Energy

Cook Inlet's natural gas bonanza: What went wrong, and why?

The Cook Inlet region floats on a sea of natural gas, so why all the panic about a shortage?

Growing fears that ENSTAR Natural Gas Co. wouldn't be able to meet demand during a cold snap or that there might not be enough gas for local power companies to keep the lights on has sent the utilities on a quest for new supplies.

They've even talked about importing liquefied or compressed natural gas by ship, but the Alaska Legislature used those fears to win support for a $450-million small-diameter pipeline project, promising "Alaska's gas for Alaskans."

That effort comes while many believe substantial amounts of undiscovered gas remain in Cook Inlet Basin.

According to the United States Geological Survey, about 19 trillion cubic feet of natural gas is waiting to be found in Cook Inlet – gas that's considered technically recoverable, meaning it can be discovered and produced with current technology.

That's a mean estimate. The ranges are as low as 5 trillion cubic feet, and as high as 29 trillion cubic feet. Even the low estimate could supply years of local demand. Southcentral's homes and electric utilities consume less than 100 billion cubic feet per year.

So how did a region that was Alaska's first petroleum producer and once delivered so much surplus gas that it sought new industries to use it wind up in such straits? After all, as recently as 2010 Cook Inlet was exporting a third of its gas overseas.

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Problems began in 2005

Those who follow the industry say Alaskans themselves play a prominent role in creating those shortages. Even decisions that seemed to be in the public interest at the time they were made backfired on the state.

For Department of Natural Resources Acting Commissioner Joe Balash, the problems go back to 2005.

At that time, decades of production declines had begun cutting into Cook Inlet's gas surplus. Enstar and others began to worry. But Marathon Oil, one of the region's biggest natural gas producers, reached a gas supply agreement with Enstar to meet all of its needs for years to come, but that agreement would have linked prices to those in the Lower 48 – where prices were much higher at the time.

There were protests from consumers as well as the administration of former Gov. Frank Murkowski, who weighed in through the Department of Law's Office of Regulatory Affairs and Public Advocacy (RAPA).

The protests convinced the Regulatory Commission of Alaska (RCA) to reject the contract.

"Enstar's proposed (Gas Supply Agreement) immediately raised concerns because it would have increased natural gas costs to the company's captive ratepayers – a topic of special concern for the Murkowski administration," then-Attorney General David Márquez said following the decision.

The new, higher prices were intended to spur exploration and bring on new reserves, but Márquez noted that what the contract would actually do is sell existing, proven reserves at the new high price.

Beginning of end for Marathon

The rejection of that contract may have been the beginning of the end for Marathon in Alaska. Over the next several years the company sold its interest in the Nikiski LNG export plant to co-owner ConocoPhillips, and sold its gas production operations to Hilcorp Energy Co.

Even before departing, Marathon began pulling back its spending on oil exploration and production as it prepared to leave Alaska. Other producers, including ConocoPhillips and Chevron Corp.'s Unocal subsidiary, did the same.

"That contract rejection had a chilling effect on the industry in Cook Inlet -- that's my assessment anyway," Balash said.

Others thought so too, and the Alaska Legislature in 2010 passed a bill pushed by Rep. Mike Hawker, R-Anchorage, that told the Regulatory Commission of Alaska to consider more than just the price to ratepayers when it reviews gas contracts.

Hawker has linked that and other contract rejections to Cook Inlet's gas shortages in later years.

"Some people thought the RCA's denial of contracts was unreasonable and resulted in compromising the gas deliverability capabilities," he testified before the RCA.

After the contract rejections, both Marathon and Unocal sold their properties to Hilcorp Energy Co., one of a new breed of smaller exploration and production companies that are expected to represent Cook Inlet's future.

Hilcorp President Greg Lalicker said that neglect was clear when they received the final set of keys to their new properties earlier this year, but that wasn't unexpected. It's what usually happens when the big guys move on and the little guys take over.

"They stop drilling new wells, and they stop fixing wells when they break because they see they are on an exit path," he said.

