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Evaluation of Geothermal Resources Makushin Volcano 2010
| bAResource Development Councileo.a ars (907)276-0700 Fax (907)276-3887 Re te:brold KelbugoffheFejtchord(oi posed vom Gam Tui (quence © fo£913-33B-b425 Qa 66(--GoiT ¥-iResource Development Councilo"Or Blase 2 ING (907)276-0700 Fax (907)276-3887 on €3 Ra +.7 L J uA tDaviALarsos312-264 -3a\% no faker cote & | could exceed those numbers. However,only further drilling and well tests can confirm these numbers.. Comments on Possible Future Development: Access into the project area will be limited seasonally by snow and other adverse weather conditions. Terrain,as mentioned earlier,is rugged,adding to the question of access.Therefore,in order to reach reservoir beneath the higher-elevation portions of the prospect area,some of the drilling may of necessity be directional.Probably the existing pad sites of ST-1,A-1 and D-1 can be utilized for deeper vertical holes as well as for directional holes.In order to extend any significant distance laterally,some directional holes may have a total drilled depth of over 3,000 feet and possibly over 4,000 feet. Given the known and anticipated range of temperatures,it is likely that a binary cycle method of power generation will be utilized.Parasitic load in such systems may easily reach 15%of power production. Therefore,a 22-25 MW sustainable production may yield 19-21 MW net power output,and 30 MW (gross)will sustain up to 25 MW net power output. If future drilling reaches a higher-temperature aquifer -perhaps to 430°F as indicated geochemically - it may be more efficient to use a flash-steam method of power generation.Parasitic losses will also be lower with flash-steam generation from a higher-temperature reservoir. Probably one injection well will be needed for every two production wells.Given the high PI of ST-1, these can be located downslope from the productive area and of relatively shallow depths.A total of 4 to 6 production wells,and 2 or 3 injection wells,would be required to sustain 25 MW(gross) production. There is a minor risk of scaling in the closed piping of a binary system.The possibility of either silica or calcite precipitation should be monitored.If it does occur,there are convenient ways to mitigate the problem.The risk of volcanic eruption presently is considered to be minor.Despite this,both volcanic risk and the risk of major earthquakes along the Aleutian subduction zone should be considered in any wellfield or power plant design. It is unknown if there are commercial reserves of gold,silver or other metals in the prospect area.Cores and cuttings should be analyzed routinely to help determine this. Consideration of project economics and of market are beyond the scope of this brief report. Submitted respectfully, James Koenig Geothermal Consultant Geothermometry based on the reported values yielded a quartz solubility temperature of 400°F and an Na-K-Ca equilibrium temperature of 434°F.These are in "good agreement”with observed temperature, and "suggest that higher temperatures are present nearby in the reservoir”.This may be taken to infer support for a deeper,hotter aquifer. Evaluation of the Prospect Area: Holes ST-1,A-1,D-1,and E-1 are located within the prospect area.Hole I-1 is some two miles to the SW.Hole D-1 was not deep enough (1,400 feet)to penetrate a geothermal aquifer encountered in the two deeper holes (ST-1 and A-1).From its location at a higher surface elevation,it is likely that a depth of over 2,000 feet would be required for D-1 to intersect the aquifers feeding A-1,ST-1 and its twin E-1. Hole I-1,about 1,500 feet in depth,apparently encountered a thermal aquifer of about 125°F at less than 300 feet.There is no evidence of lost circulation at greater depth.Therefore,the gradual increase in temperature to about 170°F suggests a regime of conductive heat flow,with a temperature gradient of about 4°F per 100 feet.There is no certainty that a high-temperature aquifer will be found at greater depth,although rock temperature is expected to rise steadily. As noted above,hole A-1 had a bottomhole temperature of about 365°F,with probable aquifers of 300- 325°F between 1,100m and 1,500 foot depth.Also as noted,ST-1 flowed at about 380°F.Upslope from these sites,that is going generally westward in the direction of the Makushin Volcano caldera,it is assumed that temperatures are likely to be comparable at depths of perhaps 2,500 or 3,000 feet.This assumption is supported by the observed temperature data,the Holocene eruptive and caldera-forming history of Makushin Volcano,and the silica and alkali geothermometry of 400 to 434°F. Thus it is assumed that temperatures of 300 to 350°F,and perhaps to 400°F,will be found across much of the western end of the prospect area.This area can be described as being within an arc drawn across the prospect area that begins at the southern boundary of Section 2,T73S,R120W,and passes to the east of ST-1 and A-1,while completing its course immediately south of Sugarloaf in the SW corner of Section 27,T72S,R119W (see Figure 4).Sugarloaf ultimately may be found by drilling to be part of this same system. Excluding Sugarloaf,this is an area of about 3.5 square miles.It appears to be bordered on the east by the NE-SW-trending linear feature mentioned earlier.Additional acreage to the north,or even to the east,may have comparably high temperature,but evidence is lacking. There also is no certainty that holes all within that area will encounter aquifers with permeability or PI comparable to those found in ST-1.However,the likelihood is that at least part of the area will be commercially productive.A useful rule of thumb is to assume that half will be highly productive, whereas the other half will be only marginally productive.Another rule of thumb widely used in the geothermal industry is that systems of high PI and with temperatures over 300°can sustain production of about 15 MW per square mile.This value increases with temperature and PI This suggests a minimum field capacity of 22-25 MW(gross),with a probable maximum of up to 30 MW(gross)within the western part of the prospect area.If the entire Makushin geothermal system is considered,this number could increase to 50 MW or more.Further,if aquifers at higher temperature are encountered in deeper drilling in the prospect area,as suggested by geothermometry,the resource summarized in the report by Denig-Chakroff,Reeder and Economides (7ransactions of the Geothermal Resources Council,1985)and in other reports by those authors and others during the years 1984-1985). The prospect area also has been prospected intensively for gold.A 2009 report by the Alaska Division of Geological and Geophysical Surveys presented chemical analyses of cores from hole ST-1.Up to 0.66 parts per million (ppm)of gold,along with 0.4 ppm of silver were present in selected core intervals.Significant quantities of copper,lead,zinc and lithium also were present.Analysis of cores from hole E-1,given in a report by mining geologist Roger Bowers to KSLC,showed a remarkable maximum of over 41 ounces per ton of rock (opt)of gold in repeat analysis of one sample.Samples from hole A-!had 10.35 opt and from ST-1 had just over 3 opt. Prior Exploration for Gold: From the earliest times of Russian occupation,there have been reports of gold-bearing rocks on Unalaska Island.The 1996 report prepared for KSLC by Roger Bowers summarized the results of exploration in the 1980s by Battle Mountain Gold and others.Two gold-bearing veins were identified a few miles from the prospect area,mapped and sampled extensively.Gold content to 8.57 ounces per ton (opt)and to 85.87 opt of silver were reported.Tonnage and average gold and silver content are unknown.However,this finding provides confirmation of the variable concentrations of gold found in cores at holes A-1,E-1 and ST-1.The potential for commercial exploitation remains unknown. Analysis of Geothermal Exploration Data:Economides,Morris and Campbell (10”Workshop on Geothermal Reservoir Engineering,Stanford University,1985)and GeothermEx,Inc.(1992 report to the Alaska Energy Authority)have analyzed the well test data and have drawn conclusions regarding the potential for power generation from the prospect area. A productivity index (PI)of 30,000 pounds per hour per psi was calculated by Economides et al., which implies a permeability-thickness product of 500,000 to 1,000,000 milliDarcy-feet (mD-ft).They described this as "phenomenally large”.A postulated "large diameter”well at the site of ST-1,they concluded,could supply 7 to 12 MW of electricity for "hundreds of years”. GeothermEx expanded on these findings by using a wellbore simulator to "calculate wellhead characteristics for both a 13-3/8 inch and 16 inch completion”.They concluded that at the "optimum wellhead pressure of 60 psig (73 psia),”flows of between 950,000 and 1,500,000 pounds per hour were attainable,and that two 13-3/8 inch wells would be capable of supplying fluid for a proposed 12 MW power plant then under consideration.One injection well would also be needed for disposal of residual fluid. Neither commented on the maximum sustainable capacity of the Makushin geothermal field,except to infer that fluid was entering the wells from some distance.This might be from a source located closer to Makushin Volcano,or perhaps an upward flow from a deeper reservoir localized along the previously mentioned NE-SW-trending lineament. Chemical analyses of produced fluid showed about 5,000 mg/I of total dissolved solids (TDS),along with less than 0.1%carbon dioxide,nearly 278 mg/l of silica,and concentrations of Na>>K>Ca>>Mg. to a prominent linear depression that trends NE-SW across the island,passing to the east of Makushin Volcano.Several areas of thermal springs and fumaroles are present along this lineament within the prospect area (see Figures 1 and 4). Terrain on the island is rugged,with numerous steep-sided glacially carved valleys that carry steams fed by rain runoff and snow melt.Where not covered by snow,the island has a lush cover of brush and grasses.Makushin Volcano is the highest point on the island. Volcanic History: Makushin is a fumarolic stratovolcano of andesitic and basaltic composition -lava flows,pyroclastic ash,cinder cones and subsidiary domes -of Pliocene to Holocene age.One fumarolic cone,Sugarloaf, is within the prospect area of interest.There apparently was a significant time period between the earlier (Plio-Pleistocene)eruptive events and those of late Pleistocene and Holocene time.A caldera formed on the volcano probably about 8,000 years ago.There has been intermittent but repeated eruptive active since formation of the caldera,the most recent ash and steam eruption having occurred in 1995. The volcano is monitored seismically by the Alaska Volcano Observatory.Current alert status is Green. Geothermal Investigation: In addition to volcanic monitoring,the island has been mapped in detail,both topographically and geologically,and a suite of geophysical and geochemical surveys have been run,under sponsorship of the State of Alaska and,to a lesser degree,the U.S.Geological Survey. In 1982,3 temperature-gradient holes (D-1,E-1 and I-1)were drilled (see Figure 1 for location)to depths of approximately 1,450 feet.Temperatures were logged in each,the maximum of about 390°F being reached at the bottom of hole E-1,located in the upper reaches of Makushin Valley.The site is almost 4 miles due east of the summit caldera of Makushin Volcano. The following year,the State of Alaska twinned E-1 with hole ST-1,to 1,945 feet in depth.Temperature increased rapidly to nearly 385°F at around 1,000 feet.Thereafter,temperature was nearly isothermal (convective conditions)to total depth.A maximum temperature of 399°F was measured at around 1,550 feet.Bottomhole temperature was 395°F.At several intervals between 1,100 feet and TD there was significant lost circulation,indicating the presence of thermal aquifers. In 1984,hole A-1 was drilled to about 1,870 feet at a site nearly 2 miles NNE of ST-1.Maximum temperature at hole bottom was about 365°F.An isothermal zone from about 1,000 to 1,400 feet indicates a possible thermal aquifer of almost 300°F.Another potentially permeable zone at about 1,500 feet had a temperature of about 325°F. In the summer of that same year,well ST-1 was flow tested for a total of 35 days at a discharge "--Mey temperature of approximately 380°F.Fluid samples also were taken for chemical analysis.Sustained flow rates were measured as high as 63,000 pounds per hour through a 3-inch pipe.There was less than 2 psi drawdown from the initial bottomhole pressure of 494 psi after 34 days of testing.Data are Summary: The Makushin prospect area (see Location for description)has been explored geologically,as well as by geochemical and geophysical methods,and by the drilling of 5 slim holes to depths of 1,450 to 1,950 feet.Results from exploration,drilling,well testing and wellbore simulation indicate that an area of approximately 3.5 square miles is underlain at 1,000 to 1,500 feet by a geothermal aquifer of at least 300°F,locally reaching 400°F.Based on these data,this is sufficient to support up to 30 MW (gross)of power generation by the binary cycle method. Conditions at greater depth are unknown,although fluid chemistry suggests that temperatures up to 435°F may be present.If such hotter fluids of comparable mass flow rates are found,or if the entire Makushin geothermal resource area is considered,the resource may be capable of sustaining upwards of 50 MW (gross). Prior work by various entities has resulted in the identification of gold-bearing veins on Unalaska Island a few miles from the geothermal prospect area.Shows of gold also were reported in analysis of cores from a hole drilled in the prospect area.It is unknown if either of these represents a commercially exploitable deposit. Location: Makushin Volcano is located on Unalaska Island,in the Aleutian chain of southwestern Alaska.The volcano occupies much of the northern part of the island,centered near the intersection of Townships 72 and 73 South and Ranges 119 and 120 West (T72 -73S,R119 -120W). The property of interest to KSLC forms a quasi-rectangular block in Sections 30 and 31,T72S, R118W;Sections 25-27 and 33-36,T72S,R119W;and Sections 2-3,T73S,R120W.This is referred to herein as the "prospect area”.It is shown on Figure 1,taken from a 1992 report by GeothermEx,Inc. Figures 2 and 3 respectively show the location of Unalaska Island within the Aleutian chain,and the location of Makushin Volcano on Unalaska Island. Regional Description: Unalaska Island and its small neighbor Amaknak Island have an area of about 212 square miles,and a population of approximately 4,300.The population is located almost entirely within the town of Unalaska and its commercial port of Dutch Harbor.Dutch Harbor,the nation's largest fisheries port by volume of seafood processed,is located on Anaknak Island and is connected to Unalaska bya bridge. Climate is wet and comparatively mild,with relatively little difference between January average temperature (30°F)and August (52°F)in Unalaska town.However,there is measurable rainfall on an average of 250 days per year and foggy conditions are almost a daily occurrence.Upslope from the port,weather conditions are more severe,with colder and snowy winters.This reflects conditions to be found at the prospect area. Makushin Volcano reaches nearly 5,700 feet in elevation and is the third highest peak in the Aleutian chain.It has a permanent snow and ice cap covering about 15 square miles.There are high-temperature fumaroles within its crater.Other fumaroles and thermal springs are present within and closely adjacent James Koenig -Geothermal Consultant Evaluation of the Geothermal Resources of the Makushin Volcano and Vicinity, Unalaska Island,Alaska for Mr.Jack Wood Mr.Ed Fisch KSLC San Francisco,California,USA November 2010 LEGEND @ =Geoiemalmatwelt ©Geothermal gradient hole ==KSLCpropertyline &Fumarols (Geotemetx) »Fumerole (Alaska) ©Hot apring (Geothermex} BERING Proposed Transmission AKUSHIN i MAKUSHIN PROJECT AREA Unalaska island,Alaska Makushin Geothermal -Synopsis Proposal:This is a proposal by Kiiguusi Suuluta Land Company ("KSLC”)to sell the Makushin geothermal resource,including 7200 acres of land on the Island of Unalaska,AK.This is a brown field geothermal resource that potentially will support a minimum of a 30 MW geothermal power plant.Estimates of the construction cost of a 30 MW geothermal power system,including wells, gathering system,plant,transmission lines including underwater cabling (transmission to Dutch Harbor),and the acquisition of the land and geothermal resource are $277 million. Key opportunities: 1.Management believes the seafood processing industry on Unalaska is prepared to support/join a non-profit co-op to be created to buy power from a new geothermal power producer.This would provide based load electric power demand of an average of 22MWa year,or more.If the City of Unalaska (which services commercial and residential power users)chooses to join,the average base load would be higher (potentially,an additional 10 MW). 2.Bond financing is likely available from several Alaska state agency with state legislative approval.State bond funding would substantially leverage the initial project investment,potentially producing a very high IRR for the investor. 3.Makushin has more validation of the size of the geothermal resource than any other commercial geothermal project now in Alaska.Besides wells drilled,millions already have been spent on project engineering,evaluation and permits. 4.Based on KSLC's estimates,Makushin could profitably produce and sell 22 MWs to an electric power co-op (Seafood processors and possibly the city of Unalaska)at $0.25 a kwh versus the current commercial and residential pricing of $0.42 to $0.49 cents per kwh.The diesel fuel costs today are estimated to be $0.30 to $0.35 per kwh (fuel only)based on the current diesel price of about $4.50 a gallon.Makushin would save $60 million a year in diesel fuel costs (15 million gallons) needed to produce the 22 MW average power. 5.The future economic growth on Unalaska is being limited by existing air emissions controls and extremely high energy costs. As the owners of the Makushin project,KSLC is offering to sell the geothermal project at $1 million per installed megawatt (minimum $15 million)with the first $15 million payable now and the balance,payable at the earlier of such time as funding for a geothermal power plant is obtained,or construction of such a plant commences. Background: e Over 170 reports including EIR (including preliminary NEPA),geology,engineering and other documents validate the resource and the project-including a geothermal summary most recently prepared by Jim Koenig,founder of GeothermEx. e Current potential project financing from the State of Alaska as HB306 mandates half of Alaska's energy come from renewable energy by 2025.Alaska Investment Development and Export Authority (AIDEA)committed $62 million in bond financing in 1992 to finance the development (OESI,a partially owned affiliate of Ormat,was the developer of record). e In 2008 AEA granted the City $3 million for additionaltonal exponen drilling in the Makushin Valley (having previously financedtheinitial5testwells).>le b,AE Fis srt,FS mateyetn2009theCityofUnalaskareceivedsivadalifonalOGDOEgrantforexploratorydrillingintheMakushin Valley (KSLC land). Geothermal Energy on Unalaska Island:Potential Power needs now and future Hotel Load Primary Load (8 warm mos.)Immediate Need 9MW 14 MWThe city 9 MW 24 MWThe seafood processers 1MW 1 MW Cold Storage -OMW -2Z MW Cruise ship and other needs19MW37MWImmediateNeedTotal Future Need 2MW 5 MW Growth in the area through additional shipping infrastructure 5 MW 10 MW Oil services and other new industries 0 MW 2 MW Additional cruise ship and related needs up to 2 MW (if arctic ice melts further) 2MW 5 MW Emergency services:Coast Guard and Navy 15 MW 15 MW Mining operations,if feasible,and ore processing 4MW 5 MW Ore processing for out-lying islands. 2MW 3 MW Conversion of HVAC systems over time to electric-could use 5 MW or more 30MW 45 MW Future Needs Total Need 49MW 82 MW Total Power Needs Overview of the Geothermal Asset: "The Makushin geothermal area has been explored geologically,as well as by geochemical and geophysical methods,and by the drilling of 5 stim holes to depths of 1,450 to 1,950 feet.Results from exploration,drilling,well testing and wellbore simulation indicate that an area of approximately 3.5 square miles is underlain at 1,000 to 1,500 feet by a geothermal aquifer of at least 3009F, locally reaching 4002F.Based on these data,it is sufficient to support no less than 30 MW (gross)of power generation by the binary cycle method,”according to geologist Koenig's review of the project.Koenig suggests further study shows the potential for 50 MW or more.The core geothermal reserves are located on KSLC land. For further information Contact:Alan Kempner Davis Starlight Investments,L.L.C.(FINRA/SIPC) alan@starlightinvestments.com Office 1-510-527-6954 Cell 1-510-501-9314 Unalaska -Power Usage Estimates Prepared by KSLC -as of May 2010 Unalaska Power Usage Estimates Prepared by KSLC KSLC's KSLC's *Based on telephone interviews May 2010 **Avg as %of Peak MW is KSLC judgment. Current Avgas Avgas Est.of Est.of Permitted *Peak *Avg %of %of Avg Base Capacity Sales Sales Permitted Peak**Load Load *** Mw =MW MW MW MW Mw OW UniSeas,Inc.