Confused on natural gas? Stand by for more

July 2, 2011 

Are we running out of natural gas in Southcentral Alaska? If the answers seem confusing, don't feel lonely.

On one hand, we had utilities in the region telling the Regulatory Commission of Alaska on June 22 that we'll have a gap in gas supply by 2014, three years from now, and we'll have to import liquefied natural gas.

On the other hand, we had the U.S. Geological Survey earlier last week telling us there are 17 trillion cubic feet of gas yet to be found in the Cook Inlet Basin, about twice what has been discovered to date.

The USGS didn't tell us what it will cost to get that 17 trillion cubic feet, but yet another report, this one from the state Division of Oil and Gas, was out Friday confirming there is indeed new gas to be developed, but also attaching a price tag.

This will get even more confusing. This coming Tuesday, the Alaska Gas Development Corp., a state corporation, will release its long-awaited report with updated figures on what it will cost to bring North Slope gas to Southcentral by a small "bullet" pipeline.

That won't be cheap, but if the state were to pay for all or most of a pipeline, the price to consumers would come down, so we wouldn't have to import LNG.

The problem the utilities face, however, is that it will take eight to 10 years to get North Slope gas to Southcentral Alaska even if the project moves ahead immediately. As for new gas in the region, there is indeed uncertainty as to whether the needed investments will be made.

The utilities know this, of course. Their forecast of shortages in 2013 seems premised on the assumption that the oil and gas industry won't make the needed investment in new drilling, or least enough to get us the gas we need.

That's probably realistic. The utilities have to err on the cautious side because they are obligated to make sure the gas is there, that our homes and buildings are heated and the lights come on when we flip the switch.

The bottom line, as the utilities see it, is that there's not enough drilling to get the gas we need. What's useful about the reports is that the USGS tells us the gas is there in the underground rocks, and the state tells us what it will cost to extract.

But despite the generous incentives, we seem unlikely to get the gas supply we need, at least in the utilities' view.

What's surprising to me is that the state basically pays for two-thirds of exploration drilling costs through very generous exploration incentive tax credits. We're getting some bang for our buck on this now -- there is new drilling and new gas -- but the utilities are still skeptical.

This is a complicated problem and I won't blame members of the state regulatory commission if they feel the need to reach for a bottle of aspirin. These are the people who have to approve any costs incurred by the utilities to import LNG imports, which will have to be passed through to consumers. The consumers, meanwhile, will be thoroughly confused by government reports saying we have gas in Cook Inlet waiting to be found.

In their presentation to the regulatory commission, the utilities, which included Municipal Light & Power, Chugach Electric Association and Enstar Natural Gas Co., said talks with potential LNG suppliers are confidential and details of their discussions can't be laid out.

But they did say the options include a regasification plant on shore that could convert LNG back to its gaseous form as well as ships or barges that have regasification plants built on board.

It's also possible that the existing Kenai LNG plant, which is built to export the liquefied gas, could be converted and used as an import facility. That's in the mix of options too. The plant is being mothballed later this summer when the final shipments of LNG are made to Asia.

All of these things will cost money, of course. The dilemma facing the utilities and the RCA, and really all of us consumers, is whether we should invest in LNG import facilities or a regasification capacity, if there is indeed more gas to be found in the region, and maybe soon?

It seems prudent to have the capability to import if drilling results are inadequate, but there is a risk that this could strand investment if the drillers get lucky. How much of a risk to take, how much capital investment is needed and whether this should be passed through to consumers are matters that need clear and careful thought.

On top of this, legislators have to think through whether the state should pay for part or all of a "bullet pipeline" from the Slope. They also must decide whether to invest state funds in a new multibillion-dollar hydroelectric dam at Watana, on the Susitna River, to supply electricity and reduce the need for gas to generate power.

Hand me the aspirin bottle.


Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Anchorage Daily News.

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