A natural gas shortage in Southcentral Alaska this winter appears to have been averted, but long-term problems in the regional gas supply picture remain. Hilcorp Energy LLC took control of Marathon Oil Co.'s Cook Inlet assets -- mostly gas producing wells -- on Jan. 31 as the sale of those assets was completed. Hilcorp had previously acquired Chevron Corp.'s Inlet properties, which included the producing offshore oil platforms.
Hilcorp immediately went to work to increase production on the Marathon producing wells and also called on regional utilities like Enstar Natural Gas Co. to discuss their needs. Enstar has been worried about its supply because the utility is still short of having its 2013 gas requirements under contract, a situation Enstar has not been in before, at least not to this degree.
Gas supply shortage
The utilities' gas supply shortage—Enstar's in the short term and all utilities, including electric utilities—for a mid-term, has surprised many Alaska state officials and community leaders in the region. Cook Inlet is thought to have good potential for new natural gas discoveries, and a generous set of state incentives has attracted new explorers. Also, new gas is being discovered.
The utilities believe, however, that not enough new gas is being discovered and that what is being found cannot be put into production fast enough to meet a projected shortfall. Imports of liquefied natural gas or compressed natural gas are being discussed, a notion that disturbs Gov. Sean Parnell. Parnell and other state officials, including Commissioner of Natural Resources Dan Sullivan, believe imports should be the last option.
They are convinced there is gas waiting to be found in Cook Inlet and that the explorers will find it. Meanwhile, they are concerned about utilities locking themselves into long-term supply contracts on imported LNG or compressed gas and also investing in regasification and other facilities that local consumers will pay for through the rate base in utility bills.
Meanwhile, Cook Inlet Natural Gas Storage Alaska, Southcentral Alaska's new gas storage facility on the Kenai Peninsula, has been a savior for Enstar this winter. It is the first year of operation for CINGSA, and Enstar has been able to store gas produced last summer, which helps the gas "deliverability" problem during winter peak demand periods. Enstar's parent company, owns CINGSA in a partnership with Warren Buffett's MidAmerican Energy Holdings Co.
Enstars Problem
However, during very cold weather last December Enstar drew down its supply in storage much more heavily than had been anticipated. At the same time Hilcorp had notified Enstar that it was having to constrain supply to Enstar because of its own storage problems. Plus, an auction-type bidding system the utility had put in place for short-term gas supplies that enabled producers to bid to supply smaller quantities of gas for Enstar's short-term needs, was not generating results. Producers in the Inlet appeared not to have any spare gas. Enstar was worried, and there was one point in December when the utility was within hours of asking Anchorage's city-owned Municipal Light & Power to fire up its oil-fired generators, which the city utility maintains in its gas-fired power plants, so as to divert gas supply to Enstar.
What eased the situation was warmer weather in late December and January. Still, Enstar warned state legislators in a January briefing that there were still several weeks of winter left, and if there were more cold snaps and no new supply available Enstar could deplete its gas stored in CINGSA in March. Luckily, warmer winter weather continued. Also, after January 31 Hilcorp was able to take control of the Marathon wells and increase gas production. The crises appeared to have been diverted.
However, had the cold weather continued and had there been no new gas, Enstar might have had to ask the electric utilities for help. They would have had to cut back their use of gas to divert the available supply to Enstar so that its system, vital to space heating across Southcentral Alaska, would have been preserved.
To do this, the electric utilities would have had to take a number of steps, including switching to oil-fired generation—Anchorage's Municipal Light & Power has that capability; have Chugach Electric Association possibly cut off its supply of power to the City of Seward—which has oil-fired backup generation; and to bring down power from Golden Valley Electric Association in Fairbanks—which has oil- and coal-fired generation. Also, hydroelectric power from the Bradley Lake hydro project near Homer could be ramped up to some extent.
Fragile system
This could preserve Enstar's system, but the backup power generation plan would be expensive. This illustrates how fragile the system is. For example, the plan assumes GVEA in Fairbanks would have surplus power available or that it could ramp up its oil-fired generators to meet the Southcentral demand. There are also limitations on how much power can be brought down the Intertie line from Fairbanks. Likewise, there are limitations on the southern end, on the Intertie connection between the Kenai Peninsula and Anchorage, over which backup Bradley Lake hydro power would be delivered.