*seafood 12.43 7.50 5.45 44%73%5.45 4.43 Westward Seafoods,Inc *seafood 666 420 2.75 41%65%2.75 2.03 Alyeska Seafoods,Inc *seafood 5.90 400 1.26 21%32%1.26 1.00 Icicle Seafroods,Inc.seafood 1.95 1.23 0.81 41%65%0.39 0.18 Kloosterboer Cold Storage 2.00 1.33 67%1.33 1.00 American President Lines,Ltd (APL)Freight 6.21 3.92 2.57 41%65%1.23 0.56 CSX Lines,LLC (CSX)Freight 1.30 082 0.54 41%65%0.26 0.12 Offshore Systems Inc.Boat Sve:4.09 _069 _0.45 41%65%0.22 0.10 Industry Sub-Total 35.55 24.36 15.15 43%62%12.89 9.40 Electric Enterprise (city)Unalaska 12.00 _9.33 78%9.33 8.00 Total 35.55 36.36 24.48 69%67%22.22 17.40 ***Base Load estimates are calculated roughly as being 2/3's of the time and Peak Load being 1/3 of the time.This was KSLC's judgment in May 2010. UniSea has 16.9 MW of equip in place,but is limited to 12.4MW due to air quality. Base Load could be high. Base Load could be high. Sales information is not confirmed Makushin Geothermal -30 MW -Proforma 2012 06 21 R8.xlsx 6 Unalaska and Seafood Demand Page 1 of 1 Letter about The Makushin Geothermal Project As the minutes of the May 22 meeting of the Unalaska City Council reflect one of the "Objectives”of the City Manager's Office for fiscal 2013 is the development of the well known Makushin geothermal resource on Unalaska Island.Ed Fisch,one of the owners of the Makushin geothermal property enthusiastically supports such a goal."We believe electricity could be produced and delivered reliably at less than 50%of the City's current retail price of approximately $0.50 per kilowatt/hour,without being subject to the price fluctuations of diesel fuel.In addition,because geothermal energy has none of the problems associated with diesel emissions,it will allow the sea food processors and other industrial users and potential users to expand their operations without worrying about air quality issues." Also,Fisch believes developing the Makushin resource would allow the City to fully capitalize on its growing strategic importance brought about by the thinning of the Polar Ice Cap.As the only protected deep water harbor in the Aleutians,and lying just 30° miles off the North Pacific Great Circle Route to the Far East,the strategic importance of Unalaska and the Port of Dutch Harbor has never been greater.Transshipping of all sorts will greatly increase through the Unimak Pass.One estimate puts increased tanker traffic at 4500 vessels annually and that does not include increased container and other types of shipping.This would create a dramatically increased need for oil spill response systems, major rescue tug facilities,emergency towing and repair systems and facilities.Coast Guard and Naval facilities would likely have to be increased as well.Unalaska could also become the staging ground for Shell Oil's explorations in the Beaufort and Chukchi Seas."All of this will require additional electric energy which Unalaska will have trouble supplying without resorting to Makushin,”Fisch said. "There is little doubt about the quality of the Makushin resource and its ability to support the increased power demands of the island,”Fisch said.Makushin is a very well defined geothermal resource with 5 test wells drilled in the 1980s,and over 170 reports generated to date.It could likely supply the total 40 Megawatts the city and seafood processors currently need.According to Jim Koenig,a well known geothermal expert who recently did a summary report on the project,there is a high degree of confidence of Makushin having enough energy to supply at least 30 to 50 megawatts of electricity. "The project has had its challenges,but came close to being built on several occasions,” Fisch said.Several entities spent substantial time and money on the project,the most serious of which were the State itself in the early 1980s,which explored for,and ultimately drilled the five wells at Makushin.Thereafter,the State actually leased the land from the Aleut Corporation for the purpose of constructing a power plant.The project was abandoned with the collapse of the oil markets in 1986.Thereafter O.E.S.I. Inc.a partially owned U.S.subsidiary of Ormat attempted to develop it in the mid 1990s. OESI,which had fully engineered and was in the process of completing the permitting for the project,and had secured Alaska State bond financing,unexpectedly abandoned the project because of unforeseen and unrelated financial difficulties. Nevertheless,Fisch thinks that with the increasing strategic importance of Unalaska and the Port of Dutch Harbor,the time is now for the City,State and other local stake holders to develop a comprehensive plan to bring the project to fruition.Such a project would integrate existing diesel generating capacity and transmission capability together with the development of Makushin as its cornerstone.Fisch said the budget for the development of the Makushin project was recently updated by a well known geothermal engineering company.Fisch is quite confident the entire project could be brought in at a cost well under $300 million which is roughly what the seafood processors are expected to spend on diesel fuel alone over the next 5 years ($60 million per year based on the state emissions records)at current diesel prices. The picture below shows steam from the proven geothermal resource up on Makushin. se 'a2!awete oF ptrdeg Benes yasTena- , Alan P.Baldivieso From:Alan Davis <alan@starlightinvestments.com> Sent:Tuesday,June 26,2012 4:49 PM To:Alan P.Baldivieso Ce:Ed Fisch;Murray Froikin Subject:Makushin background proposal Attachments:Makushin Geothermal Project Proposal -2012 April 6.pdf;Makushin geothermal news update 2012 June 5.pdf;Makushin Geothermal Summary Report November 2010 a.pdf;Makushin Geothermal -30 MW -Proforma 2012 06 21 R8.xlsx Dear Alan, We look forward to seeing you in your offices tomorrow at 9:30.While we are not under a NDA on Makushin,all of this remains confidential.Attached are a Makushin geothermal project proposal and press release.The press release was in response to the city's recent announcement that developing geothermal power was one of Dutch Harbor's goals for 2013.As way of background on the Makushin project: The Opportunity 1.This project is now driven by the energy needs of the seafood processors who use 22 MWs of average base load power.The city uses 10 MWs which would be an added benefit. 2.Alaska State financing as the project will be an engine for growth as the project was already was approved for bonding once by the state legislature. 3.The direct saving of$60 million a year in diesel fuel would quickly justify the Geothermal project costs of a little less than $300 million. As the Great Circle route opens up,Dutch Harbor is going to grow in strategic important both for shipping support and infrastructure for emergency services as well as many other businesses.The attached summary will give you a quick overview of the project.There are over a 170 reports validating Makushin plus five test wells to confirm the resource.The project was approved by the state legislature for the bonding process in the 1990s including all the required engineering documents needed for construction.OESI,a sister company to Ormat was the developer at the time of the bonding process (OESI subsequently pulled out of all US projects including Makushin). |have also attached a copy of the summary geology report by James Koenig,the founder of GeothermEx and a well known geothermal geologist.if your team would like to talk with our geologist or review our pro forma financials with us,we are available for a conference call at your convenience.You are also welcome to call the state geologist,Bob Swensen who will tell you that Mukushin is the best and most promising geothermal resource in Alaska. The IRR on the project is quite substantial.Starlight Investments LLC represents the owners of the project and we are selling the project and the surface and subsurface rights to the 7200 acres included in the geothermal project.Please do not hesitate to email or call me if you have any questions. Thank you very much in advance for considering the Makushin project. Best regards, Alan K.Davis Alan Kempner Davis Principal Starlight Investments,L.L.C.(FINRA/SIPC) Placements,Mergers and Acquisitions for Mid Market Companies in Renewable Energy,Clean Technology,software Houston*New York*San Francisco*Portland *Denver* 1 www.starlightinvestments.com alan@starlightinvestments.com Phone 1-510-527-6954 Cell 1-510-501-9314 Fax 1-510-527-7520 Securities offered through Starlight Investments L.L.C. This e-mail is intended only for the use of the addressees.Any copying ,forwarding,printing or other use of this e-mail by persons other than the addressees is not authorized.This e-mail may contain information that is privileged , confidential and not for public disclosure.If you are not the intended recipient ,please notify us immediately by return e-mail (including the original message in your reply)and then delete and discard all copies of the e-mail.Thank you very much in advance for your help on this. PROCEEDINGS,Tench Workshop on Geothermal Reservoir Engineering Stanford University,Stanford,California,January 22-24,1985 SCP-TR-84 EVAULATION OF THE MAKUSHIN GEOTHERMAL RESERVOIR, UNALASKA_ISLAND Michael J.Economides(1),Charles W.Morris(2),and Don A.Campbell 3) 1.Unlverslty of Alaska,Fairbanks,AK Now wlth Douell-Schlumberger,London 2.Republle Geothermal,In.,Santa Fe Springs,CA Now wlth Schlumberger Offshore Services,New Orleans,LA 3.Republle Geothermal,Inc..Santa Fe Springs,CA ABSTRACT Analysis of an extended flow test of well ST-1 on the flanks of Makushln Volcano lndleates an extenslve.water-domlnated, naturally fractured reservolr.The freser- volr appears to be capable of dellverlng extremely large flows when tapped by full- slze productton wells.A productlvltyIndex1Nexcessof30.000 1b/hr/ps1 Implles a phenomenal permeablllty-thlckness product,in the range of 500.000 to 1,000.000 md-ft. The flowlng bottomhole (1,949-foot) temperature of the fluld 4s 379°F,whlch {s lower than the measured statle temperature at that depth (395°F).This phenomenon, coupled wlth an observed statle temperature gradlent reversal from the maxlmum 399°F observed at 1,500 feet,Indlcates that the reservolr proper 1$located some distance from the well.Presumably It 48 at a temperature sllghtly lower than 379°F and communicates wlth the wellbore via a high conductlvlty fracture system. A materlal balance calculatlon ylelds an estlmate of reserves that are capable of sustaining all of the present power needsoftheIsland(13+MW peak)wlth ageothermalpowerplantforseveralhundred years.Theoretleally,a single largedlameterwellatthesiteofST-1 could sattsfy thls requlrement. INTRODUCTION Unalaska Island,located in the centralportionoftheAleutlanChalnhasbeenthe slte of a multi-year exploratlon program for'the evaluatlon of 4ts geothermal energy potentlal (Flgure 1).Makushln Volcano, the 6.680-foot high active volcano, situated on the northern end of the Island, has a large number of surface manifesta - tlons,Including several large fumarole flelds. PROJECT LOCATION MAP Followlng extenslve geolggical,geo- physical,and geochemical surveys of theMakushlnreglon,three +1,500-foot tempera-ture gradlent holes were sited and drilled {in the summer of 1982.The holes and thelr temperature gradlents were descrlbed byIsselhardt,et al (19834),who also provlded a geothermal resource model of the Makushin geothermal area (Isbelhardt.et al,1983b). The heat source of the Makushin geo- thermal system appears to fe a burled Igneous Intruston associated wlth the volcano.The temperature and post-glaclal volcanic dilstrlbutlons suggest that the heat source for the system 1$not directlybeneaththesummit,but rather 1s offset to the east.The location of the Makushln productng horlzon.a fracturtd dlorlte, appears to be structurally controlled by a major northeasterly strlklng fracture zone. In the summer of 1983,a ttratlgraphle test well (ST-1)was drilled near one of the 1982 temperature gradlent holes (E-1). A steam zone was encountered at 672 feet, -227- followed a 1,946 feet,where free for three feet. The 1983 well testIng described byCampbellandEconomides(1983)confirmed ahighlyprolificreservolrproducing47.000 lb/hr through three-Inch plpe wlth little or no detectable pressure drawdown. Inadequately sensttive Amerada-type pres-sure Instrumentatlon prevented rigorousanalysis.A productivity Index of over3.000 Ib/hr/psi and a permeability thick- ness of over 50.000 md-ft were Inferred.A long flow test in the summer of 1984 wasIntendedtoprovideabetterestimateofthesereservolrparametersaswellas demonstrate sustalned flow capablllty. TEST FACILITIES AND_INSTRUMENTATION by significant fracture atthedrltllstemdropped The surface equipment utlllzed during the 1984 testIng was basically the same as that used in 1983 and described in the report by Campbell and Economides (1983).Figure 2.shows”the surface equipmentarrangementsutlllzedduringthelong-termtestof1984.A relatively simple two- MAKUSHIN WELL TEST EQUIPMENT 'bintooftis phase orlflce meter and James tube were Installed at the end of the flow IIne to measure the flow rate.Upstream and down- stream orlflce pressures were recorded simultaneously with a differential pressure flow meter.The James tube IIlp pressure was monitored contlnuously during the flow test utilizing both a test quallty pressure gauge and a Barton pressure recordingmeter.In additlon,the wellhead pressure and temperature were recorded continuously on Barton meters throughout the flow test.The orlflce plate described above was utlllzed to calculate the enthalpy of the fluld using the empirical equation developed by Russel James (1980). Downhole pressure and measurements were obtalned using two separate monitoring systems.The pressure monitoring equipment was a caplilary tube system which utlllzed a gas filled,volu-metric chamber downhole connected to a very small dlameter caplilary tube with a sur- face recording pressure transducer.This equipment was fllled with hellum gas as the pressure transmitting medium from the temperature -228- bottomhole to the surface transducer.The equipment utllized In thls test has anaccuracyofapproximately+0.3 pst,with a sensitivity of +#0.1 psl on the transducer.The temperature.measurements were obtalnedusingathermocouplecablesystemcompletelyseparatefromthecaplilary tube.This required that the temperature data and the pressure data be acquired In separate runs In the well.The thermo-couple was a_chromel-alumel,grounded junction-type with an accuracy of +3degreesFandasensitivityof«3/4 of adegreef.The thermocouple cable and the caplllary tube were contalned on twoseparatespools.As wlll be seen in thedatadiscussedlater,the pressure data and the temperature data were found to be qultereproduciblethroughouttheflowtest(unlike the prior years'data with Amerada-type Instrumentatlon). FLOW TEST MEASUREMENTS The test of ST-1 consisted of two flow perlods of approximately 33.000 lb/hr and63,000 ib/hr each.The test rate/welthead pressure/bottomhole pressure history 1sshownInFigure3.The first flow period GAKUENET-1 FLOW TEST j - / I anne - i**yime=- jaa : oa 1 te 2 ae 7 comme |«|i.|3s f=: 8 a s a s :s :_ lasted 15 days,while the second flowperlodatthehigherratelasted19days. During the 34 days of flow from ST-1,there were several minor changes in the flow rate and/or a bypass of the measuring system Inordertoperformsamplingexperimentsorto modify the flow equipment.However,thetestproceededrelatlvelysmoothly,withthetwoflowratesbelngmalintalnedat essentially constant condltlons throughoutthelrrespectivetestperlods. Prior to the Inltlatlon of flow from ST-1,a static temperature profile of thewellborewasobtalnedonJuly3andastatlcpressureprofllewasobtalnedonJuly4,as shown in_Figure 4.These surveys clearly Indicate that the well has a steam zone,with the vapor-Ilquild Inter- face located at about 825 feet.This is shown by the constant temperature and pres-sure conditlons extsting in the upper part of the wellbore untll very near the surface(+200 feet).Below 825 feet there is a Ilquld zone which Increases to a maximum temperature of 399°F at the 1,500-foot depth,then shows a slilght decline to a temperature of 395°F at the bottom of the wellbore (1,949 feet). FIGURE 4 STATIC TEMPERATURE (JULY 3,1964) ANO PRESSURE (JULY 4,1964)IN ST-4 TRPUUTUNE Denes -F) ©80 100 158 200 280 WOO EO 400 40 808 8B0 800 FL NiN\-XN see]erent \2800.ee NOL After flow was Initlated onJuly5.1984,the well stabilized at a flow rate of about 33,000 Ib/hr and this condi- tlon was malntalned untll July 20,1984.During thls flow perlod the pressure tool was left at the bottom of the well (1,949 feet),contlnuously recordingbottomholepressure,except for the times when wellbore pressure and temperatureprofileswereobtained.Flowing pressureandtemperatureproflleswereobtalnedonJuly6.The results are shown =§tnFigure5.A second set of pressure/temperature profiles were obtalned =onJuly19.which were exact overlays of the July 6 profiles.About one psl of drawdown wes observed over the 15 days at the low tate. Following the change §n the flow to the higher rate of 63.000 lb/hr on July 20-21, another pressure/temperature profile was obtalned (Figure 6).August 7.1984,aflnalpressureprofllewasobtainedwhich was agaln an exact overlay of the July 21profile.During the high-rate flow perlod,the pressure tool was agaln left at thebottomoftheholecontlnuouslyrecordingbottomholepressureexceptwhenproflles were run.An addittonal one pst of draw- FIGURE 5 FLOWING TEMPERATURE (JULY 6,1964) AND PRESSURE (JULY 6,1984)IN ST-4 TEWERATURE CSREES *) @ 808 100 188 200 280 200 350 260 480 800 SBO G00 wo L1 MK | -\\- |\. E \E 000 1000 E w20e 1400 BN 1400 teoe ss 1000 soe Lf NY swe--eee woe LLL IT voce©BO 100 180 800 NO 300 380 400 «8D S00 ano R00 Ones PEIN down was observed during the 19-day hightrateperlod.The well was shut-In on August 8,1984,with the pressure tool hangtng in the well at bottom,The pres- sure tool recorded bulldup data for the next 17 days,showing less thaa one psl of Increase in bottomhole pressure. FIGURE 6 FLOWING TEMPERATURE (JULY 30,1984) ANO PRESSURE (JULY 21.1984)IN ST-1 Teewutug CENWES Fi ©88 100 :Be 200 mC 300 950 490 <b 800 HO G00orf »oe ecoE\| =i000 /1000 'SANT :1408 q 1480 -IN.- N 1900 =NY i006 2008 Os ne ee ee |N @ ©108 180 808 208 200 Bee 4080 @S bOU Gad GUO -229- DISCUSSION ANDINTERPRETATIONOFRESULTS Although the resolution of the pressure equipment during thls test was far superiortothatusedduringthe1983testprogram, 4%wes again found that the drawdown pressure response im ST-1 was extremelysmall,perhaps beyond the true sensttivityoftheinstrumentation.It appears that the pressure drawdown during the low-rateflowperlodwasontheorderofonepsi, while the pressure drawdown in ST-1 during the high-flow rate was on the order of two psi.Thus,the productivity indexderivedfromthetwoflowperlodsequals 31,000-33,000 Ib/hr/psi.These values are very large (an order of magnitude more than the ones postulated tn 1983),and Indicate that the productivity of the Makushinreservolr4sextremelyhigh.Precise calculation of the permeability-thickness product 1s not possible with these data, although 1t 4s easy to infer that the value 4s phenomenally large (1.e.,500,000 to 1,000,000 md-ft). Produced fluld enters the wellbore at the bottom of the well,1,946-1,949 feet, at a temperature of 379°F,which 1s less than the statlc temperature in the wellboreatthatlevel(395°F).This Indicates that colder water 1s enterlng the well from someotherareaofthereservoir,probablyshallower,along an unknown Fracture path.After shut-In,the wellbore re-equilibrates to its statle conditlon.Thus,the fluld density within much of the uellbore cotumn lightens over a perlod of time as it returns to a higher static temperature. Because there '4s essentlally only oneInflowpolnt,however.and pressure bulldup was measured opposite this point,the re-equlllbratlon of the wellbore fluld density should have no effect on the accuracy of the measured reservolr pres- sure.Therefore,the lack of full pressurerecovery(only one psi rather than two)1s not explalned by thermal equllibratlon,butrathermaybeattributabletoa_realdecreaseinaveragereservolrpressure. Well Potentlal The estimation of Individual well power potential for comnerclal operattons requires the fundamental assumption that an extensive reservolr can be represented by the fluld propertles.Initlal pressure, temperature,and productivity Index derlvedfromsilmholedatasuchasthatfrom ST-1.Glven thls as a basis,a wellbore flow model ylelding wellhead pressure vstatemustfirstbevalldatedagalnstthemeasuredslimholeconditions.Once a match 4s achleved.then wellhead pressurevsratecurvesforvariouscommercial-size wellbore conflguratlons may be generatedandrelatedtoappropriatepowercycleswlthsomedegreeofconfidence. The flow stmulator used for thls studywasdevelopedbyIntercomp(1982)and hasbeenusedextensivelybytheIndustryforgeothermalandgeopressuredvellboreflow calculatlons for several years.It is a vertical,multiphase flow simulator which Incorporates treatment for vartable well diameter wlth depth,heat losses,andnoncondensablegases.The *"nominal®comnerclal well conditions arrived at were as follows: Initial Pressure =494 pstg at 1,949 feet Inflow Temperature «=379°F at 1,949 feet Salinity =»4,000 ppm TDSC02Content2200ppm Productivity Index =31.500 1b/hr/psi13-3/8 or 16 Inch Wellbore Using these conditlons, stmuiator- generated curves for wellhead pressure vs flow rate were constructed for the two different "commercial?wellbore sizes (Flgure 7).At a reasonably optimum wellhead pressure of 60 psla (for powergenerationfromthlsresource),a flow rate of 1,250,000 to 2,000.000 lb/hr Ns predicted,depending on welibore size. OURE:7 MAKUSHINCOMMERCIALSIZEWELL PREDICTED PLOW RATE vs.WELLHEAD PRESSURE 'KIReserve Estimation Using a Material Balance Calculatton Material balance calculations for largely Incompresstble systems,such as theoneattheMakushingeothermalreservolr. have been developed and used by a number of Investigators in the petroleum Ilterature. The initiating step is an expression providing the isothermal compressibility. ce-l av (1):V a T 230- Assuming that the total compresslbtllty ofthesystem1sconstant,Equation1 may beIntegrated: V2 =ecAp (2) yy and because the recovery in terns of reservolr volumes 1s deflned as: r=¥2-¥)(3) vy then a comblinatlon of Equatlons 2 and 3 results tn: V2-¥)2 echp | vy The cumulative productlon in terms of reservolr volumes 18,of course,V9-Vyand,because the fluld 1s considered Incompressible,the ratlo Ya-¥y (4)y may be taken as: Wp which 1s the ratio of the cumulative mass produced to the Inlitlal mass-In-place. Hence,Equatlon 4 becomes: Wp =e(CAp)1 (5) W Of the varlables in Equatlon 5,Wp is the one known with certainty.In this case Wy 1s equal to: Wp =33.000 x 15 x 24 +63,000 x 19x24=4.06 x 10/Tbs reflecting the two flow perlods. The varlables contalned in the exponentlal expression consist of the total compresslbillty of the system and the average reservotr pressure drop observed during the flow perlod.In this system, the total compresslblllty 4s the sum of the Individual rock and fluld compressiblilitles. Ct ©cy +Cf (6) Yater gomprassibility {s normally taken as3x10-6 psi-!,while the compressi- bility of the rock could reasonably rangebetween2x10-6 psi-!and 6 x 10-6 psi-1, depending on the Ilthology and the elasti-city of the geologic features.For most reservolrs the value of the compressibility{s taken as equal to 6.x 10-6 psi-1. This value will be used here with the -231- knowledge that 1t could be somewhat higherorlower. The total observed bottomhole pressure drop at ST-1 during the 34 days of the flow test was less than two psl.The subsequent pressure bulldup test resulted in less than one ps!pressure galn.Both tests Indicate an extremely large permeabllity-thickness product which 4s consistent ulth the small pressure dtfferences observed,The total average reservolr pressure drap 4s assumed to be roughly one psl. Using Equatlon 5,the Inlitlal-fluld-In-place may then be calculated: 4.06 x 107 e(6 x 10-8 x1)_4Y ylelding W =68 x 1012 Ibs.Given the uncertaintles Inherent in_this calculatlon.the value of "W*®can be considered order of maghitude only. Nonetheless.assuming a single full-size production well drilled on thesiteofST-1 ylelding 1,$00,000 1b/hr (depending on the power cycle used 1t could generate 7-12 MWe),the longevityofthlsreservolrIsextremelylargerelativetotheneedsofUnalaska Island (currently only about 13 Mwpeak).e calculated inttial-mass-in- place could deliver thls flow rate for over 500 years. CONCLUSIONS Results from the stlm hohe ST-1 flow test in 1984 confirmed the baésic Hakushin model of a shallow steam zone overlying aIlquid-domInated reservolr In fractured dlorite.A flowing temperature at1,949 feet wes found to be 379°F.This fluld appears to be entering the wellbore along a fracture which brings in colderwaterthanwouldbeexpectedbythe395°F statlc temperature of the fracture zone. The flow testing of the well in 1984 proved that the reservolr '4s potentially highly productive,even with only three feet of fracture Interval open to the wellbore. Sustalned flow through a three-inch dia- meter wellbore of 63,000 %b/hr was achleved with less than two psl of pressure drawdownfromtheInltlalpressureof494psi.Thissuggestsaverylarge permeability-thickness value for the reservoir.The well productivity Index obtalned during thls test was approximately30,000 Ib/hr/psi.Wellbore flow modelin Indicates that commerical-size wells shoul be capable of one to two million 10/hr rates.A materlal balance calculation Indicates a theoretical electricity reserve sufflclent for the needs of the Island for several hundred years at current consump- tlon rates.In general,the data obtalned during the 1984 flow test la consistent ulth the results obtained during the short-term flow test of 1983.and confirms the existence of a substantlal resource. REFERENCES 1.Isselhardt,C.F,et 48)(1983a), 'Temperature Gradient Hole Results fromMakushinGeothermalArea.Unalaska Island,Alaska,'Geothermal Resources Councll Transactlons,Vol.7,October 1983,pqs.95-98. 