’s next moves. So far, the process has been smooth.
To execute the first phase of exploration, Avery projects the company will need $100-million over three years. After that, he anticipates moving into the production phase – building a gas plant and gathering systems and drilling development wells to the tune of around $600-million. Add to that further exploration drilling – the company expects to drill between 20 and 25 exploration wells – and the total full cycle development plan will cost an estimated $800-million. “We believe Eagle Plain has a potential that will allow us to be successful and that’s what we’re aiming for,” says Avery. “We’re hoping to develop a two-trillion cubic foot field here.”
The potential is there. Since the early seventies, 34 wells have been drilled in Eagle Plain revealing discovered resources in the order of 83.7 billion cubic feet of gas and 11.1 million barrels of oil. A National Energy Board and Geologic Survey of Canada resource assessment conservatively estimated Eagle Plain to contain over six trillion cubic feet (tcf) of natural gas and 437 million barrels of oil. All Northern Cross has to do is dig their wells and see what comes up.
All their permits and licences are in place, their application to the Yukon Environmental and Socio-Economic Assessment Board passed through with only a few public complaints, recommendations laid out in the North Yukon Land Use Plan have been followed, and the company has consulted and developed good working relations with local area first nations, the Vuntut Gwitchin of Old Crow and the First Nation of Nacho Nyak Dun of Mayo. “We’re not holding them back,” says Love. “I just want to make this clear here, we’re doing everything we can. Nothing’s holding them back from the environmental assessment or regulatory point of view. At this point, they are just looking for capital.”
They only thing left to secure is money. Financial markets aren’t strong right now and Avery and his partners are having difficulty drumming up investment cash. At press time, Northern Cross had yet to raise the full capital needed to begin the first phase. This down-to-the-wire mentality leaves many uncertain. Confident as ever, Avery is sure they’ll get the backing they need. “We do have a number of very good leads, very good interest from some institutions and our financing plan is reasonable, so we’re expecting to pull this together in the next few months.”
It’s not easy for a junior company with no assets or major successes to its name to raise hundreds of millions of dollars to explore in a chillingly remote and unproven oil and gas basin. Since Northern Cross was incorporated 14 years ago, they have done little more than sit on their one SDL well, dormant as hibernating bears. Back in the late nineties, there was brief talk of developing a local micro-refinery for local markets, but except for one small test program, the idea fell flat. Now they’re back, and with serious intent to get busy. Not only did they purchase the leases, the drill and the camp, they hired Avery to run the show. “They realized they couldn’t do it off the corner of their desk anymore,” says Love. “The Yukon is a frontier area, a long way from market, very different than operating in Calgary or Alberta. They realized that if they were going to be successful, they would have to hire someone who has the ability to take it from a concept into development.”
Partners Richard Wyman and David Thompson started Northern Cross in 1994 as a side-project, after snapping up the grandfathered SDL, all the while devoting their full-time attention to their day jobs, Wyman as a senior analyst at Canaccord Capital and Thompson running another Northern Cross energy company in Ontario developing oil and gas and wind resources. It was only in the last year, since acquiring the 13 additional leases, that they refocused their energies northward. With no experience with remote oil and gas exploration and development, they brought in seasoned Avery as president. A 30-year veteran of the oil and gas industry, Avery spent the first 20 years with Amoco, BP, and Husky, and the last few years at Exalta Energy, another young start-up he helped grow from the ground-up. He has 10 years in the North Sea, exploring and producing in difficult, remote and sub-zero conditions.
Avery is thrilled to bits with his new position. “I really like the idea of the large land base we have, and the strong operatorship and ownership position that allows us to control the pace of exploration,” he says. “I also believe the Eagle Plain basin has a lot of prospectivity. It is really exciting and quite unique. There are not a lot of companies in North America that have a brand new basin and are ready to start exploring.” And when they do finally start exploring, they will have a wide-open sky of options available to them, depending on what they find and what the markets are doing.
In 2001, Northern Cross and the Yukon government developed a feasibility study that recommended producing and selling their crude oil reserves in the Yukon. Mining was to be their main customer until the industry took a worldwide dive.
Now that mining is on the upswing, they’re counting on any new big mining development as a potential customer. Local oil or gas would be far cheaper than what is currently available and with energy costs being one of the more prohibitive factors in mine development, Northern Cross is hoping they can work something out with a budding hard rock project so that the two ventures can grow concurrently.
There are five distinct scenarios Northern Cross is entertaining. The first, most bare bones, involves the production of oil from their Chance Well in the SDL. Despite high transport costs, the numbers suggest it would be feasible to truck the oil to Fort Nelson. The second scenario, upon discovering between five and 10 additional barrels of oil, would warrant the construction of a local micro-refinery to supply diesel and other fuels to Yukon mines and communities. The third scenario, if they hit 250 bcf of natural gas or higher, would prompt the company to process and truck the gas south in its liquefied state. With the fourth option, if they strike over one tcf of gas, Northern Cross would look to build a pipeline to tie-in with either the Alaska Highway pipeline or the Mackenzie Valley pipeline, whichever begins construction first. The fifth and final scenario, the one that keeps Avery and Love passionate about their jobs, is the dream of striking a major gas field in the 1.5 to two tcf range, a situation that would legitimize the construction of their own natural gas pipeline all the way to Fort Nelson. You can hear Avery’s excitement as he explains these scenarios. “We’re really ramping up for something big,” he says.
First, they’re hiring a handful of full-time staff for their Calgary office. The next task will be to staff-up their Eagle Plain camp, with the intention of hiring at least 50 per cent local. Although skilled labour is at a shortage, Avery says the company will provide training and benefits that will be difficult to refuse. Although well-intentioned, their Yukon-hire policy may be overly ambitious – the Yukon has one of the lowest unemployment rates in the country and suffers a worker shortage second only to Alberta, where oil and gas workers are in the highest demand.
Karen Baltgalis, executive director of the Yukon Conservation Society, raises several other concerns with the proposed plan. She says the winter range of the Porcupine Caribou Herd and other sensitive habitats will be affected by Northern Cross’ work. “We’re always screaming at the Alaskans for messing up their calving grounds,” she says. “Well here we may be messing up their winter grounds.” The North Yukon Land Use Plan, she says, was only finalized after Northern Cross was awarded their 13 leases, one of which overlaps with the sensitive Whitefish Wetlands complex. “It’s all fine and well for Northern Cross to stand up and say that they consulted with the planning commission but why didn’t they wait for work to finish first? The oil and gas isn’t going anywhere.”
Baltgalis also ponders the impact a microrefinery might have, citing that the larger refineries in Alberta and Alaska have better economies of scale, and hence, tighter environmental controls. The bigger refineries, she says, can produce a wider range of fuel products and have less waste to deal with.
But the markets are driving Northern Cross to act now and to act fast. After sitting on their nest egg for almost 15 years, they’re ready to see their plans hatch.
“In the nineties, we bought that first SDL from a previous company who thought it was a stranded resource with no short-term way to monetize it,” says Avery. “But Dave (Thompson) and Richard (Wyman) had the vision to pick it up and be patient with it until the right time. I guess now is the right time.”