That neglect, he said, means that the fields Hilcorp acquired weren't producing as much oil or gas as they could, but it also means there is room for new production if they're aggressively operated.

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"The first thing you've got to do is to go in and start fixing broken stuff," he said.

Charging more to keep the lights on

That's already turning around production in the Cook Inlet and the company has been signing firm contracts with local utilities. Another new explorer, Buccaneer, is one of the companies doing the same.

Meanwhile, changes in state law allowed the RCA to look at more than just low price when it decides what's best for consumers, said Steven DeVries, chief assistant attorney general with RAPA, the state's consumer protection agency.

"The other thing it has to consider is what would happen if the utility couldn't meet its supply agreements."

That means that Southcentral residents might be charged a bit more to ensure the heat and lights stay on.

But the seeming shortage also resulted in another problem for the basin that compounded the first and lingers in Cook Inlet today. With gas shortages appearing in the region's future, objections were made to the continued export of natural gas by the Nikiski LNG plant owned by the two big oil companies.

That plant has shipped gas to Japan for decades when Cook Inlet was awash in huge surpluses. When those surpluses vanished, exports became controversial. In some cases, utilities and consumers opposed them.

"The utilities didn't oppose exporting LNG just for the sake of it, but they wanted to make sure their needs were met first," Balash said.

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While the Nikiski plant exported gas, it also provided an important buffer for Anchorage on cold winter days. Gas could be diverted from the plant to keep homes warm. It also had an important in the role keeping wells flowing during the summer when there was little home heating demand. That keeps wells producing steadily so they don't become clogged.

And the export plant provided a way for exploration companies to sell gas in an isolated marketplace that doesn't actually use all that much.

Another anchor consumer that played a similar role for the region was Agrium, the fertilizer plant also located in Nikiski. Such plants make fertilizer out of natural gas, and are located only where natural gas is cheap and plentiful. It closed in 2007 and was mothballed.

Ending natural gas exports to Japan isn't likely to produce the boost to supply some expect, RCA commissioner Robert Pickett warned the Legislature before ConocoPhillips shut the plant earlier this year.

"If the LNG plant ceases to export gas, some people will think that more gas will be available for ratepayers, but what will likely happen is that producers have less incentive to explore for gas without the anchors," he said.

After protests to the Nikiski plant's federal export license were made, exploration did decline -- even though the exports were eventually approved, Balash said.

ConocoPhillips voluntarily gave up its export license earlier this year.

Without those anchor consumers, the Alaska Legislature stepped in and authorized the Cook Inlet Natural Gas Storage Alaska, an underground storage facility that can be filled during the summer and drawn down when peak winter demand hits.

That just went into service last year, and has already been relied on to meet local needs, utilities say.

The new high prices received by natural gas producers, along with the steady demand from CINGSA, new state tax credits and other incentives for drilling appear to be turning around production.

"We've seen some signs of success, and we are expecting more," Balash said.

Keeping Cook Inlet growth going

It's changing the motivations of the new explorers drawn to the market.

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"They take risk and they expect rewards," Balash said.

To keep growth going, the Department of Natural Resources has called on ConocoPhillips to apply to reopen the Nikiski LNG export plant. Also, with new production coming in Cook Inlet, Agrium is looking at the possibility of reopening the fertilizer plant.

New places to sell gas are needed to keep explorers interested in Cook Inlet, he said.

"If we want to see ongoing exploration for and production of natural gas we need to grow the market, and we need to grow it beyond just the utility load," Balash said.

Hilcorp's Lalicker said his company will remain active, but isn't likely to make the big investment to find huge amounts of gas if it has nowhere to sell it.

"Would I go out and spend lots of money looking for huge gas reserves, because you don't have any place for it to go right at the moment," Lalicker told the Legislature.

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"That's not my business model, I'm chasing lots of little bites, and I can actually time those little bits to the market as the market evolves," he said.

Contact Pat Forgey at pat(at)alaskadispatch.com

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