2.Isselhardt,C.F,et al (1983b) 'Geothermal Resource Model for the Makushin Geothermal Area,Unalaska Island,Alaska,'Geothermal Resources Council Transactlons,Vol.7,October 1983,pgs.99-102. 3.Campbell.0.A,and Economides,M J. (1983),"A Summary of Geothermal Exploratlon and Data from StratlgraphleTestWellNo1,Makushtn Volcano, Unalaska Island,"Proceedings of the Ninth Workshop on Geothermal ReservolrEngineering,Stanford University, December 1983.pgs 167-174. 4.James,Russell (1980),A Choke-Meter for Geothermal Wells Which Heasures Both Enthalpy and Flow,)GeothermalEnergy,May 1980,pgs.27-30. 5."Vertical Steam-Water Flow in Wells wlth Heat Transfer,'Sclentlifle Software-Intercomp,February 1982. ACKNOALEDGEMENTS The authors wish to thank the Alaska Power Authority for thelr support and numerousmemebersofRepublic's staff for thelr input to this report. -232- CITY OF UNALASKA % P.O.BOX 610 ' UNALASKA,ALASKA 99685-0610 .bah) (907)581-1251 FAX (907)581-1417 -)° UNALASKA,ALASKA June 25,2008 Jack Wood,Member Manager KSLC 21859 Angeli Place Grass Valley,CA 95949 RE:Makushin Geothermal Project Dear Jack: We are in receipt of Ed Fisch's e-mail of June 20 providing additional information regarding KSLC's desired rental payments on its Makushin property.We are pleased that KSLC finally recognizes that the City is acting in the dual capacity of developer and local utility.However during our teleconference on June 17,we discussed the need for a Memorandum of Understanding to be put into place prior to the City initiating drilling this summer.Me.Fisch's June 20 e-mail does not provide that Memorandum. As you may recall,KSLC met with City staff and its representative over the past several months,and a draft Fluid Sales Agreement was established with numerous concepts agreed to.Mr.Franklin Smith then believed a lease arrangement may work better and promised to provide an agreement in a very short time.After two calls by the City to KSLC representatives,a draft was finally provided to us 3 4%weeks later and included reference errors,undefined terms,and ignored several important concepts agreed to in the original draft developed by the City.Further,as evidenced by our teleconference on June 17,pricing language was so unclear that a great deal of discussion transpired before it was made known KSLC desired to base the royalty payments on retail rates and not a proxy wholesale rate. The June 20 e-mail is also confusing since the draft agreement prepared by KSLC includes various blanks for:payments in Section 1A,an initial "bonus”payment in Section 2(g)and two rental fees (one for the entire property and one for the utilized property)for years 2 -7 in Section 2(g).Yet,your e-mail simply offers acreage payments for Section 2(g)payments.Are these for the entire property or utilized property?What about the Section 1A payments? PROJECT HISTORY The technical,economic,and financial feasibilities of a geothermal resource at Mt.Makushin near Unalaska have been investigated since at least the early 1980's (the "Makushin Project”or the "Project”).In 1982 and 1983,a drilling program was initiated by the State in the area which culminated with the establishment of what is now referred to as the ST-]Test Well.Extended flow testing of the test well demonstrated that it was reasonable to believe that a full-size production well at the site could support commercial electric power production. Makushin Geothermal Project Letter to Jack Wood of KSLC Page |of 5 Based on this information,the Alaska Energy Authority (then the Alaska Power Authority) commissioned several studies investigating the cost of such a facility.Construction and operating costs were estimated for a 7-megawatt facility. It is important to remember that the Makushin Project,if constructed,will require a very sizable investment in infrastructure not normal to such resources elsewhere in the United States.A dock must be built that can withstand wave and surf action from winds of 150 mph or more.A road of up to 8 miles must be constructed from the dock to the resource and may include a series of switchbacks that traverse an 800-foot elevation change.The transmission line will include a three-mile submarine crossing with spare conductors. Given these large capital costs,the financial feasibility assessments conducted in 1983 and 1984 revealed that without large amounts of financial support by the State,the rate shock to the ratepayers would be more than could reasonably be absorbed.The State was unwilling to provide that support,and the Project was shelved. Over the ensuing two decades,the Makushin Project has been investigated by private developers no less than five times.The result was the same each time -the Project was not developed.The detailed reasons and subtleties for these failures vary and cannot be fully addressed in this letter.Suffice it to say,the Project failed to gain the full support from all parties required for successful completion. Since that time,the City has developed a working relationship with the processors on the island with regard to the Project.Although specific arrangements have not been worked out,the processors are willing to work out power sales arrangements with the City if the Project goes forward.The processor loads would represent at least half of the Project output,and the importance of this working relationship should not be overlooked.In the past processors have been reluctant to enter into long term power sales agreements with the City because of the volatility of the commercial fishing industry. RISK The Makushin Project has a number of risks that are not found with other geothermal resources.As further described below,the relative amount of these risks may shift once the results of the temperature gradient well drilling in the lower valley are known.Consequently,it has been the City's goal to approach the State of Alaska after the drilling is completed.At that time,a cohesive package with a general Project configuration and development plan can be presented and discussed in a meaningful manner. |.Size in Relation to the System.Perhaps the most important risk regards the relative amount of Project power as compared to total power requirements.The Project will not simply be a small part of a diversified resource mix.Rather,it must be the primary source of power for resource economics to work.Given that it could provide 75 percent or more of the total requirements,there is little room for error in setting technical,operating,and costing structures.Failure in any of these could result in the financial demise of the City. 2.Permitting.It is estimated that permitting will take between three and four years and cost well over a million dollars.The Endanger Species Act will impact the EIS process in regards to Steliar's Eiders and Aleutian Otters.There are a host of permits that must be obtained in this process and the challenge as our island is part of the Alaska Maritime Wildlife Refuge. There are cultural sites,WWII sites;SHPO must be consulted as well as the National Park Service. Makushin Geothermal Project Letter to Jack Wood of KSLC Page 2 of 5 10. .Alternative Cost of Power -Processors.Currently,two processors are using fish oil as a fuel for power generation and heating purposes,and all three use recovered heat for heating and processing purposes.These factors must be considered when evaluating a rate that Project participants are willing to pay for power. Alternative Cost of Power -City.We all know the cost of generation from diesel is high today.We don't know what it will be next year.Not only must the cost of diesel be considered,but efficiency improvements must also be considered.The City expects to achieve at least 18 kWh/gallon with its new Wartsila units,and the addition of UTC heat recovery systems could increase the efficiency to 19 kWh/gallon.Furthermore,the City is actively investigating the use of fish oil as a generating fuel.Based on a fuel price of $3.50/gallon,the result of the increased fuel efficiency and using just 25 percent fish oil for fuel would result in an equivalent fuel cost of $1.93/gallon,Inclusion of wind generation can reduce this to an even lower equivalent cost. Technical and Operating.\f the drilling program in the Makushin Valley does not yield promising results,then a resource located on the upper bench is quite problematic.A pipeline to transport fluid down the hill to a power plant located in the lower valley or a transmission line bringing electric power from a resource located on the upper bench will be subject to the numerous avalanches that occur throughout the winter.Furthermore,a steep road with several switchbacks must be maintained throughout the winter to provide access to either wells or the generating facilities. Resource.Even though the ST-1 well provided promising results,the actual production well must be drilled.It is reasonable to expect that a well drilled adjacent to the test well will yield commercial quantities of geothermal fluid,but nothing is known with certainty until!the actual well is drilled,If the facility and wells are located in the lower valley,there remains a great deal of risk at this time. .Loads.Unlike resources elsewhere that provide power into an interconnected grid,theMakushinProjectwouldprovidepowertoanisolatedsystemdependentonasingleindustry.Long-term stability in loads is not inherent to such systems. Load Patterns.Much of the processing activities coincide with the two Pollock seasons. This results in two very steep peaks in power requirements;and while recent shifts in the seasons may not have reduced power requirements for the entire year as a whole,power requirements have been condensed into shorter time periods.The Makushin Project is a base load resource and needs large amounts of near-continuous power requirements for the best resource economics. Financing.Although detailed construction and operating costs are well out of date,the City believes the minimum capital investment to be in the range of $150 million.It will take a minimum of three years to develop the information and agreements required just to start the financing process. Financial Support.As we all know,development of the Makushin Project will require support by the State of Alaska.What that support is and how it is structured is yet to be determined.However simply because the State has a large budget surplus at this time and is actively pursuing alternative energy does not mean that the required support will be fully provided.The governor and legislature must address energy needs throughout the state,and the City of Unalaska is only a small portion of the total needs. .Development Time.The many risks outlined above are not insurmountable,and the City has worked in good faith over the past two years in trying to gain some focus on these risks.The Makushin Geothermal Project Letter to Jack Wood of KSLC Page 3 of 5 drilling work,that should have been accomplished this summer would have been the last piece of work required before developing a detailed development plan.However,the risks described above are quite real,and we view the development of the Project could take up to ten years,especially with the permitting process required. ROYALTY RATE Over the past several months,the City and KSLC have met in an attempt to establish a fluid sales agreement prior to the City initiating drilling test wells in the lower valley this summer.As part of this, the City has proposed a royalty payment that recognizes the operating structure of the facility (ie.,the City would act as both developer and utility)but at the same time mirrors something that a developer might expect elsewhere.KSLC then proposed a royalty rate of 6.5 percent of unsubsidized retail revenues.Mr.Franklin Smith of KSLC stated in a memo that: "...the percentage of Royalty Payments is far too low,and should be in the range of 3.5 to 5%per Kw hour [sic](staged),as with most other contemporary geothermal power projects.” While we do not have access to confidential agreements that may be in place between private parties, our review of public documents reveal that royalty rates of 1.75 -3.5 percent of gross revenues or 10 percent of net revenues might be expected.In your e-mail of June 20,you alluded to Mr.Smith forwarding the City "several”filings setting out royalty arrangements that greatly exceed the 6.5 percent proposed by KSLC. Mr.Smith provided two. We note that one was dated 1983,a year that cannot be considered "contemporary”as described in Mr. Smith's memo. The second example was for a company that constructed two facilities in 1986 and 1991.This is still not "contemporary,”and we also note that the company that constructed the facilities and paid the high royalty payments had to liquidate its assets in 1996 since it could not meet cash flow requirements. Your June 20 e-mail!also states that a US Geothermal contract provided by a City consultant could not be used as an example since you did not know which of the royalty provisions set forth in the contract applies.The purpose of sending you the contract was to show that "net revenues”used in royalty contracts meant gross revenues less expenses,not net of parasitic loads as you maintained during our June 17 teleconference.However,I do not understand you questioning its applicability simply because it has more than one royalty provision.The agreement drafted by KSLC for the Makushin Project had three separate royalty rates (6.5 percent for electric power production;10 percent for production of hydrogen,methanol,ammonia or "other fuel products;”and 15 percent for other uses). Whether the royalty rate norm elsewhere is 2 percent or 5 percent is immaterial.The royalty rate and fees that the City is willing to pay must result in a resource that provides benefits to its ratepayers.The rate must also be commensurate with the risks of the Project including the potential of greater generating efficiencies and use of alternative fuels as described earlier in this letter.A developer will evaluate the royalty structure and lease fees as compared to its projected revenues and other costs;and if the rate is too high,the developer will walk away from the project.The City of Unalaska is no different. Makushin Geothermal Project Letter to Jack Wood of KSLC Page 4 of S MEMORANDUM OF UNDERSTANDING As stated at the beginning of this letter,the City expected a Memorandum of Understanding from KSLC that sets forth the general terms and conditions to be included in a full agreement.The MOU was required since there simply is insufficient time to finalize the agreement prior to the time drilling was to be initiated.As we have told you,the City will not drill on KSLC land absent a MOU that sets pricing mechanisms and other structures. The lack of inclusion of a MOU in your e-mail leaves us unsure of your current intentions.The City Council met last evening,and we discussed the evolution of our negotiations and lack of MOU.The City Council and staff are extremely disappointed at this recent set back to the Project given the amount of work it took to obtain the funding from the State of Alaska,produce and administer an RFP for a drilling contractor,and expense of the negotiations thus far.The work accomplished by staff was done so in good faith and with an expectation that we would have an agreement prior to drilling. The City will not drill on KSLC land this summer. The City Council has directed staff to meet with the Alaska Energy Authority in August.We will contact you after that meeting concerning future negotiations and your willingness to develop the Project with the City. Sincerely, Shirley Mafquardt Mayor of Unalaska ce:City Council City Manager KSLC Members Steve Haagenson,Alaska Energy Authority Makushin Geothermal Project Letter to Jack Wood of KSLC Page 5 of § Makushin Geothermal Project Finance Meeting Notes 7-8-08 Participants: Jack Peterson-BLM Bob Swenson-DNR (telecon) Chris Nye-DNR (telecon) Jack Wood-KSLC Bob LeResche-KSLC Frank Smith-KSLC Ed Fisch-KSLC Mike Harper-AEA Jim Hemsath-AIDEA David Lockard-AEA The discussion began with a short history of the project,including a description of the land ownership and transfers.KSLC bought the property,including subsurface rights, from Battle Mountain Gold in 1995. The State estimated the cost of developing Makushin in the 1990s at $110m. The City of Unalaska has received $1.5m of State funds to match $1.5m of City funds for exploratory drilling at Makushin.In the spring of 2008 KSLC signed an agreement with the City to allow access to KSLC property for drilling purposes at no cost.There has been discussion of the City keeping this data confidential while it negotiates fluid prices with KSLC.David said that,since there is public funding involved,if the City decides to do this it should verify that it is allowable under State grant conditions.The City recently declared it's intent not to drill on KSLC land this season. We discussed potential uses for the geothermal energy beyond meeting the existing electric loads in Unalaska.These include production of alternative fuels for transportation,fishing vessels and cargo vessels. Jim Hemsath reviewed AIDEA's mission statement: The mission of the Alaska Industrial Development and Export Authority (AIDEA) is to provide various means of financing to promote economic growth and diversification in Alaska. AIDEA was created by the Alaska Legislature to "promote,develop and advance the general prosperity and economic welfare of the people of Alaska,to relieve problems of unemployment,and to create additional employment" Jim also said: e There must be a benefit to the community from AIDEA projects e AIDEA's involvement would require approval by the City e A business plan is required e AIDEA doesn't fund studies (he suggested that HB152,the Renewable Energy Fund,is a possible source of funding for a study) Jim said the project could be funded with bonds and either AIDEA or the City could own the project.He said that one type of bonds,conduit bonds,would have the backing of the State but the State would not be a participant in the project.Projects funded with conduit bonds must be at least $10m. We discussed the production tax credits,which currently expire 12/08.There was cautious optimism expressed that they may be extended.In order to take advantage of PTCs,the project ownership would have to be properly structured. Possible stakeholders in the project include: e The City of Unalaska e KSLC e Fish processors e The Aleut Corporation e The Ounalashka Corporation e TDX Corporation e Qawalangin Tribe e AIDEA e AEA KSLC MAKUSHIN GEOTHERMAL PROJECT Makushin Geothermal Project Unalaska Island,Alaska Kiiguusi Suuluta Land Company,LLC December 2010 mfictaneial a eye ebb "ede gi hare ey VEE RECT rere pe ry i.Sim ind ge:Dac gspiegarConfidentialNotforPublicDistribution©Copyright KSLC,2020.All Rights Reserves 1 TABLE OF CONTENTS Cover:KSLC Makushin Geothermal Project Table of Contents Proposer:Kiiguusi Suuluta Land Co.,LLC Project Type:Build a 33.2 MW (Avg Sales 30MW)Geothermal-Electric Power Plant Project DescriptionoOND=[TUBLs)4 Creating Jobs and Revenues for Alaska 4 Current Unalaska Power Demand Factors for Growth in Unalaska Power Demand 1.Mining