While Enstar faces a supply problem this year, the gas situation for the electric utilities, like Chugach Electric and Anchorage's city-owned ML&P, is less serious for the near term. Chugach has gas supply under contract until 2016 and ML&P has its own gas as a one-third owner of the Beluga gas field. However, the Beluga field production is declining at about 17 percent a year, so ML&P will soon be seeking other supplies, as will Chugach after 2016.
Also, Matanuska Electric Association, serving the Mat-Su region north of Anchorage as well as the Eagle River and Chugiak communities in north Anchorage, will be bringing its new Eklutna gas-fired power plant on line. The plant is now in construction. MEA has not yet secured its supply of gas, but the plant is designed to also use fuel oil, although it is an expensive alternative. MEA may have to actually start up its plant with oil and operate in that mode until there is new gas.
There is some better news, however. Cook Inlet Region's new Fire Island wind project is now operating near Anchorage and during December generated power for its customer, Chugach Electric. That meant that Chugach didn't need to burn as much gas that month.
The new Southcentral Power Project built by Chugach and ML&P has also gone into operation using gas-fired turbines that are much more efficient, using less natural gas to generate the same amount of electricity. ML&P is also installing more efficient generation equipment in its power plants in Anchorage, which will reduce its need for gas.
Undiscovered solution
It seems likely that the Southcentral utilities will muddle through this year at least, but how serious is the longer-term gas supply problem, and how did we get into this situation?
Geologists feel there is a lot of undiscovered gas in Cook Inlet, so what's the problem? Also, if Hillcorp was able to ramp up production from the Marathon wells in February after it took ownership, why wasn't Marathon producing this gas earlier in December, when Enstar was really worried about supply?
Hilcorp's problem before it took over Marathon was that because it didn't legally own Marathon's properties it couldn't make commitments to new contracts. Since Marathon was not active in the closing months of its owning the fields, it didn't make new contracts, and little or no new gas was being developed.
This problem was aggravated by an extended Federal Trade Commission investigation of the Marathon sale, which extended through most of 2012. State DNR Commissioner Dan Sullivan said that review essentially stopped most new gas development activity in the Inlet because of the uncertainties it created. It was only late in 2012, and after the state intervened to negotiate a Consent Decree with Hilcorp, that the FTC backed off on the investigation.
Hilcorp won't say how much gas remains in the Marathon properties but the fact that the company is now talking to utilities seems to indicate there is gas there.
On the horizon
What about new gas discoveries? Several companies are exploring, including experienced, well-capitalized firms like Apache Corp. While Apache is mainly targeting oil, as are most of the explorers, natural gas is usually found when oil is discovered. If gas is discovered offshore it will take several years for platforms and pipelines to be built. If gas is discovered onshore it will still take time, perhaps years, if infrastructure must be built or if there are permitting problems. If the gas is found near an existing pipeline, it might be in production fairly quickly.
There are two gas discoveries where this could happen. One is NordAq's discovery on Cook Inlet Region Inc. subsurface leases within the Kenai National Wildlife Refuge. This could be an important discovery and it could be in production soon—by 2015—if the company receives its permits. It is very near a pipeline, too. A second gas discovery that could be produced soon is at Cosmopolitan, an oil and gas deposit about three miles offshore Anchor Point. More test drilling at Cosmopolitan is planned this spring by Buccaneer Energy with a jack-up rig, but the gas is known, lies a short distance from shore, and once ashore is near an existing pipeline.
With luck, these two discoveries could fill the gap estimated to occur in 2014 and 2015, possibly avoiding the need for imported gas. After that, by 2016 or 2017, there could be larger discoveries. Furie Operating Alaska has made a gas discovery in Cook Inlet, but it is farther from shore and will require a pipeline and platform, if the discovery pans out.
Also, by then there could be more new gas from Buccaneer's onshore drilling and new development by Armstrong Oil and Gas around its small North Fork field east of Homer. In the longer term, by 2020 or later, gas could be brought from the North Slope by pipeline.
There's little doubt the gas is there in Cook Inlet. The question is whether enough of it can be found, and fast enough, to meet the needs of Enstar and the electric utilities. If not, imported gas is inevitable.
This article originally appeared in the April edition of Alaska Business Monthly magazine and is used with permission. Mike Bradner is publisher of Alaska Legislative Digest.