Activities 5 2.Oil and Gas off shore drilling and shipping 3.Seafood Processors 4,Trans-Shipping and the Northeast Passage §.City of Unalaska 6.Tourism 6 7.Transportable Fuels 6 Project Financial and Economic Summary 6 1.CapEx-Drilling and Plant Construction 2.Sales 7 3.Operating Projections -Total and Per kWh 4.Investor Returns 9 Addendum A -James Koenig Geothermal Report 13 Addendum B -KSLC Makushin Gold Review including Battle Mountain and Other Gold Studies 27 Addendum C -Makushin Ownership &Development History 28 Addendum D -Index of Selected Documents Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec Proposer:Kiiguusi Suuluta Land Co.,LLC,an Alaska Limited Liability Company Project Type:Build a 33.2 MW (Avg Sales 30MW)Geothermal-Electric Power Plant Project Description: Kiiguusi Suuluta Land Co.,LLC ("KSLC”)proposes AIDEA acquires 65%of KSLC's interest in the Makushin land and proven geothermal resource.The Makushin Project,a brownfield geothermal resource,has been determined to be sufficient to provide an estimated 30-50 MW of electricity (see Report of James Koenig attached hereto as Addendum A).It is located within the approximate 7200 acres of land owned by KSLC on the flank of the Makushin Volcano. The financial projections (see Makushin Geothermal-Proforma Model (separate file)and the summary schedules included herein)are based on AIDEA ultimately owning 65%of the Makushin Geothermal Project and a local group (presumably either OC and/or TAC)owning 35%.The purpose of the acquisition is to develop a 33.2 MW (average sales of 30 MW)geothermal electric power plant. Building such a power plant will provide the infrastructure backbone to enable mining,ore processing, harbor services expansion or other industrial uses,with excess electricity,if any,supplied to the city and existing fish processors.Unalaska's future growth is limited by the cost of imported diesel and air quality issues. Based on the attached projections AIDEA would achieve an estimated IRR of approximately 25%on its investment of $19.5 million ($15.0 million to AIDEA to acquire 65%of the KSLC geothermal rights, $2.5 million to fund MT and initial engineering studies,and $2.0 million for project supervision and final engineering studies).The remaining 35%of KSLC's geothermal rights would be sold to a local investor at terms to be determined.The model assumes all dividends that would be paid to the local investor would be used to buy the remaining rights from KSLC until $20 million has been paid.In addition to the $19.5 million invested by AIDEA,there will be about $230 million of debt financing required to bring total financing to approximately $250 million. KSLC estimates the total cost of the project,including rights acquisition,to be about $250 million. Source of Funds (thru Yr5 $mm Use of Funds (thru Yr 5)$mm AIDEA Investment 19.5 Project Prep and Oversight 3.0 Debt 229.8 Sub-Total Steam Production 73.7 Total Funding 249.3 Sub-Total Power Production 115.0 Sub-Total Non-Financing CapEx 191.7 Operating G(L)(0.1)apitaliz n ion 24.0 Energy Depletion 0.4 CapEx with Capitalized Carry Cost 215.7 CapEx Depreciation 5.4 Rights Acquisition from KSLC 15.0 Cash from Operations 5.7 Cash Reserve 7.4 Accounts Receivable 4.4 Spare Parts 10.0 Accounts Payable --(0.3) Sources of Funds 255.0 Total Use of Funds 252. Creating Jobs and Revenues for Alaska: Confidential Not for Public Distribution®Copyright KSLC,2010.All Rights Reservec 3 Current Unalaska Power Demand:KSLC did an informal survey of current electric demand for Unalaska.It shows base load for Unalaska of about 12.5 MW.The model assumes supplying only 7 MW of base load in its sales mix to the city of Unalaska. Unalaska Power Usage Estimates Prepared by KSLC KSLC's KSLC's Current Avgas Avgas Estof Estof Permitted *Peak *Avg '%of %of Avg Base Capacity Sales Sales Permitted Peak*Load Load ** Mw Mw MW MW MW mw Mw UniSea has 16.9 MW of equip in place,but is limited to 12.4MW due to air quality. UniSeas,Inc.seafood 12.43 7.50 §.45 44%73%5.45 4.43 Base Load could be high. Westward Seafoods,Inc *seafood 666 420 2.75 "N%65%2.75 2.03 Base Load could be high. Alyeska Seafoods,Inc seafood 5.90 4.00 1.26 21%32%1.26 -Sales information is not confirmed kicle Seafroods,inc.(Trident)seafood 195 1.23 0.81 41%65%0.39 0.18 American President Lines,Ltd (APL)Freight 6.21 3.92 2.57 41%65%1.23 0.56 CSX Lines,LLC (CSX Freight 1.30 082 0.54 41%65%0.26 0.12 Offshore Systems Inc,Boat Svcs __109 _0.69 _045 41%5%0.22 |_0.10industrySub-Total 35.55 22.36 13.82 39%62%11.56 7.40 Total 43.15 2886 19.32 45%67%17.06 12.40 *Based on telephone Interviews May 2010 "Avg as %of Peak MW is KSLC Judgment. *""Base Load estimates are calculated roughly as being 2/3's of the time and Peak Load being 1/3 of the time.This is KSLC judgment. Factors for Growth in Unalaska Power Demand:From an economic and air quality prospective, building the Makushin project is mandatory for additional industria!development of Unalaska,if not the entire region.With the advent of stable,lower cost geothermal electricity it is believed the following can be achieved: 1.Mining Activities: A.Gold Mining on Unataska:Unalaska Island has been the subject of extensive gold exploration (See "Summary Report on Gold Exploration and Potential of Unalaska Island, Aleutian Islands,Alaska,”attached hereto as Addendum B).Battle Mountain Gold Company spent 19 years exploring the Aleutian Islands and in 1989 and 1990 published two large survey reports on the island confirming an approximate 100 square mile "gold band”across the northern part of Unalaska.The gold band included two large veins of potentially very high yield gold laden quartz,the Mak and Mak North veins.Development of just this site could require up to 15 MW.An additional 10-15 MW would be required for related ore processing equipment and facilities. B.Ore Processing for Aleutian Islands:The Battle Mountain reports indicated the likelihood of additional mineral resources throughout the Aleutian chain.Because of the port facilities at Dutch Harbor and the geothermal resource at Makushin,raw ore from remote locations can be barged to Unalaska and processed using the same or expanded facilities as would be developed for mining operations on Unalaska.Such activities could increase demand for electricity by an additional 10-15 MW. According to the Southwest Alaska Comprehensive Economic Development Strategy 2009- 2074,potential sources of ore for ore concentrate processing include;'in the Aleutians East Borough,the Apollo-Sitka and Shumagin prospects offer known deposits of 150,000 ounces of gold and 700,000 ounces of silver.The Centennial deposit has probable gold reserves of 4.8 million tons with a possible additional two million tons.Other locations of hard rock prospects in the Aleutians East Borough are Canoe Bay,Aquila,and San Diego Bay with gold and other minerals present.One hardrock prospect is known in the Aleutians West Census Area.The Sendanka or Biorka prospect contains copper,lead,zinc,gold and silver.55 It is Confuential Not tur Public Distributing@ Copyright RSEC,2010.All Rights Reserves 4 located on Sendanka Island east of Unalaska.”Southwest Alaska Comprehensive Economic Development Strategy 2009-2014,pp_85. 2.Oil and Gas off shore drilling and shipping:Shell is planning to build a substantial facility at Unalaska to support their off shore drilling activity in the Beaufort Sea.Shell could also locate storage facilities and other processing facilities on Unalaska.In addition there is no Emergency Towing System (ETS)to respond to large commercial vessels in distress outside of the harbor and there is no oil spill response organization (OSRO)yet in the area.While the Golden Seas was successfully rescued recently it was almost 7 years to the day after the Selendang Ayu spill which remains the largest single spill off Dutch Harbor.There have been 7 major maritime accidents over the last 22 years in the waters off the Aleutian Islands according to SPECIAL REPORT 293 Risk of Vessel Accidents and Spills in the Aleutian Islands DESIGNING A COMPREHENSIVE RISK ASSESSMENT. 3.Seafood Processors:Provided that the cost of electricity is cheap enough,the seafood processers have previously indicated that they would support the project.The Trident project at Akutan shows that a potential partnership between a seafood processer and an IPP is possible in the Aleutian Istands.Future seafood processing can be developed on the Makushin side of the bay much more cost effectively using heat from Makushin to run absorption cooling systems. 4.Trans-Shipping and the Northeast Passage:As the Northeast passage opens up because of climate change,Dutch Harbor can grow as a supply and logistics center with dry docks and other support services.In 2008,1600 container ships and 40 tankers transited through the Aleutian Islands traveling the Great Circle route,according MTB estimates.Unalaska can become an important logistics and supply port as use of these shipping routes grow. 5.City of Unalaska:The model assumes there could be enough remaining capacity to supply the City with 7-9 MW of base load electricity to supplant its potentially more costly diesel generation.We believe the city could need a part of this base load to support increased population that additional industry would require.In addition to supplying residents with lower cost electricity,thermal energy could be used to provide heat and hot water to the City as well as to major green house operations. Lower heating and electricity costs would lower the cost of living in Dutch Harbor,currently 158% higher than Anchorage,AK according to US census figures. 6.Tourism:According to the Arctic Council Arctic Marine Shipping Assessment 2009 Report,as the North East passage opens up,cruise ship tourism in the Aleutians will grow and more infrastructure and supply chain support will be required at Dutch Harbor.The majority of cruise ships observed recently in Arctic waters are not purpose-built for Arctic operations as many are built for voyaging in open water in lower latitudes and warmer climates.In KSLC's opinion additional supply chain support at Unalaska will be important for the growth of this market. 7.Transportable Fuels:Longer term opportunities might be available for production of transportable fuels like hydrogen and ammonia.These systems would use at least 10 MW.Such fuels could be used locally to support maritime activities or exported for use,for example,in fertilizers. A mixture of 95%hydrogen and 5%diesel fuel has been used successfully as a substitute fuel for diesel engines in Canadian mining activities. Project Financial and Economic Summary 1.CapEx-Drilling and Plant Construction:After AIDEA acquires control of the Makushin project and finalizes indicative PPAs with harbor industry participants,mining and possibly the town of Unalaska,it would fund the MT studies and test well drilling to map out the production wells.The Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 5 resource is well defined with over 170 reports on the project geology and engineering including a description of the geology in this report by James Koenig,the founder of GeothermEx.The plan expects approximately 6 production wells and 3 injections wells will be needed to produce 33.3 MW of delivered electric power (however,studies suggest it may be possible to provide the power with only 5 production wells).The plant is budgeted as binary,but depending on the well depths and other factors the heat seems hot enough to support flash technology which could reduce the capital cost of equipment.The budget provides undersea power cable to Unalaska. The total additional funding,beyond the initial!$19.5 million investment,would be construction financing replaced by a long term loan of about $230 million.That would cover capital expenditures for Prep and Oversite,Steam Production,Power Production,working capital,and accrued construction carrying costs as follows: Capital Expenses ($mm)Total YrO Yr1 Yr2 Yr3 Yr4 Yr5 Project Prep and Oversight 3.0 0.6 0.6 0.6 0.6 0.6 Sub-Total Steam Production 73.7 2.5 35.6 35.6 -Total Power Pr i 115.0 38.3 38.3 38.3 Sub-Total Non-Financing CapEx 191.7 3.1 0.6 74.5 74.5 38.9 italiz n ion 20%24.0 2.9 8.3 12.8 CapEx with Capitalized Carry Cost 215.7 3.1 06 77.4 82.8 51.8 Accounts Receivable 4.4 4.4 Spare Parts 10.0 -----10.0 Accounts Payable -_-(0.3)--(0.3) Total Uses (excludes Rights,and Cash Rest)229.8 3.1 0.6 77.4 82.8 65.9 Cumulative Uses (excludes R and CR)3.1 '3.7 81.1 163.9 229.8 Cash Resene 7.4.1.4 0.8 4.5 4.5 7.4 Rights Acquisition fr __15.0 15.0 Total Investment 252.2 2.Sales:The model assumes the Plant would have enough power to contribute 19.8 MW of power to industrial (docking,dry docking &/or other industrial uses),gold/silver Unalaska mining,and Aleutian Islands ore processing,use 3 MW for the base camp and harbor,provide approximately 7-9 MW of base load power to Unalaska.Note that 43 MW of potential demand will not be able to be met. Max Limited Limited Demand (MW)Peak Peak Avg Sales Industry:Docking,Dry Dock,&Oth Ind 15.0 Industry potential could Industry:Mining 30.0 exceed the geo resource Industry:Ore Processing 15.0 available.Industrial demand Industry:Add'l Commercial Uses 10.0 would generally provide 12 mos Industry:Sub-Total!70.0 level load requirements. Potential Excess Industry Demand --_{43.0) Industry:Sub-Total-Usable Demand 27.0 19.8 19.8 Support:Camp &Infrastructure 3.0 3.0 3.0 Incls Power for harbor facilities ren laska Deman "15.0 9.0 7.2 Provide for some seasonality Total MW Sales 30.0 31.8 30.0 Total kWh per Year 262,800 3.Operating Projections -Total and Per kWh:The economics assume selling power at $0.20 per kWh would generate $52.6 million per year of gross revenues and about $17.8 million of Pre- Rights Pre-Tax Income.On a per kWh basis this would be income of $.068 per kWh. Comfdential Not for Public Distrib 2)Copyright KSLC,2010.ANB 5 Reserves 6 Income Summary Yr 6*$mm_-$/kWh Revenues 52.6 $0.200 Op and Maintenance Exps 7.9 0.030 Pr |Expen 0.2 0.001 EBITDA 44.0.169 Energy Depletion Costs 0.8 0.003 Depreciation (Yrs)10.8 0.041 EBIT 33.7 0.128 Inter xpen 15.9 0.060 Pre-Rights Income 17.8 0.068 *Year 6 is the assumed first full year of operations %Revs Comments 100.0%Substantial savings vs Diesel 15.0%Assume $.016 OpEx,$.015 Maintenance 0.4%Misc 84.6% 1.4%20 year amort of $19.5 mm rights acquisition 20.5%20 year depr of CapEx 64.1% 30.2%7%ona 20 yr loan of $229.8 mm 33.9%Dividends would be paid based on Pre-Rights Pre-Tax Income.Residual Rights Payments of $20.0 mm to be paid in 3 yrs of operations. 4.Investor Returns:Starting with Pre-Rights Pre-Tax Income,adding back non-cash Depletion and Depreciation,and then subtracting annual costs of repaying the loan principal,allows for dividends (including residual payments)of almost $23.5 million a year**.The 65%of the dividends (based on the ownership %of AIDEA),which start in year 6,provides 25.7%IRR**on the $19.5 million of initial AIDEA investment. The Local Partners (presumably either the OC and/or TAC)would contribute all rights of way and forego any leasing fees for use of land for the plant etc.,plus pay KSLC $20 million out of its share of first earned dividends. Financing Assumed $mm Inwestor Equity 19.5 Long Term Loan 229.8 20 yrs(rota Financing 249.3 | Timing Assumed Prepare to Drill 2.0 Yrs Drill and Build 2.5 Yrs [Yrs until Power is tumed on 4.5 Yrs] Investor Cash Flows ($mm)Yra Yrs 1-5 Initial Funding (19.5) Dividends 0.0ResidualValue(5%last Divs) Net Cash Flow to Investor (19.5)0.0 NPV at 10%§5.2 DCF-IRR 25.7% Local Partners Cash Flows ($mm) Dividends 2 Residual Value (5Xs last Divs) Net Cash Flow to Local Partner -0.0 INPV at 10%30.3] KSLC Payments received Initial Funding 15.0 idual ei : Net Cash Flow to KSLC 15.0 - INPV at 10%35.0] Comment Paid by Investor on purchase of rights from KSLC 7.0%Replaces construction financing at Year 4.5 91 _82 _27 9.1 8.2 2.--- **Note all projections are based on a number of assumptions as spelled out in the model. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec AddendumA -James Koenig Geothermal Report Evaluation of the Geothermal Resources of the Makushin Volcano and Vicinity Unalaska Island,Alaska Summary: The Makushin prospect area (see Location for description)has been explored geologically,as well as by geochemical and geophysical methods,and by the drilling of 5 slim holes to depths of 1,450 to 1,950 feet. Results from exploration,drilling,well testing and wellbore simulation indicate that an area of approximately 3.5 square miles is underlain at 1,000 to 1,500 feet by a geothermal aquifer of at least 300°F,locally reaching 400°F.Based on these data,this is sufficient to support up to 30 MW (gross)of power generation by the binary cycle method. Conditions at greater depth are unknown,although fluid chemistry suggests that temperatures up to 435°F may be present.If such hotter fluids of comparable mass flow rates are found,or if the entire Makushin geothermal resource area is considered,the resource may be capable of sustaining upwards of 50 MW (gross). Prior work by various entities has resulted in the identification of gold-bearing veins on Unalaska Island a few miles from the geothermal prospect area.Shows of gold also were reported in analysis of cores from a hole drilled in the prospect area.It is unknown if either of these represents a commercially exploitable deposit. Location: Makushin Volcano is located on Unalaska Island,in the Aleutian chain of southwestern Alaska.The volcano occupies much of the northern part of the island,centered near the intersection of Townships 72 and 73 South and Ranges 119 and 120 West (T72 -73S,R119 -120W). The property of interest to KSLC forms a quasi-rectangular block in Sections 30 and 31,T72S,R118W; Sections 25-27 and 33-36,T72S,R119W;and Sections 2-3,T73S,R120W.This is referred to herein as the "prospect area”.It is shown on Figure 1,taken from a 1992 report by GeothermEx,Inc.Figures 2 and 3 respectively show the location of Unalaska Island within the Aleutian chain,and the location of Makushin Volcano on Unalaska Island. Regional Description: Unalaska Island and its small neighbor Amaknak Island have an area of about 212 square miles,and a population of approximately 4,300.The population is located almost entirely within the town of Unalaska and its commercial port of Dutch Harbor.Dutch Harbor,the nation's largest fisheries port by volume of seafood processed,is located on Anaknak Island and is connected to Unalaska by a bridge. Climate is wet and comparatively mild,with relatively little difference between January average temperature (30°F)and August (52°F)in Unalaska town.However,there is measurable rainfall on an average of 250 days per year and foggy conditions are almost a daily occurrence.Upslope from the port,weather conditions are more severe,with colder and snowy winters.This reflects conditions to be found at the prospect area. Makushin Volcano reaches nearly 5,700 feet in elevation and is the third highest peak in the Aleutian chain.It has a permanent snow and ice cap covering about 15 square miles.There are high-temperature fumaroles within its crater.Other fumaroles and thermal springs are present within and closely adjacent to a prominent linear depression that trends NE-SW across the island,passing to the east of Makushin Volcano.Several areas of thermal springs and fumaroles are present along this lineament within the prospect area (see Figures 1 and 4). Terrain on the island is rugged,with numerous steep-sided glacially carved valleys that carry steams fed by rain runoff and snow melt.Where not covered by snow,the island has a lush cover of brush and grasses.Makushin Volcano is the highest point on the island. Volcanic History: Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 8 Makushin is a fumarolic stratovoicano of andesitic and basaltic composition -lava flows,pyroclastic ash,cinder cones and subsidiary domes -of Pliocene to Holocene age.One fumarolic cone,Sugarloaf,is within the prospect area of interest.There apparently was a significant time period between the earlier (Plio-Pleistocene) eruptive events and those of late Pleistocene and Holocene time.A caldera formed on the volcano probably about 8,000 years ago.There has been intermittent but repeated eruptive active since formation of the caldera, the most recent ash and steam eruption having occurred in 1995. The volcano is monitored seismically by the Alaska Volcano Observatory.Current alert status is Green. Geothermal Investigation: In addition to volcanic monitoring,the island has been mapped in detail,both topographically and geologically, and a suite of geophysical and geochemical surveys have been run,under sponsorship of the State of Alaska and,to a lesser degree,the U.S.Geological Survey. In 1982,3 temperature-gradient holes (D-1,E-1 and I-1)were drilled (see Figure 1 for location)to depths of approximately 1,450 feet.Temperatures were logged in each,the maximum of about 390°F being reached at the bottom of hole E-1,located in the upper reaches of Makushin Valley.The site is almost 4 miles due east of the summit caldera of Makushin Volcano. The following year,the State of Alaska twinned E-1 with hole ST-1,to 1,945 feet in depth.Temperature increased rapidly to nearly 385°F at around 1,000 feet.Thereafter,temperature was nearly isothermal (convective conditions)to total depth.A maximum temperature of 399°F was measured at around 1,550 feet. Bottomhole temperature was 395°F.At several intervals between 1,100 feet and TD there was significant lost circulation,indicating the presence of thermal aquifers. In 1984,hole A-1 was drilled to about 1,870 feet at a site nearly 2 miles NNE of ST-1.Maximum temperature at hole bottom was about 365°F.An isothermal zone from about 1,000 to 1,400 feet indicates a possible thermal aquifer of almost 300°F.Another potentially permeable zone at about 1,500 feet had a temperature of about 325°F. In the summer of that same year,well ST-1 was flow tested for a total of 35 days at a discharge temperature of approximately 380°F.Fluid samples also were taken for chemical analysis.Sustained flow rates were measured as high as 63,000 pounds per hour through a 3-inch pipe.There was less than 2 psi drawdown from the initial bottomhole pressure of 494 psi after 34 days of testing.Data are summarized in the report by Denig-Chakroff, Reeder and Economides (Transactions of the Geothermal Resources Council,1985)and in other reports by those authors and others during the years 1984-1985). The prospect area also has been prospected intensively for gold.A 2009 report by the Alaska Division of Geological and Geophysical Surveys presented chemical analyses of cores from hole ST-1.Up to 0.66 parts per million (ppm)of gold,along with 0.4 ppm of silver were present in selected core intervals.Significant quantities of copper,lead,zinc and lithium also were present.Analysis of cores from hole E-1,given in a report by mining geologist Roger Bowers to KSLC,showed a remarkable maximum of over 41 ounces per ton of rock (opt)of gold in repeat analysis of one sample.Samples from hole A-1 had 10.35 opt and from ST-1 had just over 3 opt. Prior Exploration for Gold: From the earliest times of Russian occupation,there have been reports of gold-bearing rocks on Unalaska Island.The 1996 report prepared for KSLC by Roger Bowers summarized the results of exploration in the 1980s by Battle Mountain Gold and others.Two gold-bearing veins were identified a few miles from the prospect area,mapped and sampled extensively.Gold content to 8.57 ounces per ton (opt)and to 85.87 opt of silver were reported.Tonnage and average gold and silver content are unknown.However,this finding provides confirmation of the variable concentrations of gold found in cores at holes A-1,E-1 and ST-1.The potential for commercial exploitation remains unknown. Analysis of Geothermal Exploration Data:Economides,Morris and Campbell (10 Workshop on Geothermal Reservoir Engineering,Stanford University, 1985)and GeothermEx,Inc.(1992 report to the Alaska Energy Authority)have analyzed the well test data and have drawn conclusions regarding the potential for power generation from the prospect area. Confidential Not for Public Distribution ©Copyright KSLC,2010.All Rights Reservec 9 A productivity index (Pl)of 30,000 pounds per hour per psi was calculated by Economides ef a/.,which implies a permeability-thickness product of 500,000 to 1,000,000 milliDarcy-feet (mD-ft).They described this as "phenomenally large”.A postulated "large diameter'well at the site of ST-1,they concluded,could supply 7 to 12 MW of electricity for "hundreds of years”. GeothermEx expanded on these findings by using a wellbore simulator to "calculate wellhead characteristics for both a 13-3/8 inch and 16 inch completion”.They concluded that at the "optimum wellhead pressure of 60 psig (73 psia),”flows of between 950,000 and 1,500,000 pounds per hour were attainable,and that two 13-3/8 inch wells would be capable of supplying fluid for a proposed 12 MW power plant then under consideration.One injection well would also be needed for disposal of residual fluid. Neither commented on the maximum sustainable capacity of the Makushin geothermal field,except to infer that fluid was entering the wells from some distance.This might be from a source located closer to Makushin Volcano,or perhaps an upward flow from a deeper reservoir localized along the previously mentioned NE-SW- trending lineament. Chemical analyses of produced fluid showed about 5,000 mg/l of total dissolved solids (TDS),along with less than 0.1%carbon dioxide,nearly 278 mg/I of silica,and concentrations of Na>>K>Ca>>Mg.Geothermometry based on the reported values yielded a quartz solubility temperature of 400°F and an Na-K-Ca equilibrium temperature of 434°F.These are in "good agreement”with observed temperature,and "suggest that higher temperatures are present nearby in the reservoir'.This may be taken to infer support for a deeper,hotter aquifer. Evaluation of the Prospect Area: Holes ST-1,A-1,D-1,and E-1 are located within the prospect area.Hole I-1 is some two miles to the SW.Hole D-1 was not deep enough (1,400 feet)to penetrate a geothermal aquifer encountered in the two deeper holes (ST-1 and A-1).From its location at a higher surface elevation,it is likely that a depth of over 2,000 feet would be required for D-1 to intersect the aquifers feeding A-1,ST-1 and its twin E-1. Hole I-1,about 1,500 feet in depth,apparently encountered a thermal aquifer of about 125°F at less than 300 feet.There is no evidence of lost circulation at greater depth.Therefore,the gradual increase in temperature to about 170°F suggests a regime of conductive heat flow,with a temperature gradient of about 4°F per 100 feet. There is no certainty that a high-temperature aquifer will be found at greater depth,although rock temperature is expected to rise steadily. As noted above,hole A-1 had a bottomhole temperature of about 365°F,with probable aquifers of 300-325°F between 1,100m and 1,500 foot depth.Also as noted,ST-1 flowed at about 380°F.Upslope from these sites, that is going generally westward in the direction of the Makushin Volcano caldera,it is assumed that temperatures are likely to be comparable at depths of perhaps 2,500 or 3,000 feet.This assumption is supported by the observed temperature data,the Holocene eruptive and caldera-forming history of Makushin Volcano,and the silica and alkali geothermometry of 400 to 434°F. Thus it is assumed that temperatures of 300 to 350°F,and perhaps to 400°F,will be found across much of the western end of the prospect area.This area can be described as being within an arc drawn across the prospect area that begins at the southern boundary of Section 2,T73S,R120W,and passes to the east of ST-1 and A-1, while completing its course immediately south of Sugarloaf in the SW corner of Section 27,T72S,R119W (see Figure 4).Sugarloaf ultimately may be found by drilling to be part of this same system. Excluding Sugarloaf,this is an area of about 3.5 square miles.It appears to be bordered on the east by the NE- SW-trending linear feature mentioned earlier.Additional acreage to the north,or even to the east,may have comparably high temperature,but evidence is lacking. There also is no certainty that holes all within that area will encounter aquifers with permeability or Pl comparable to those found in ST-1.However,the likelihood is that at least part of the area will be commercially productive.A useful rule of thumb is to assume that half will be highly productive,whereas the other half will be only marginally productive.Another rule of thumb widely used in the geothermal industry is that systems of high PI and with temperatures over 300°can sustain production of about 15 MW per square mile.This value increases with temperature and Pl This suggests a minimum field capacity of 22-25 MW(gross),with a probable maximum of up to 30 MW(gross) Confidential Not for Public Distribution©Copyright KSLC,2019.All Rights Reservec 10 within the western part of the prospect area.If the entire Makushin geothermal system is considered,this number could increase to 50 MW or more.Further,if aquifers at higher temperature are encountered in deeper drilling in the prospect area,as suggested by geothermometry,the resource could exceed those numbers. However,only further drilling and well tests can confirm these numbers.. Comments on Possible Future Development: Access into the project area will be limited seasonally by snow and other adverse weather conditions. Terrain,as mentioned earlier,is rugged,adding to the question of access.Therefore,in order to reach reservoir beneath the higher-elevation portions of the prospect area,some of the drilling may of necessity be directional. Probably the existing pad sites of ST-1,A-1 and D-1 can be utilized for deeper vertical holes as well as for directional holes.In order to extend any significant distance laterally,some directional holes may have a totaldrilleddepthofover3,000 feet and possibly over 4,000 feet. Given the known and anticipated range of temperatures,it is likely that a binary cycle method of power generation will be utilized.Parasitic load in such systems may easily reach 15%of power production. Therefore,a 22-25 MW sustainable production may yield 19-21 MW net power output,and 30 MW (gross)will sustain up to 25 MW net power output. If future drilling reaches a higher-temperature aquifer -perhaps to 430°F as indicated geochemically -it may be more efficient to use a flash-steam method of power generation.Parasitic losses will also be lower with flash-steam generation from a higher-temperature reservoir. Probably one injection well will be needed for every two production wells.Given the high PI of ST-1,these can be located downslope from the productive area and of relatively shallow depths.A total of 4 to 6 production wells,and 2 or 3 injection wells,would be required to sustain 25 MW(gross)production. There is a minor risk of scaling in the closed piping of a binary system.The possibility of either silica or calcite precipitation should be monitored.If it does occur,there are convenient ways to mitigate the problem.The risk of volcanic eruption presently is considered to be minor.Despite this,both volcanic risk and the risk of major earthquakes along the Aleutian subduction zone should be considered in any wellfield or power plant design. it is unknown if there are commercial reserves of gold,silver or other metals in the prospect area.Cores and cuttings should be analyzed routinely to help determine this. Consideration of project economics and of market are beyond the scope of this brief report. Submitted respectfully, James Koenig Geothermal Consultant Confidential Not for Public Distribution©Copyright KSLC,2016.All Rights Reservec 11 +WHER Tony FOZ mwas Addendum C Makushin Ownership &Development Ownership In 1985,Makushin Lands deeded to the Aleut Corporation by the United States pursuant to the Alaska Native Claims Settlement Act of 1971. In 1988,the Aleut Corporation sold the Makushin Lands to Battle Mountain Gold Company in a transaction best described as tax motivated on the part of the Aleuts.In 1995 the Aleuts entered into a negotiated settlement with the IRS whereby the Makushin Lands was valued at $15.5 million in 1985 dollars. In 1995 Kiiguusi Suuluta Land Company,LLC ("KSLC”)was formed for the purpose of purchasing the Makushin Lands from Battle Mountain Gold Company.The transaction was completed in November of that year.KSLC was formed as,and remains,an Alaska Limited Liability Company.Its two principals,Jack Wood and Edward Fisch own approximately 80%of the membership interests and are its managers. Prior Development Activities 1982-1988:In 1986 the State of Alaska Power Authority entered into a geothermal lease of the Makushin Lands with the Aleut Corporation for purposes of developing the resources and constructing a power plant.In 1985 the State stopped all renewable energy projects when oil dropped below $12/bbl.Ultimately the lease expired and the Power Authority quit claimed the Makushin Lands back to the Aleut Corporation in 1988. 1991-1995:Ormat Energy Systems,Inc.("OESI”)entered into a similar lease with Battle Mountain Gold Company for purposes of developing the resources and constructing a power plant.Although AIDEA had committed $60 million of bond financing to the project,OESI was unable to fulfill its obligations under the lease and otherwise,due to severe financial problems at Rye Patch,NV and an uncontrolled blow out at Puna,HI. 1996-1997:Anex,a joint venture between Ansaldo (a major international participant in the geothermal industry)and Exergy,Inc.(holder of certain rights to the Kalina Cycle'),leased the Makushin Lands from KSLC,again for purposes of developing the resources and constructing a power plant.The deal collapsed when Ansaldo withdrew from the joint venture over matters unrelated to the project.CP WEMADAT2005-2007:Iceland America Energy Company leased the Makushin Land from KSLC for the same reasons.Iceland America was unable to come to terms with the City of Unalaska. Ultimately KSLC terminated the lease with Iceland America. DULL @ VARIOUS LOCATION.©1105 BUDGET Mone O.O1%VAWE (PypctASed wep TO PeocEss 'The Kalina Cycle consisted of ammonia based energy conversion equipment Confidential Not for Public Distribution©Cosyright KSLC,2010.All Rights Reservar 26 R=SOMDNAARWOoa2222mmSmemOMANOAAWN=NNNON=©NNak©Addendum D Index of Reference Documents An FTP site will set up for due diligence Unalaska Geothermal Project Feasibility Proposal,March 15,1990,prepared by OES! Unalaska Geothermal Feasibility Study,June 22,1987,Dames &Moore in association with SAI Engineers,Inc.and Mesquite Group,Inc. Summary Report,R.W.Beck to Alaska Energy Authority,March 19,1993 Project,R.W.Beck,February,1995 Unalaska Geothermal Project Consultant's Report Volume C Economides-500yrs Matrix Geo thermal costs Alaska_4-09 Report 83-15 Progress Investigations of Makushin Geothermal area Assay reports including Bonder Kleg,American Assay and Alaska Earth Science reports .Statistical Repost of the Power Cost Equalization Program,State of Alaska Division of Energy,10"Edition,May,1999 .Unalaska Interconnect Study .Unalaska Geothermal Project Phase 3 Final Report .Unalaska Geothermal Power Plant Project Summary .Unalaska Geo.Feasibility Study-Final Vol.1 6-22-1987 .Makushin_GeotheEx_1992 .Summary of Geo.Exploration &Data From Stratigraphic Test Well .Republic-Unalaska Executive Final Report .Power Production from a Moderate -Temperature Geothermal Resource .Power Cost Analysis of the Makushin Geothermal Project .Nabors-Alaska Helio Drilling .Makushin Geothermal_Review of OESI Dev.Plan .Makushin Geothermal Project Revisited March 1996 .Unalaska Geothermal Project Consultant's Report Volume C .AIDEA Lewis Unalaska Geothermal Project Final Report .Geothermal Power Plant at Makushin Alaska Feasibility Study 2005 prepared by Enex,hf (Iceland America Energy) Confidential Not for Public Distribution©®Copyright KSLC,2010.All Rights Reservec 27 Addendum B KSLC Makushin Gold Review including Battle Mountain and Other Gold Studies Summary Report on Gold Exploration and Potential Of Unalaska Island,Aleutian Islands,Alaska INTRODUCTION -EXECUTIVE SUMMARY Since the 1700's,Gold has been found on Unalaska Island,a number of attempts to recover the gold there have been made over the years.In 1989 and 1990,Battle Mountain Exploration Company conducted gold exploration programs on Unalaska and Umnak islands in the Aleutian chain.On Unalaska Island,this exploration program consisted primarily of:1)reconnaissance collection of panned concentrate stream samples,and 2)evaluation of previously known prospects and anomalies by collection of rock and soil samples.A total of 1,808 samples were analyzed:484 panned concentrates,4 silt samples,839 rock samples, and 481 soil samples.Battle Mountain prepared two reports on their gold findings,one in 1989 and the other in 1990. The exploration effort resulted in the identification of several gold anomalies or source areas,and confirmed the occurrence of significant gold values in the Makushin and Mak North veins.The reconnaissance exploration also identified a regional trend or "belt”of gold occurrences across the northern part of Unalaska Island. Part of the Makushin vein was mapped and systematically sampled by traverses of rock and soil samples.The vein has dips of 70°and more,a known strike length of at least 3,500 feet,and an apparent average thickness of 30 feet.Consisting primarily of milky and brecciated quartz,the Makushin vein has assay values as high as 8.57 ounces per ton (opt)gold and 85.87 opt silver. In October 1995,a field examination by Kiiguusi Suuluta Land Company confirmed the locations of the Makushin and Mak North veins.Rock samples collected from the Makushin vein were analyzed and results confirmed the existence of gold.Additional reconnaissance of the area showed excellent potential for Makushin and Mak North veins to be larger than now known,and for the occurrence of additional (undiscovered)veins. One of the main reasons gold mining has not already occurred on Unalaska where there is well defined gold reserves is the lack of low cost available power as currently all electricity on the island is generated by diesel and the cost of diesel power production has proven prohibitive.Diesel emissions pose additional problems for mining development. All of these problems can be effectively resolved and the total cost of the extraction of the Makushin reserves substantially reduced because of the confirmed,well defined geothermal power resource on the island.The Makushin geothermal resource can provide the electricity to power a mine and the ore processing system at a much lower cost of energy than diesel power. Beside enabling the gold and silver mining on the !sland of Unalaska,the geothermal power can also provide the ore processing facility to turn ore into concentrate from other nearby Islands in the Aleuts as the Battle Mountain report quoted in this report also documents substantial potential gold finds on those islands too. The Makushin geothermal resource was originally explored by the State of Alaska in the 1980s and there are test wells and many reports (including GeothermEx)that confirm the resource.There are also state and federal funds and loan guarantees available for financing of the project.The city of Dutch Harbor received a 980,000 grant in 2009 to develop geothermal resources on the Unalaska Island and another island in the Aleut chain,Akutan is looking to the state of Alaska to finance their 1O0MW power pliant. This report summarizes the results of two projects conducted for Kiiguusi Suuluta Land Company ("KSLC'). The first project was to review a technical report by Battle Mountain Exploration Company,an exploration branch of Battle Mountain Gold Company ("BMG')that presented the results of BMG's 1989-1990 reconnaissance gold exploration program of Unalaska Island and other islands in the Aleutian chain (Fig.1). The second project was a trip to Unalaska Island to confirm the location of BMG-identified gold-bearing veins and to verify gold occurrences with new samples. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 12 In addition to these two projects,a search of published geologic literature and maps was conducted and applicable publications were obtained and reviewed for reference.Also,topographic maps covering the northern part of Unalaska Island were digitized for computer applications and future technical use.A few computer-generated illustrations are included in this report. sre"=wks KA ' a Bering Sea %J NHEMEVA ATH J DETTCH HARBOR @ .2.Aleutian Islands <o,ra Acari BESKA 'whee ioe an a er) was AMCHHAKA ADAR Pacific Ocean Figure 1.Location of Unalaska Island on the Aleutian chain. PREVIOUS WORK GEOLOGY The Aleutian Islands are a volcanic arc that probably started forming in late Cretaceous or early Tertiary time. Several of the islands,including Unalaska,have live volcanoes.Makushin Volcano,the primary volcano on Unalaska Island,has not had a major eruption for many years although a small ash eruption occurred in 1980. There are several active fumeroles on the flanks of Makushin and a significant geothermal resource has been discovered and is being developed for generation of electricity. As described by Randolph (1991): Unalaska Island can be divided into 2 parts,which are separated by the rugged massif of central Unalaska's Shaler Pluton.The northern portion of the island is dominated by the massive ice-covered dome of Makushin Volcano (6,820 feet high).Large bays (actually fjords)cut the northern island into 3 major peninsulas.The portion of the island south of the Shaler Piuton is itself peninsular.The entire island has been intricately sculptured by alpine and "continental”(ice sheet)glaciation,making Unalaska Island extremely rugged. The vast majority of the land surface is in slope;and most slopes measure greater than 30 degrees. The general geology of Unalaska Island was studied and a map was published by the U.S.Geological Survey (Drewes and others,1961).The part of this geologic map which covers the north-central area of the island,is shown in Figure 2. oGdential Not for Pubdic Distributian©Copyright ESLC,20710.All Rights Reserved The oldest or "basement”rocks on Unalaska are believed to be of Cretaceous or Tertiary age and crop out in the southern part of the island.Most of the island is comprised of Tertiary volcanics,their equivalent intrusives, and sedimentary rocks derived from the igneous rocks.The Shaler Pluton,in the southern part of the island, consists primarily of granodiorite with minor granite,diorite and other related intrusive rocks.These intrusives have been dated as Miocene in age. Sedimentary units include the Tertiary (Miocene)Unalaska Formation that covers about two-thirds of the island and consists of sedimentary and pyroclastic rocks intermixed with andesite and basalt flows.This formation is believed to be several thousand feet thick with sedimentary lithologies grading from argillite (mudstone/shale)to sandstone to conglomerate.The coarser sedimentary rocks,along with breccias and volcaniclastic rocks, increase in the northern and eastern parts of the island.On the northern part of the island,the Unalaska Formation is unconformably covered by the Makushin volcanics (Drewes and others,1961). Rocks of the Unalaska Formation subsequently have been intruded,faulted,and possibly folded at places.In the northern part of the island,the formation has a general dip to the northeast.The numerous intrusive dikes and sills,the extensive fracturing,and multiple episodes of mineralization and alteration,make the Unalaska Formation an attractive target for gold exploration.According to Randolph,"The relatively advanced age and overall high porosities of these rocks make them excellent potential traps for mineralization associated with Unalaska Island's many generations of hydrothermal activity.” Structurally,the rocks of Unalaska Island show numerous faults and joints.There are also regional linear features,the exact nature of which is unknown.It is difficult to determine the displacement along faults because the rocks have few "key”elements such as marker beds upon which to measure.Also,because of the abundant soil and vegetative cover,it is difficult to trace structures or beds for more than a few tens or hundreds of feet.It is apparent,however,that the rocks have been extensively fractured and altered at many places. More recent rocks and sediments (Tertiary and Quaternary)consist of the Makushin volcanics and sediments derived from them,and the sediments associated with and derived from Quaternary and Recent glacial activity. EARLY EXPLORATION Compared to other regions of the world,relatively little detailed exploration for precious metals has been done on Unalaska and the other Aleutian Islands.The exploration work completed to date seems to have been done on a somewhat sporadic basis over the years.Many factors contribute to this lack of exploration,including remote location,access,weather,and land status.The lack of a geological environment conducive to gold mineralization,however,has not been a factor. Gold occurrences on the Aleutian Islands have been known for many years.It is not known when gold was first discovered on Unalaska Island,but it is likely that the Russians knew of gold veins near their village of Unalaska sometime in the 17th century.Collier (1905)reported on a small gold mine located 1.5 miles from the village near Captains Bay. According to Randolph (1990),Kennecott conducted copper exploration on Unalaska and other nearby islands as early as 1934.Kennecott revisited the Aleutians in 1985 looking for precious metals,and it was then that they sampled the Makushin vein.According to Randolph (1991),"They terminated their entire Alaskan exploration effort shortly thereafter,but concluded that the islands still hold good exploration potential and that prospects such as Kigunak and the Makushin Vein merit additional work.” BMG EXPLORATION Battle Mountain Exploration conducted extensive reconnaissance exploration for gold on several of the Aleutian islands in 1989 and 1990.These field exploration efforts were summarized in BMG's report "Unalaska Project, 1990 Final Report (Randolph,1991).Most of the effort was directed at Umnak and Unalaska islands:a prospect on Umnak was drilled and reconnaissance sampling was done over much of Unalaska.Some of the Confidential Not for Public Distribution®Copyright KSLC,2019.All Rights Reservec 14 identified prospects had negative results and were abandoned,but several,especially on Unalaska,showed very positive results which justify follow-up exploration work. Unalaska Exploration BMG's field work on Unalaska Island consisted of two different efforts or approaches,apparently conducted simultaneously.The first effort was to perform over much of the island a reconnaissance sampling of stream sediments by panning and analyzing the concentrates.The second effort was to examine and evaluate known prospects,including the Makushin and Mak North veins located northwest of Dutch Harbor,which had been identified by Kennecott and others (Fig.3).These prospects were evaluated primarily by mapping and detailed sampling.According to the final report,a total of 1,808 samples were analyzed:484 panned concentrates,4 silt samples,839 rock samples,and 481 soil samples.The results of the reconnaissance panning led to the identification of several potential source areas for gold which warrant additional exploration (Randolph,1991). "Gold Belt” BMGs field work identified a trend of gold occurrences across the northern part of Unalaska Island that BMG referred to as a possible "gold belt”.At this stage of exploration,it may be premature to refer to the trend as a "belt”,but there is little doubt that the data indicate some sort of regional lineation in the gold occurrences.It is likely that this lineation is controlled by regional geologic structures. Confidential Not for Public Distribution ©Copyright KSLC,2010.All Rights Reservec 15 Makushin and Mak North ', Gold Veins a Figure 3.Computer-generated,3-dimensional perspective diagram of the northern part of Unalaska Island showing the location of key features. Known gold occurrences within this "gold belt”include the Makushin and Mak North veins near Makushin Valley,and Mt.Cockscomb and Pyramid Peak south and east of Dutch Harbor. Makushin Vein The Makushin vein is located along the north slope of Makushin Valley near its mouth.The vein strikes nearly parallel to the axis of the valley and is exposed at various places along its strike.Where the vein is exposed,it dips steeply toward the valley (southward)with dips ranging from 70°to 80 °or more. According to Randolph (1991),Kennecott discovered and sampled the Makushin vein in 1985 and had one sample assay 8.57 opt gold and 85.87 opt silver.In 1990 BMG completed reconnaissance mapping,sampling of vein outcrops,and soil sample traverses over covered areas of the vein.The vein is better exposed at the higher altitudes in the western part and becomes more covered eastward. One large-scale map was produced which showed sample locations and soil sampling lines. The vein consists primarily of massive milky quartz,much of which has been brecciated.At many places,the breccia has been healed by subsequent silicification,commonly forming large cockscomb Confidential Not tor Public Distriputiand Copwricht RSEC 2070)AGP Rights Reserves 16 quartz crystals.The quartz seems to be somewhat barren of sulfides,but some pyrite was apparently observed. Rock samples collected by BMG along the vein and from other nearby outcrops had gold values ranging from less than 2.0 ppb to more than 3.3 opt.Soil samples were collected and analyzed primarily for "pathfinder”elements such as mercury (Hg)and arsenic (As),and the results were somewhat useful in determining the buried extent of the vein.Overall,BMG's work delineated a surface trace of the vein that is a minimum of approximately 3,500 feet long and an average thickness of 30 feet. Mak North Vein The Mak North vein is located on the south flank of the next ridge north of the Makushin vein and runs nearly parallel to the Makushin vein.It is partly exposed along its strike,but most of it appears to be covered with soil and vegetation.The vein extends eastward to the coast and can be seen on the steep slope at the water's edge. This vein is much more covered than the Makushin vein,but apparently did not receive as much attention from BMG as the Makushin vein.Rock and soil samples were taken and analyzed,and the vein had a chemical signature similar to the Makushin vein.Gold values had an average of 0.024 opt with a high of 0.034 opt.Where exposed,the vein consists of brecciated quartz.As delineated byBMGswork,the Mak North vein has a length of at least 9,000 feet and avertical "depth”of at least 1,000 feet (Randolph,1991)., Other Targets Many smaller veins were discovered between the Makushin and Mak North veins,and some of them were sampled.Some carried gold but some did not.Because of the extensive fracturing and veining, BMG personnel considered this area a high priority for additional field work.Much of the proposed 1991 work program was allotted to detailed surveys in this area. BMG also conducted some magnetometer surveys across the Mak North vein and nearby areas and found that the magnetic results correlated well with the soil survey results.In summarizing the 1990 results,Randolph (1991)concluded the following: With regard to general gold exploration on Unalaska !sland-gold-bearing rocks were difficult to identify and locate on the southern part of the island,but in Randolph's words,"We have shown that the potential for finding economic gold deposits on Unalaska Island is very good.....there is no known reason why highly permeable units of the Unalaska Fm.cannot host classically disseminated gold mineralization.” With regard to the northern part of Unalaska Island-only one-fourth of the proposed panning program was completed for this area,and yet more than a dozen gold anomalies were discovered that need additional evaluation.According to Randolph,"Ail exploration efforts should now be concentrated on the northern part of Unalaska Island...” With regard to the Makushin/Mak North vein area-three techniques were successfully identified for locating buried veins and these techniques should be used for future exploration of the area.The high gold values obtained from the Makushin vein make this the primary target for additional field work. 1995 FIELD INSPECTION During the first week of October 1995,a trip was made to Unalaska Island with KSLC personnel to examine first hand the Makushin vein and other prospective areas.Approximately two and one-half days were spent reconnoitering the Makushin Valley area,by helicopter and on foot,including the geothermal resource and the Makushin vein areas. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 17 MAKUSHIN VEIN Much time was spent at the Makushin vein trying to verify BMG's reconnaissance map of the vein.Because the map was more of a sketch map and not drawn on a topographic base map,it was difficult to locate certain identified features.Several areas along the vein exposure were examined and some 1990 BMG sample points that had been marked with stakes or flagging were finally found.Because of the steep slope and limited time, most of the vein areas were reached by helicopter,although some of the larger outcrops were examined and sampled with the aid of climbing ropes. Geology As previously described by BMG,outcrops of the vein consist mostly of milky quartz which has been extensively brecciated at some places.The fractures and breccias appear to have been largely and partly healed by secondary silica which commonly forms cockscomb quartz in the openings.BMG described "crackle breccias” at some places,and these appear to be the result of secondary silicification along intensely fractured or brecciated zones which take on the appearance of small stockworks.Other BMG descriptions of the vein were also verified. Some minor pyrite was noted in certain parts of the vein,but pyrite and other sulfides were not abundant or readily apparent.In some places,the vein appeared to be quite barren of mineralization or alteration,but this may be a misleading observation considering the very small total area of the vein that was examined in any detail.There is no doubt that the vein is significantly large and may increase in size with depth.The vein does bifurcate into two distinct trends,as reported by BMG,and this offers even more incentive for additional detailed field work in the area. The cursory examination of the Makushin vein area,both from the ground and from the air,found evidence such as fracture trends and zones of white milky quartz that suggest the vein is much longer than the 3,500 feet reported by BMG.Further field work will have to be done to confirm this,but it seems a fairly safe assumption at this stage of exploration that the vein exceeds the dimensions given.It is also suspected that the Mak North vein may also be larger than reported.Figure 4 is a cross-section diagram that shows the topography and relative positions of the Makushin and Mak North veins. yex0<South ort North3000-7 we RX SMALE - - +7 we |Zeot/ton : ®20004 .|F 2 7 ;rasa®1000+Makushin Unalaska r 3 J .Valley Formation LU =sea level <=J y I -1000-ETT TTT a at TTT TTT ET TP 0 5000 10000 _16000 20000 25000 30000 Distance (feet) Figure 4.North-south cross section across Makushin Valley showing the relationship of the Makushin and Mak North veins. Geochemistry Eleven rock samples were collected for chemical analyses from the Makushin vein.Most samples were taken from random locations along exposed parts of the vein,but three samples (labeled "BMG'”)were taken at Confidential Nut for Public Distribution @ Copyrieht KSLC,2010.All Rights Reserves 18 locations on a large outcrop where old flagging,assumed to be that of BMG,was found.The flagging was very faded and weathered and no other identifying markings were found. The eleven samples were analyzed for gold and sixteen other elements commonly used for mineral exploration (see Table 1).These elements are (in order as shown on the table)silver (Ag),arsenic (As),barium (Ba), bismuth (Bi),cobalt (Co),chromium (Cr),copper (Cu),iron (Fe),mercury (Hg),manganese (Mn),molybdenum (Mo),nickel (Ni),lead (Pb),antimony (Sb),tungsten (W),and zinc (Zn). The results for each of the elements in the new samples are in general agreement with BMG's 1990 results for their rock samples.Although no gold values from the new samples were obtained that approach the 3.3 or 8.5 opt range,the new analyses do confirm the existence of gold.Only one element,barium (Ba),seems to be anomalous compared to BMG's analyses.Amounts of barium in the new samples are significantly higher than those obtained by BMG:barium in the new samples ranges from less than 10 to 287 ppm with an average of about 100 ppm,as compared to a range from less than 10 to a maximum of 88 ppm with an average of about 25 ppm in the BMG 1990 samples.This difference is likely the result of several factors,including the types of rocks sampled,number and geographic range of samples,and the types of analytical procedures. The barium concentrations may be indicative of relatively low-temperature hydrothermal fluids that once circulated through the fractured rock.This may also suggest that mineralization could increase with depth,but much more study will be needed to confirm or refute this hypothesis. MAK NORTH VEIN The Mak North vein was observed from the air only;it was not examined on the ground.However,the vein's outcrops were easily identified and its trace could be observed extending along strike for a considerable distance.Slight changes in vegetation,soil color,and topographic slope indicated the likely extension of the vein. The Mak North vein appears to be significantly longer and wider,both in outcrop and in trend,than the Makushin vein.No samples were collected. Au |Ag |As j Ba Bi |Co |Cr |Cu |Fe j}Hg |Mn |Mo Ni Pb |Sb |W Zn Sample ppb |ppm |ppm |ppm]ppm |ppm |ppm |ppm |pct |ppm |ppm |ppm |ppm |ppm |ppm |ppm |ppmR2MAK-BMG1 |229}2.7 |18 |257 |<5.0]9 77 |90 |1.82]033]350]3 5 3 |<5.0/<20.0}34 R2 MAK-BMG2 |1676]14.1{10 |10 {<5.0|<10]108 |19 |0.18]0.08|29 4 2 42 |<5.0{<20.0]6 R2 MAK-BMG3 |119 |1.1 7 |1104 <5.0]3 |158 {12 |0.76]006]193}6 5 4 |<5.0)<20.0|17 R2 MAK-East1-95}913 |2 15 |182]<5.0]1 132 |13 |065]018]88 4 3 |<2.0]<5.0|<20.0]11 R2 MAK-East2-95}1729]3.1 |44 |100 |<5.0]<10]110}9 [0.41/0.29|18 10 2 §|<5.0|<20.0}3 R2 MAK-HG 95-1]84 |0.9 |43 |287 |<5.0]6 83 |38 |146]0.19]272}4 4 3 |<5.0 }<20.0]25 R2 MAK-HG 95-2]601 |3.2 |15 |130]<5.0]3 144 |46 |08 |0.14]186;2 4 §|<5.0 }<20.0|16 R2 MAK-HG 95-3 |431 {|0.9 |<5.0]65 |<5.0]1 129}9 |0.26/0.05{60 i)3 3 |<5.0}<20.0]6 R2 MAK-HG 95-4|209}0.8 |11 78 |<50}4 92 15 |0.95]0.09j 209 |3 3 4 |}<5.0}<20.0]19 R2 MAK-HG 95-5 |1137]1.5 |<5.0 [<10.0}]<5.0!<1.0]141 |10 |0.16|0.02{31 1 3 5 |<5.0]<200|2 R2 MAK-West1-95,353 |2.3 6 37 {|<5.0]<1.0]108]9 |024]|0.04|51 2 2 |<2.0}<5.0/<20.0|5 Table 1.Chemical analyses of rock samples collected in October 1995 from the Makushin vein. OTHER FEATURES Abundant small quartz veins,ranging in size from an inch to about two feet thick,were noted on the ridge above the Makushin vein while traversing part of the ridge on foot.This observation confirms BMG's reports:These small veins evidence an area that has been extensively fractured and altered. Confticdentiab Not for Public DictributionSs GCopwentit KSLC,2010 Ad Rights Reserves 19 From the air,it was noted that many other linear features parallel or sub-parallel to the Makushin and Mak North veins were obvious in the area north of Makushin Valley.These features lie within the "belt”as defined by BMG.It was also noted that larger regional features-tinears or structural features-could be traced across Unalaska Bay toward Mt.Cockscomb and Pyramid Peak.As reported above,this "belt”defines an area of known gold occurrences that apparently has received only cursory exploration over the years,and is thus a prime target for future exploration. Gold Potential in Geothermal Area A total of five deep geothermal holes were drilled in the geothermal area during the early 1980's (see map).The holes were drilled with a core rig that was flown in by helicopter.According to earlier reports from personnel with direct knowledge of the drilling operation,no cores were recovered because the holes were drilled with a tricone bit.In February 1996,as part of its continuing efforts to develop the geothermal resource, Kiiguusi Suuluta Land Company was able to confirm that cores were indeed recovered and that they were stored in Alaska. Some of the cores from hole D-2 (shown as E-1 on the map)were briefly examined in February 1996. Five samples were taken randomly from the depth interval 200-332 feet to be analyzed for gold and other elements.The samples were analyzed by Bondar Clegg Laboratories in Vancouver and results are shown on the attached lab report.As shown on the report,two of the samples had very high gold values,being >10,000 ppb and 6,605 ppb.Because the one sample contained more than 10,000 ppb Au,Bondar Clegg analyzed it again using different techniques.When they obtained the extremely high result of 42.121 ounces per ton,they ran the sample again for confirmation and obtained the result of 41.324 ounces per ton. In March 1996,KSLC was able to obtain eight additional random samples from two other holes, including a sample from the geothermal test production well,ST1-R.These samples were analyzed by American Assay Laboratories and the results are shown in the attached lab report.Two of the eight samples had high gold values:A-1-508 had 10.350 opt and ST1-R-213 had 3.070 opt. The results are encouraging in that they confirm significant gold mineralization in an area previously unknown.The geothermal area is on the fringe of the gold trend as indicated by Battle Mountain's work.These initial results from the new samples: e Confirm gold mineralization outside of the main trend area, e Greatly increase the area of prospective gold mineralization, e Confirm the occurrence of very high-grade gold veins,and e Suggest the likelihood of a large disseminated gold deposit. CONCLUSIONS Conclusions from the review of BMG's 1991 report and of the 1995 field inspection are summarized as follows: e Much of the northern part of Unalaska Island remains unexplored,but that which has been found is very prospective for economic gold deposits. e The work by BMG is sound and provides an excellent base for future field work and gold development on Unalaska Island.Based on this work,efforts should be directed to the northern part of the island. e BMG's "gold belt”appears to be real,although controlling geologic factors need more definition.The area within this trend or belt,as defined by known gold occurrences and the reconnaissance sampling done by BMG,offers an excellent starting area for field work by KSLC. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 20 e BMG's reconnaissance panning efforts led to the discovery and identification of several gold anomalies which justify additional field work for verification and detailed examination. e Major gold-bearing veins,especially the Makushin and Mak North veins,require additional field work to determine the immediate areas of economic gold deposits. e The occurrence of gold in the Makushin vein has been verified.The reported gold values and size of this vein certainly warrant further detailed examination.Geochemistry of this vein suggests that mineralization may increase with depth.The strike and dip of the vein in relation to the topography of Makushin Valley makes drilling of the deeper parts of the vein relatively simple and economically feasible for KSLC's field work in 1996. RECOMMENDATIONS GENERAL A great amount of gold exploration remains to be done on Unalaska Island.Known gold occurrences and the necessary geologic conditions for economic gold deposits exist in the northern part of the island and warrant additional field work. It will be important for KSLC to decide not only how and where to start,but how large of a program it is willing and able to support. The work of BMG offers a very valuable exploration base and starting point for future exploration.Several "follow-up”programs could be done,including the following: e The area of the Makushin and Mak North veins should be mapped in detail,sampled extensively,and drilled.Some geophysical surveys may be needed before drilling.With reported gold values of greater than 1.0 opt,this area cannot be ignored and offers the best initial target for continued field work. e The gold anomalies identified on the north side of the island by BMG's reconnaissance panning should be examined in more detail.The panning program should be continued to cover prospective areas not sampled by BMG. e Other areas within the "gold belt”should be explored,perhaps by photogeologic mapping,reconnaissance field sampling,and airborne geophysical surveys. DATA REVIEW Prior to conducting any additional field work,it will be important to complete a review of company reports,maps, and other data in order to plan properly and adequately new field surveys for 1996.All available data pertaining to the areas of interest should be compiled,reviewed,and evaluated to determine the details of future surveys. Such data review and evaluation will minimize duplication,aid in survey layout,and allow for verification where necessary.This is especially important for rock and soil samples collected for geochemical analyses and for geophysical surveys. FUTURE EXPLORATION BMG outlined a 1991 season of field work that was never carried out due to changes in corporate goals and budgets.This planned phase of work included additional sampling and mapping,geophysical surveys as justified,and possible drilling,all as follow-up to the completed 1990 program. The proposed program below generally follows the same plan with minor modifications to focus on only the most promising areas,specifically the Makushin/Mak North vein area.The program easily could be expanded should encouraging results be obtained,and the program should remain flexible to change according to results from the field. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 21 Program Mapping Additional field mapping of the geology and veins will likely need to be done,but the extent of such mapping should be determined only after all available maps and data have been reviewed. Efforts should be made to obtain recent or new aerial photographs of the project area.Photographs used by BMG for their reconnaissance exploration are not satisfactory,either in scale or in quality,to properly aid with detailed mapping or siting of exploration surveys in the primary vein areas.It is recommended that new color air photos be flown over selected areas of the island. Existing published topographic maps (USGS,scale 1:63,360)are also inadequate as base maps for the needed detailed exploration surveys.These maps can be enlarged photographically,but even enlargements often lack useful details needed in the field.It is possible that BMG made more-detailed topographic maps and the files should be reviewed for such.If suitable maps are not found,new aerial photos,flown at a suitable scale (and at a reasonable cost),can be used to construct very detailed topographic maps through the use of computerized digitization. Sampling An extensive program of rock and soil sampling will be needed to define better the extent and quality of known veins and to explore for additional veins in the prospective areas.All sampling work should be done in conjunction with field mapping and should incorporate the results of BMG's work. Some of the sampling can be done on a random pattern basis,especially rock sampling where outcrops are limited.However,soil sampling surveys are usually best done on a grid pattern in order to detect anomalous zones in the subsurface. Geophysics Certain geophysical surveys were recommended by BMG asa part of their second phase of exploration.Geophysical surveys,such as magnetics and gravity,IP (induced polarization)and VLF- EM (very long frequency-electromagnetic)can be very useful to help delineate mineralized zones and veins if the surveys are planned and applied carefully.At this stage of exploration,it is somewhat uncertain which surveys would be the most useful;types and locations of any geophysical surveys should be determined only after the data review and additional mapping and sampling have been completed. Drilling Drilling is the only way to test a vein or mineralized zone at depth during exploration.Unfortunately,it is also the most expensive form of exploration.Two types of drilling are commonly used in mineral exploration:reverse-circulation and coring. Reverse-circulation drilling Reverse-circulation drilling is cheaper than coring but generally requires heavier equipment which is difficult to transport by helicopter.Geologically,the cuttings provide useful information but not as much as solid core. Core drilling Core drilling is commonly called diamond drilling and can be done with smaller and lighter (and thus more easily transportable)equipment than reverse-circulation drilling,but it is also more expensive. Confidential Not for Public Distribution ©Copyright KSLC,2010.All Rights Reserve 22 The diamond drilling recovers a solid core of rock which can be extensively studied,tested,and analyzed.By using a different drill bit such as a tricone,a core drilling rig can also drill in a normal "rotary”fashion without recovering solid core.Rotary drilling produces ground-up rock chips similar to reverse-circulation drilling,but the method also allows for increased contamination of samples.Rotary drilling could be used to drill through known barren sections.Since the Summary Report was written in January 1996,exciting findings have occurred which significantly expand the area of prospective gold mineralization and which may alter the geologic models of gold mineralization on the island.These new findings are briefly described below. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 23 Figure 3 of the Summary Report shows the locations of the Makushin and Mak North gold veins near the mouth of Makushin Valley and the geothermal resource area at the head of Makushin Valley on the east flank of Makushin Volcano.Reports by Battle Mountain Exploration Company stated that the two veins,along with several others in the same area,carried gold values which made them prime targets for further evaluation.These veins lie within a major trend of gold occurrences across the northern part of Unalaska Island.The known geothermal area is located just outside of the main trend as defined by Battle Mountain Gold. A total of five deep geothermal holes were drilled in the geothermal area during the early 1980's (see map).The holes were drilled with a core rig that was flown in by helicopter.According to earlier reports from personnel with direct knowledge of the drilling operation,no cores were recovered because the holes were drilled with a tricone bit.In February 1996,as part of its continuing efforts to develop the geothermal resource, Kiiguusi Suuluta Land Company was able to confirm that cores were indeed recovered and that they were stored in Alaska.To date,cores from the geothermal holes have been located at two different storage sites, and efforts are being made to consolidate all of the cores at a single location. Some of the cores from hole D-2 (shown as E-1 on the map)were briefly examined in February 1996.Five samples were taken randomly from the depth interval 200-332 feet to be analyzed for gold and other elements. The samples were analyzed by Bondar Clegg Laboratories in Vancouver and results are shown on the attached lab report.As shown on the report,two of the samples had very high gold values,being >10,000 ppb and 6,605 ppb.Because the one sample contained more than 10,000 ppb Au,Bondar Clegg analyzed it again using different techniques.When they obtained the extremely high result of 42.121 ounces per ton,they ran the sample again for confirmation and obtained the result of 41.324 ounces per ton. In March 1996,KSLC was able to obtain eight additional random samples from two other holes,including a sample from the geothermal test production well,ST1-R.These samples were analyzed by American Assay Laboratories and the results are shown in the attached lab report.Two of the eight samples had high gold values: A1-508 had 10.350 opt and ST1-R-213 had 3.070 opt. The results are exciting and encouraging in that they confirm significant gold mineralization in an area previously unknown.The geothermal area is on the fringe of the gold trend as indicated by Battle Mountain's work.These initial results from the new samples: 4.Confirm gold mineralization outside of the main trend area, 2.Greatly increase the area of prospective gold mineralization, 3.Confirm the occurrence of very high-grade gold veins,and 4.Suggest the likelihood of a large disseminated gold deposit. KSLC has reason to believe that more than 8,000 feet of core from the geothermal holes are available for studyandanalyses.KSLC's efforts are now directed to: Consolidating all available cores at a single site. Completing an inventory of the cores. Instituting a program to study and sample all cores at regular intervals and to analyze all samples for precious metals and other key elements. A standard literature search was conducted for geologic information pertaining to Unalaska Island.The search included the latest available computer databases such as GEOREF by the U.S.Geological Survey. Confidential Not for Public Distribution©®Copyright KSLC,2010.All Rights Reservec 24 Understandably,little work has been published on the geology of Unalaska Island over the years,and most reports published during the past twenty years pertain to the Makushin geothermal resource on the island.It is common that little information is published on mineral exploration-especially for gold-because most exploration is conducted by companies that closely guard their data. The following references provide useful information on the geology of Unalaska.The only unpublished reference is the report by Battle Mountain Gold Company,which contains many references to other proprietary reports contained in the files turned over to KSLC. Additional References Berg,H.C.,and E.H.Cobb,1967,Metalliferous lode deposits of Alaska:U.S.Geological Survey Bulletin 1246, 254 p. Cobb,E.H.,1972,Metallic mineral resources map of the Unalaska quadrangle,Alaska:U.S.Geological Survey Miscellaneous Field Studies Map MF-446,scale 1:150,000. Collier,A.J.,1905,Auriferous quartz veins on Unalaska Island:U.S.Geological Survey Bulletin 259,p.102- 103. Drewes,Harold,and others,1961,Geology of Unalaska Island and adjacent insular shelf,Aleutian Islands, Alaska:U.S.Geological Survey Bulletin 1028-S,p.583-676. Lankford,S.M.,and J.M.Hill,1979,Stratigraphy and depositional environment of the Dutch Harbor Member of the Unalaska Formation,Unalaska Island,Alaska:U.S.Geological Survey Bulletin 1457-B,104 p. Marlow,M.S,and others,1973,Tectonic history of the central Aleutian Arc:Geological Society of America Bulletin,v.84,p.1555-1574. Nokleberg,Warren J.,and others,1987,Significant metalliferous lode deposits and placer deposits of Alaska: U.S.Geological Survey Bulletin 1786. Randolph,Dee B.,1991,Unalaska project,1990 final report:proprietary report,Battle Mountain Exploration Company,Alaska District,February 1991,63 p. Confidential Not for Public Distribution©Copyright KSLC,2010.All Rights Reservec 25 Alan P.Baldivieso From:Steve Haagenson Sent:Tuesday,July 01,2008 7:17 AM To:David Lockard;Mike Harper Ce:Ted Leonard Subject:FW:Makushin Financing FYI.Looks like they are nervous about the Jack Wood meeting. |think that Jack Wood may have overstated the AIDEA loan at no risk to the city. We need to correct this statement in the July meeting. We can help craft the response message. Dave,do you want to take my note off and respond for AEA? Steve From:Michael Hubbard [mailto:mhubbard@FinancialEngineeringCo.com] Sent:Monday,June 30,2008 8:30 AM To:Steve Haagenson Subject:Makushin Financing Steve- As you may now know,the City of Unalaska does not plan to drill on Jack Wood's property this summer/fall.After several months of negotiating a fluid sales/lease agreement with Jack and his partners (KSLC),it became evident that an agreement could not be reached prior to the cut-off time for activating the drilling.In my mind,cost of fluid was only one of the issues.More importantly,the latest draft provided by KSLC had retracted several concepts that we thought had been agreed to by all parties.The City simply did not want to be held hostage over these concepts if fluid in the lower valley was proved. However,that is not the point of my e-mail.Jack Wood called the Mayor a couple days after the City notified him that drilling would not occur this year.During the course of the conversation (I was not directly in on the call),Jack told Mayor Marquardt that the state would finance Makushin at_no risk to the City. I'm not sure what AEA told Jack,but since your history with the project is limited,|thought |would point out some of the risks that the City has identified. Ona high-level basis,the Project would be developed through a process of: Detailed design/Cost estimating Feasibility studies Permitting Production well drilling 5.Construction There are many other tasks (power sales agreements,refinements,etc.),but this will give you an idea.PwNnNreUntil production wells are drilled,one actually doesn't know whether there will be a project.GeoethermEx,geothermal resource consultant(not just a leading,but considered the lead),is providing consulting services to the City on Makushin 1 and has estimated the following wells will be required.Obviously,nothing is known until temperature and flow rates are available from each well.Also,remember the ST-1 well is a test well,and not an actual production well. Wells located in Upper Valley near the ST-1 test well:5-6 wells (3 production (1 standby capacity),2 injection, 1 contingency);total cost $25 -50 million Wells located in Lower Valley:7 -8 wells (4 production,3 injection,1 contingency);total cost $20 -40 million The question is,how much work must be done prior to drilling.If one can lift the drill rigs in with very large helicopters, then the dock and road don't have to be built.But if drill rigs must be trucked in,then the dock,road,and permitting must be accomplished first. Before going into the specific risks,first a brief discussion on capital costs --we don't know what they are.In June 07, the City met with PND,EPS,and GeothermEx to discuss what it would cost to find out what the costs are.At that meeting,$50+million in savings were identified if the Project could be built in the lower valley vs.near the ST-1 well.Those savings told us several things.First and foremost,the project,if located near the ST-1 well,was NOT a $100 million project or even $150 million.Based on these savings and subsequent conversations with state geologists and others,the drill program for the lower valley was set up. All of these,the lack of good cost estimates from which to based feasibility studies on,the need to drill wells before a final decision can be made,the remoteness of the site,etc.,require very large sums of money to be spent prior to final decisions being made.Granted,production wells may be of relatively low risk in some areas,but the euphemism in the industry of the injection well being the first dry hole when drilling production wells does indicate there is a risk, nonetheless. Now to the risks of financing that Jack Wood has inferred the State would accept. 1.Up-front costs.Tens of millions of dollars must be spent prior to final decisions.As indicated above,risks of non-completion diminish with each step,but it is more than the City could absorb in the event of non- completion.Therefore,the State would have to guarantee these amounts if the project were not completed.If completed,these costs would be part of the overall capital costs recovered.KSLC has also provided a rental fee schedule that would provide them with $1.1 million during the initial five years of development (plus inflation), plus an additional $281,000/year (plus inflation)each year thereafter until the project comes on line. 2.Long-term commitments.The processors will not provide long-term take-or-pay commitments for any debt.Since resource economics depend a large portion of the processor load being included,the State must be willing to guarantee this portion of the debt.Since the City economy is dependent on the processing industry, there may have to be shadow guarantees to all or part of the City's portion. 3.Long-term outages.If any part of the project failed during the winter months (submarine cable,transmission line,etc.),it may be several months before the outage can be fixed.In the meantime,debt service must be paid. 4.Interest rate.As you may recall,we had to get special legislation to get tax-exempt financing for Bradley Lake since part of the load would be used by non-qualifying entities (in that case,the co-ops).Makushin may be the same.Keep in mind,I'm not a tax attorney,but section 1.141 of the Code of Federal Regulations provides that if more than 10 percent of the output is used by a non-qualifying entity,then it cannot be a tax-exempt bond.Requirements,net requirements,and other types of contracts with the processors would create the problem.Perhaps if the processors became regular customers of the City might solve the problem,but I'm not sure they would do that. 5.Grant requirements.If capital and operating costs result in delivered costs being in excess of diesel costs,grants or some form of buy-down of debt service will be required. Given the problems with locating facilities on the upper bench near the ST-1 well,project scoping and risks are quite distinct between one located there or in the lower valley.Hence it was the City's plan to discuss the project in detail with AEA after the temperature gradient wells were drilled and a better project configuration could be defined.At that time,risk sharing,etc.,could be discussed in a meaningful manner. |am not sure of the goals of your "stakeholder”meeting to be held in early July.The City will not be able to attend due to vacations and accessibility. If you do plan to hold the meeting,please contact me as the City and |would like to confer with you on the phone prior to the meeting.If you have questions on the above,please give me a call. Mike Michael!D.Hubbard,P.E. the Financial Engineering Company 235 Rockland Street Rockport,Maine 04856 207.593.9131 /907.522.3351 207.593.9053 /907.344.1843 (fax) mhubbard @FinancialEngineeringCo.com Total Project Snapshot Report FY 2009 Capital Budget TPS Report 48710 \gency:Commerce,Community and Economic Development Grants to Municipalities (AS 37.05.315): Grant Recipient:Unalaska Project Title: Unalaska -Geothermal Exploration State Funding Requested:$1,500,000 House District:37-S One-Time Need . Brief Project Description: {Exploration of the Makushin Valley for a geothermal energy source. Funding Plan: Total Cost of Project:$3,000,000FundingSecured Other Pending Requests Anticipated Future Need Amount.FY --Amount FY Amount FY Local Funds .$1,500,000 2009 Total , $1,500,000 etailed Project Description and Justification: fhe City is pursuing a geothermal project for Unalaska /Dutch Harbor given the high cost of fuel and their desire to reduce their dependence on fossil fuels.A promising resource has been located on the flanks of Makushin Volcano,but there is a need for more exploration to see if the resource exists lower in the Makushin Valley.if the resource is found,project costs could be reduced by $25 million or more,making energy production using geothermal more realistic.It will cost $3 million toflyinthenecessaryequipmenttodriliseveralholesintheMakushinValley.This project is an amazing opportunity for the entire State to learn from,and possibly emulate where feasible. This possibility has been known about for twenty years and has been assessed numerous times.Past development plans have always been based on locating the power plant in the Upper Makushin Valley,1,200 feet above sea level.This location is problematic due to the terrain of the Lower Valley.Environmental factors cause the technical and economic viability of this location problems. Today,with the high cost of diesel fuel and new regulatory requirements for air quality,the City wishes to explore the possibility of developing Makushin on its own,a concept that has never been explored in the history of the project.The City's resource consultants believe that the geothermal fluid located in the test well is not trapped,but rather flows out of thearea,likely through the Makushin Valley.Location of facilities in the Lower Valley would result in significant construction and operating costs savings.This project will determine whether any resource found in the Lower Valley remains hot enough for commercial purposes. Project Timeline: |Exploration will take place this year with successful funding For use by Co-chair Staff Only: Page 1 Contact Name:Adam BergContactNumber:465-4451 :5:50 PM 4/29/2008 > Total Project Snapshot Report FY 2009 Capital Budget TPS Report 48710 Entity Responsible for the Ongoing Operation and Maintenanceof this Project:7 woof {City of Unalaska ; Grant Recipient Contact Information: Contact Name:Chris Hladick Phone Number:581-1251 Address:PO Box 610,Unalaska,99685 bf . Email:chladick@ci.unalaska.ak.us ° Has this project been through a public review process at the local level and is it a community priority?Yes[_|No For use by Co-chair Staff Only: Page 2 : Contact Name:Adam Berg Contact Number:465-4451 5:50 PM 4/29/2008 MAKUSHIN GEOTHERMAL PROJECT (Briefing Update) Past development plans of the proposed Makushin Geothermal Project ("Makushin”)havealwaysbeenbasedonlocatingthepowerplantintheUpperMakushinValleyatelevation 1,200 feet above sea level near the existing well drilled in 1982.Although the size and boundaries of the underground heat source are not well defined,the site was selected in an attempt to maximize the probability for the highest temperature resource. The site is relatively inaccessible,and a steep slope with an 800-foot elevation differential must be traversed via a series of switchbacks.This slope creates environmental factors that cause the technical and economic viability of the proposed project to be problematic.Not only would construction and operating costs be higher,but the susceptibility of the transmission line to outages from avalanches and wind could bring into question the overall reliability of the project. Since the time the existing well was drilled,a number of advancements in geothermal production technology have been made so that lower fluid temperatures can now be commercially viable.Given this advancement and the strong possibility that the geothermal fluid is flowing from the Upper into the Lower Valley,a prudent part of the development is to perform exploratory drilling in the Lower Valley.If a commercially viable fluid is located,significant savings can-be achieved in both capital and operating costs.Preliminary estimates of capital cost savings are a minimum of $50 million. The City of Unalaska is now ready to embark on a preliminary drilling program of small-diameter temperature gradient wells in the Lower Valley.This type of drilling can be accomplished with relatively small drill rigs and is the least-cost drilling that can be performed and still achieves meaningful results.If results indicate high enough temperatures,production-size wells can then be drilled. _The cost of the temperature gradient well drilling program is approximately $3 million. However,given that at least $50 million of capital costs plus substantial operating costs can oe ee programis a prudent investment. Future actions taken regarding the development of the Makushin Geothermal Project depend on the outcome of drilling the temperature gradient wells.If temperatures are high enough, production wells would be drilled to verify the volume of fluid.It is felt that a commercially viable resource can be built in the Lower Valley,and full resource development would in all likelihood follow the production wells. If,on the other hand,temperatures are not high enough,a reassessment of the conceptual design,placement of.production facilities,and capital/operating costs would follow to determine whether it is prudent to continue development., CITY OF UNALASKA P.O.BOX 610 UNALASKA,ALASKA 99685-0610 (907)581-1251 FAX (907)581-1417 7UNALASKA,ALASKAOctober26,2007 The Honorable Sarah Palin Governor of Alaska P.O.Box 110001 Juneau,AK 99811-0001 Re:City of Unalaska Capital Requests for FYO9 Dear Governor Palin: This letter is written to request your assistance with two projects critical to the continued health and stability ofourhardworkingcommunitybyplacing$4 million dollars for Powerhouse Expansion and $1.5 million dollars for geothermal exploration in your Capital Budget. The City's Electric Utility is in the process of building a new Powerhouse.This $23 million dollar project will replace existing,inefficient diesel units in an antiquated WWII era facility with two highly fuel efficient 5.2 MW Wartsila units in a new facility,allowing the City to rise above power capacity limits currently restricting industry and small businesses growth in the "Number One Fishing Port in the Nation.”Unalaska will obtain long term financing of $14 million dollars,with another $5 million dollars coming from the City's General Fund for the long anticipated project.This leaves a need of $4 million dollars to complete the project without further burdening our rate payers. Our community is also very supportive of the City Council pursuing a geothermal project for Unalaska/Dutch Harbor given the high cost of fuel and their desire to reduce our dependence on fossil fuels.A promising resource has been located on the flanks of Makushin Volcano but there is a need for more exploration to see if the resource exists lower in the Makushin Valley.If this is the case,the project costs could be reduced by $25 million or more,making energy production using a renewable resoufce more realistic.It will cost $3 million dollars,with the City Council contributing $1.5 million dollars to fly in the necessary equipment to drill several holes in the Makushin Valley.This project could be an amazing opportunity for the entire State to lear from,and possibly emulate where feasible.; Any assistance you can providein this regard will be greatly appreciated.In advance,thank you for your timeconsideringthesetwoimportantprojectstoUnalaska. MbShirleyMarquardt ? Mayor Sincerely, Enclosures cc:The Honorable Lyman Hoffman,State Senator The Honorable Bryce Edgmon,State Representative Mr.Mike Tibbles,Chief Of Staff Karen Rehfeld,OMB Director CITY OF UNALASKA UNALASKA,ALASKA RESOLUTION 2007-48 A RESOLUTION OF THE UNALASKA CITY COUNCIL IDENTIFYING THE CITY OF UNALASKA'S STATE LEGISLATIVE FUNDING PRIORITIES FOR THE FISCAL YEAR 2009. WHEREAS,the City of Unalaska is in the final design and permitting phase of a new powerhouse to meet its existing and future power generation needs;and WHEREAS,the City of Unalaska estimates construction costs for the powerhouse project to be approximately $23 million;and WHEREAS,the City of Unalaska is fully responsible for all development costs,including aconstructionloan;and - WHEREAS,the City of Unalaska will have to fully fund the remaining costs to bring this neededprojectonline. WHEREAS,the City of Unalaska has been investigating geothermal potential for the last twenty years;and WHEREAS,the City of Unalaska has been working with the Alaska Dept.of Energy to develop thisproject; WHEREAS,with the high cost of fuel results in the Unalaska city Council wishes to revisit the feasibility of the geothermal project;and WHEREAS,'a proven geothermal resource exists on the flanks of Mt.Makushin volcano that could be developed if feasible;and WHEREAS,the next step in the process is further exploratory drilling estimated at $3 million. NOW THEREFORE BE IT RESOLVED that the City of Unalaska,by this resolution,hereby identifies its top legistative priorities for FY 2009 and requests legislative appropriations as follows: Construction of new powerhouse $4 million Geothermal Drilling .$1.5 miflion PASSED AND SONA b BY A DULY CONSTITUTED QUORUM OF THE UNALASKA CITYCOUNCILTHISHMADAYOFOct.,2007. MAYOR -PRO TEM ATTEST: CITY CLERK MAKUSHIN GEOTHERMAL DRILLING PROJECT Capital Project Request Criteria Project Name:Makushin Geothermal Project.(See attached for more information) Project Location and House District:Unalaska Island,House District 37 Amount of Funding Request:$1.5 million Total F unding to Complete the Project:$3 million for this phase of the project.Current ROM numbers put the total project funding at over $80 million. Number of years to complete the project:12 months Matching Funds available sources:$1.5 million from the City of Unalaska Prior State Appropriations:None,however the State of Alaska has been involved in the project for over 20 years through various proposals. In Governors Budget:No Federal Funds grants or earmarks requested:Yes,we are looking for fundingin Washington,DC through the Department of Energy. Public Review Process:Over the past twenty years this project has been through many public meetings.The privately owned resource is said to be one of the best geothermal resources in Alaska.The public and industry is very much behind this project. Is funding available for the project this year,who is responsible for providing ongoing maintenance?:The City has committed $1.5 million to the project.There will be no on-goingmaintenanceoftheproject. Economic Return to State of Alaska:This is the most important,innovative economic development project ever undertaken by the City of Unalaska.With the ever increasing cost of fuel and air quality permits for diesel power production,this project has the potential to provide a stable power structure for the Number One Commercial Fishing Port in the Nation and pave the way for future "Green Development.”Stable power will allow this community to diversify while |keeping our carbon footprint low.The economic activity,currently operating in Unalaska, contributes $27 millionin taxes per year to State of Alaska coffers.Our contribution per capita is twice the State of Alaska average.Investment in Unalaska produces a two fold return to the State. Legislator submitting request:Senator Lyman Hoffman and Representative Bryce Edgmon Project Contact Information:City Manager Chris Hladick,City of Unalaska Box 610,99685 chladick@ci.unlaska.ak.us,907-581-7733 Makushin Geothermal Project Project Description:This project consists of determining the feasibility ofdevelopinga5+megawatt (MW)geothermal electric plant in Makushin Valley, which is located on the east side,at the base of Mount Makushin.If geothermal power production is determined to be feasible,consideration will be given to the development of other phases,such as permitting,constructing a generation plant,installing an underwater transmission line,developing a road,and creating a connection into the existing distribution system and any needed accessoryinfrastructure. Project Purpose and Need:The City Powerhouse is currently operating at maximum capacity with no reserve.Utility power supply planning requires a utility to anticipate the loss of its largest generating plant (n-1),and the (n-1)plan determines the utility's ability to serve its peak load.The City's total available power is less than 6.2 MW,with about 5.0 MW considered "firm,”or consistently reliable (note the attached chart "Installed Capacity”).The City can not serve the present firm load with a (n-1)condition.If the City were to lose two units (n-2), _the system could encounter multiple hours of forced outage conditions. Because of current economic development,the City now finds itself in a position to offer only non-firm contracts to new industrial and commercial accounts.For an alternate source of power,the City has recently interconnected with UniSea, which can transmit about 3.0 megawatt to the City grid.However,this power isonanon-firm basis. Although the City is in the process of expanding its generation capacity with the development of a new powerhouse that has a minimum of two 5.2 megawatt generators,it is important to the community's overall economic development to find alternative methods,preferably with renewable resources,to cut the cost or power production. History of the Project Over the past 20 years,the economic and financial feasibility of the Makushin Geothermal ("Makushin”)Project has been assessed numerous times.Past development plans of the proposed Makushin Project have always been based on locating the power plant in the Upper Makushin Valley at an elevation of 1,200 feet above sea level,near the existing well drilled in 1982.Although the size and boundaries of the underground heat source are not well defined,the site was selected in an attempt to maximize the probability'for the highest temperature resource.To reach the existing well access to the Upper Makushin Valley would be via a road from Nateekin Bay running through the Lower Makushin Valley.At the upper reaches of the valley,a series of switchbacks traverse the 800 foot elevation differential to the upper bench,where the road would continue to the proposed site.This area that connects the lower and upper valleys is where environmental factors cause the technical andeconomicviabilityoftheproposedprojecttobeproblematic.Not only would construction and operating costs be higher,.but the susceptibility of the transmission line to outages from avalanches and wind could bring into question the overall reliability of the project. Development Plan and Status:Although past assessments showed that,under certain circumstances,the project might be economically effective over its expected life,short-term rate impacts,the security required by lenders,and otherfactorscreatedinsurmountableobstaclestoprojectdevelopment.Today,with thehighcostofdieselfuelandnewregulatoryrequirementsforairquality,the CitynowwishestoexplorethepossibilityofdevelopingMakushinonitsown,a concept that has never been explored in the history of the project.The City's resource consultants believe that the geothermal fluid located in the test well is not trapped,but rather flows out of the area,possibly down gradient.A likely avenue of escape is through the Makushin Valley.Locating the facilities in the Makushin Valley would result in significant construction and operating costssavings.In order to determine the feasibility of this project,.the City must establish that the geothermal fluid is indeed escaping along the Makushin Valley and that the resource remains hot enough for commercial purposes.If asufficientcommercialresourcecanbefoundinthevalley,then the City will makeageneralassessmentofproject's economics. Relation to Other Scheduled Projects:This project will incorporate theproposedpowerhouseexpansionprojectwhichwillserveasaback-up system tothegeothermalplant. Cost and Financing Data:The feasibility phase of this project has an estimated budget of $3,000,000. ky §221 CENTRAL AVENUE,SUITE 201GeothermEx,Inc.rictwonp.caritornia 9404-8829a TELEPHONE:(510)527-9876 FAX:(510)527-8164. E-MAIL:mw@geothermex.com MEMORANDUM To:Chris Hladick .Date:June 20,2007 City of Unalaska sent via email:chladick@ci.unalaska.ak.us From:Roger Henneberger /Eduardo Granados Subject:Geothermal Resources on Unalaska Island Recommendations for Additional Investigations 7 Background Investigations of the potential for geothermal energy development on Unalaska Island have taken place periodically over the past several decades.For the most part,these investigations have focused on an area on the eastern and southeastern flank of the Makushin volcano,where a number of fumarole fields provide evidence of a high-temperature geothermal system.The existence of the system was confirmed by exploratory drilling in the early 1980s;this effort included the drilling of a number of temperature gradient holes and,eventually,a slim-diameter well that encountered temperatures close to 200°C and produced more than 60,000 Ib/hr of steam and water. The exploratory drilling at the Makushin volcano was concentrated along a plateau that extends to the north and a shorter distance to the south of Fox Creek,at the upper end of the MakushinValley(this is referred to as the "plateau area”hereafter in this memo).This pattern is a -consequence of the distribution of the fumarole fields,which are located on the plateau and in zones further southwest on the volcano.Although the drilling was successful in demonstrating that a high-quality geothermal resource is present at Makushin,it did not fully delineate the geothermal field,which is likely to extend (through lateral flow of thermal waters)some distance beyond the limits defined by the fumaroles.Furthermore,the conditions of terrain and climate make geothermal development and the operation of a power plant in the plateau area extremely challenging with regard to technical difficulty and cost.Therefore,while the exploration at the Makushin volcano has been extremely successful in terms of resource identification,it has so far failed to demonstrate the economic feasibility of geothermal development on Unalaska. During a meeting organized in Anchorage by the City of Unalaska in early June 2007,the cost of development and operation in the plateau area was discussed,with contributions by experts in the design and construction of roads,transmission lines,pipelines,and other facilities that would be required for a geothermal power generation project.It was concluded on a preliminary basisthat,even if all technical obstacles can be overcome,the cost of developing and operating a | 5221 CENTRAL AVENUE,SUITE 201 . ;G eotherm Ex,In C.RICHMOND,CALIFORNIA 94604-5829 TELEPHONE:(510)527-9676 FAX:(510)527-6164 E-MAIL:Mw@geothermex.com small (10-12 MW)project in the plateau area would be several tens of millions of dollars greater than developing a comparable project in a lower-elevation area,such as the Makushin Valley. This large cost differential makes it more critical than usual to consider alternative approaches to geothermal development that could be accomplished at lower cost.Possible alternatives are discussed in the following section of this memo.The final section discusses a recommended approach to investigating these alternatives,as part of an overall program to evaluate the 7 feasibility of geothermal energy development on Unalaska. Exploration Alternatives There are three areas on Unalaska that offer more favorable conditions for development than the . plateau area,and a great enough possibility of the presence of an exploitable geothermalresourcetomeritadditionalinvestigation.These are: e the floor of the Makushin Valley; e the Driftwood Bay area (on the northern flank of the Makushin volcano);and ©the Summer Bay area,located about 3 miles to the east of Dutch Harbor. The first two of these areas have been selected based on their proximity to the known Makushin geothermal resource,taking into account that lateral outflow from the high-temperature geothermal system is likely to create zones of lower-temperature but still exploitable hot water at some distance from the area where exploratory drilling has taken place and where access and construction conditions are less challenging.The location and extent of such outflow is unknown,but it is not unusual to encounter outflow zones up to several miles:'long associatedwithhigh-temperature geothermal reservoirs.ote The Summer Bay area is too distant from the Makushin volcano to be associated with the known high-temperature geothermal system,but there is a warm (95°F)spring in the valley adjacent to Summer Bay Lake,and a very shallow exploratory well drilled near the spring encountered temperatures of about 122°F.There is therefore a possibility that an exploitable low to moderate-temperature is present in the area.The three areas are discussed in succession below. Makushin Valley The Makushin Valley extends inland about 5 miles from Broad Bay,with little elevation gain (less than 500 feet)from the coastline to the steep slope that leads to the plateau area.An existing road or track provides some access into the valley,and it is likely that numerous sites >could be occupied by a small drilling rig for exploratory drilling. The head of the valley is within about 2 miles of the nearest fumarole field and the nearest exploration holes on the Makushin Volcano.There are no direct indications that the geothermal 2 uy ° 5221 CENTRAL AVENUE,SUITE 201GeothermEx,INC.RICHMOND,CALIFORNIA 94804-5829 TELEPHONE:(510)527-9876 FAX:(510)527-8164 E-MAIL:mw@geothermex.com reservoir extends this far,but there are several indirect indicators of possible thermal activity, including: e °soil mercury anomalies on the valley floor,identified in the exploratory work conducted during the 1980s;and e anecdotal reports of springs*near Broad Bay that do not freeze in the winter,suggesting possible elevated groundwater temperatures. If there is geothermal outflow within the Makushin Valley,it probably occurs at a fairly shallow depth,based on the known elevation of the geothermal reservoir in the plateau area.Therefore, the presence or absence of adequate temperatures for power generation could possibly be confirmed by drilling to 1,000 feet or less.Two drillholes located in the upper part of the valley should be sufficient for this confirmation;if positive results are obtained,additional holes could eventually be drilled further down the valley to determine whether the geothermal resource extends to even more accessible areas. Driftwood Bay Like the Makushin Valley,the Driftwood Bay area,situated on the northern coast of Unalaska,is _a possible location of outflow from the Makushin geothermal system.Again,there are no direct indications of geothermal activity,but there are indirect indicators including: e areport of warm ground,in coincidence with a soil mercury anomaly,partway down the slope below Sugarloaf Cone;and *some suggestion from geophysical surveys (principally self-potential)that the geothermal reservoir may be elongated in this direction. In terms of resource potential,therefore,the Driftwood Bay area is similar to the Makushin Valley.However,in terms of logistics it is less favorable.In particular,a transmission line from Driftwood Bay would need to cross the same difficult terrain as a line from the plateau area.In addition,the topography and overall access conditions of the area are less attractive than in the Makushin Valley.Therefore,this area merits a somewhat lower priority for new exploration. Summer Bay Summer Bay is the most accessible of the three areas identified,and,though it is somewhat constrained by topography,there is enough near-level ground for development in the event that an exploitable resource is discovered.The warm spring in this area is located a short distance southwest of Summer Bay Lake,which is immediately adjacent to the coastline.In 1980,two wells were drilled to depths of 54 and 57 feet in the vicinity of the warm spring.Both wellsa_encountered warm water under artesian pressure at a depth near 45 feet;the water temperature Fa 5221 CENTRAL AVENUE,SUITE 201GeothermEX,INC._aicumono.cauirornid 94804-5829 TELEPHONE:(510)527-9676 FAX:(510)527-8164 E-MAIL:mw@geothermex.com was measured at 122°Fin one well and 111°Fin the other.These results indicate the presence ofawarm-water aquifer of some extent. Higher temperatures are likely to be encountered by drilling to deeper levels,if a significant geothermal resource is present.The maximum resource temperature in the area can only be confirmed by drilling,but,because of the absence of an active volcanic heat source in the area,it is unlikely to be as high as the temperatures already confirmed in the Makushin field.The depth of the geothermal resource is similarly uncertain;however,one or more exploratory holes of 1,000 feet or less should be adequate to determine,from extrapolation of temperature gradients, whether attractive temperatures may exist at greater depth. Recommended Strategy for Additional Investigations Given the known high cost and technical difficulty of geothermal development in the plateau area,additional investigations aimed at confirming the presence or absence of exploitable geothermal resource in more accessible areas on Unalaska is justified.Although several types of investigations may be considered,exploratory drilling will ultimately be necessary for thisconfirmation,and therefore should be the principal or only component of this effort. As discussed above,exploratory drillholes should be programmed to maximum depths ofapproximately1,000 feet.The drilling equipment employed should be adequate to reach a minimum depth of 500-600 feet in each drillhole,in order to ensure that useful temperature gradients can be measured.For this objective (and taking into account the cost and feasibility of mobilization),a small diamond-coring rig may be the most effective;however,the optimal equipment should be selected based on availability,cost and functionality as the program is being planned and quotations for equipment and services are obtained.Similarly,the exact choice of drillhole design (e.g.temperature observation well vs.slim-diameter open-hole exploratory well)may be made as planning proceeds.- The priorities for drilling should be as follows,based on the apparent resource potential andrelativeaccessibilityofthedifferentareas: e Makushin Valley:2 holes e Summer Bay:|to 2 holes . ©Driftwood Bay:1 to 2 holes Ideally,the available budget for the program should be sufficient to ensure that at least the first 3 of these holes can be drilled and evaluated,even in the event of unexpected drilling problems, and that 5 to 6 holes can be drilled if drilling goes smoothly.In more accessible regions elsewhere,a budget of approximately $1,000,000 could be adequate for reaching this ebjective. an :'5221 CENTRAL AVENUE,SUITE 201tseGeothermEx,inc.RICHMOND,CALIFORNIA 94804-5829 TELEPHONE:(510)527-9876 o FAX:(510)527-8164 E-MAIL:Mw@geothermex.com On Unalaska,where costs are higher for almost all components of this type of operation,a minimum budget of $3,000,000 is recommended. 'Once the exploratory holes have been drilled and evaluated,a decision can be made as to whether one or more of the areas merits additional investigation for geothermal resource exploitation.If so,then additional activities leading to determination of the feasibility of development in one of these relatively accessible areas can be designed and executed.If it isdeterminedthatthereisnosignificantlikelihoodofgeothermalpotentialintheseareas,then a conclusive feasibility study of development in the plateau area can be carried out. a CITY OF UNALASKA MAKUSHIN GEOTHERMAL PROJECT Switchbacks Leading Out of Makushin River Valley me ome ' awAST mS :yopeiece en : ntSo CITY OF UNALASKA POWER GENERATION EXPANSION