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Southcentral Alaska may have to import natural gas to heat and power homes

Suzanna Caldwell
The Tyonek offshore oil platform in Cook Inlet. November 1, 2012
Loren Holmes photo
Offshore oil platforms in Cook Inlet. November 1, 2012
Loren Holmes photo
Offshore oil platforms in Cook Inlet. November 1, 2012
Loren Holmes photo
The Spark offshore oil platform in Cook Inlet. November 1, 2012
Loren Holmes photo
Offshore oil platforms in Cook Inlet. November 1, 2012
Loren Holmes photo
The Monopod offshore oil platform in Cook Inlet. November 1, 2012
Loren Holmes photo
The drift river oil terminal, at the base of Redoubt Volcano on Cook Inlet. November 1, 2012
Loren Holmes photo
The Osprey platform in Cook Inlet. November 1, 2012
Loren Holmes photo
The Tyonek offshore oil platform in Cook Inlet, with Mt. Spurr behind. November 1, 2012
Loren Holmes photo

Despite reports that Cook Inlet may be awash in natural gas, leading to a surge of interest by smaller oil-and-gas companies, utilities are now looking elsewhere to ensure supply meets Southcentral Alaska’s growing demand in the face of aging fields whose output has dwindled precipitously. As a result, the state with the biggest supply of natural gas of any in the union will, within two years, find itself importing the very quantity of gas it has for decades intended to ship overseas or to the Lower 48 to secure its economic future.

How much importing natural gas will cost Alaskans living in the state’s largest city, or the Kenai Peninsula or the Mat-Su Valley is unclear. Certainly, it will be more expensive. But there’s no other way to ensure Alaskans don’t freeze during winters that routinely see the temperature dip to minus-20 or colder.

Speaking at a recent Regulatory Commission of Alaska hearing, Lee Thibert, vice president of strategic planning at Chugach Electric, said utilities are already seeking proposals for importing liquefied natural gas or compressed natural gas.

New wells, but not enough

Thibert spoke on behalf of the five Southcentral Alaska utilities -- including Enstar, the region's natural gas supplier. Natural gas shortages are expected by the fall of 2014.

New Cook Inlet wells are coming online, but they aren't coming fast enough, according to a new study by Petrochemical Resources of Alaska. Estimates from the Anchorage-based company show that despite an average of six wells a year coming online, that’s not enough to keep pace with waning production from older wells. According to the study, 13 to 15 new wells a year are needed to meet the gas needs of Southcentral Alaska -- and that may not happen until 2014.

“We've been talking about this for a long time,” said Chugach Electric spokesman Phil Steyer. “As things have progressed, we've now come to this as the next logical step.”

The utilities have hired Northern Economics to help them decide whether liquefied natural gas (LNG) or compressed natural gas (CNG) makes more sense.

LNG or CNG?

There are pros and cons to each.

The LNG market is a worldwide market established since the 1960s. More LNG -- natural gas that's cooled to about minus-260 degrees and condensed to take up 1/600th the space as uncompressed gas -- can be transported at one time. However, the process of re-gasifying is complex.

The CNG Alaska would consider importing mostly comes from Canada, and does not have the same sort of global infastructure. Enstar spokesman John Sims said compressed gas can essentially be put right into the system without having to “warm it up.”

Electric utilities may also have the option to use liquid fuel in the event that natural gas availability doesn't meet demand. While that works in the interim, the high cost of liquid fuel is a deterrent.

“It's not an option you want to be in for a long period of time,” Steyer said.

Enstar, the region's natural gas utility, doesn't have that option. Sims said that once supply falls short of demand, cutbacks will begin -- and Enstar may have to turn away new customers. “We're still a ways from that point, but that's something that's possible,” he said.

How much power costs will rise remains unknown, but Sims noted the current cost of Cook Inlet gas is $6.16 per thousand cubic feet. In the Lower 48, natural gas prices have been depressed by booming supplies of shale gas, falling around $2-$4 per thousand cubic feet. The current market rate of LNG, however, is about $16-$18 for an equivalent amount.

But Sims said customers shouldn't expect their bills to triple overnight. Adding imported gas will drive costs up. How far depends on how much gas needs to be imported. Those new costs will be split by all of the utilities in the region.

An irony is that Alaska's natural gas has recently been a part of supplying the very market its utilities are now apprehensive about buying from. Since 1967, the only LNG manufacturing plant in the U.S. approved for commercial export to non-free-trade agreement countries, such as China and Japan, has been the one at Nikiski, on the Kenai Peninsula. The first shipments under a long-term supply contract began in 1969 and went to utilities in Japan.

Other prospects a long way off

The utilities acknowledge that other energy projects coming online could eventually offset the region's natural gas woes. A natural gas pipeline from the North Slope to tidewater or hydroelectric power from the proposed Susitna-Watana dam would offset Southcentral’s natural gas woes, but both projects are probably years from approval and could take a decade or more to build.

State Rep. Mike Hawker, R-Anchorage, says Southcentral Alaska should turn Cook Inlet into a trading hub to keep up with its energy needs. He called it an apparent paradox -- that producers must be willing to work with utilities to supply gas to residents while at the same time having enough supply to ship natural gas to world markets.

“We start controlling our destiny,” he said. “We're just not the end of the supply chain line.”

Hawker is one of the fathers of the Cook Inlet Recovery Act. Signed into law in 2010, the bill called for a natural gas storage facility in Kenai and tax incentives to spur Cook Inlet development.

The Cook Inlet Natural Gas Storage Alaska facility (known as CINGSA) started holding gas this summer. With winter here, the facility, designed to bolster the Southcentral’s natural gas system during times of peak demand, is a little over half full. While smaller wells have come online in recent years, no large natural gas discoveries have been discovered.

'We exported our resource'

“We have to accept that the days of cheap gas are over everywhere in the world,” Hawker said. Southcentral Alaska "had the luxury of the cheapest gas in the world, anywhere, but now it's going to be driven more by the world market.”

Sims noted that while the tax incentives have lured new players to Cook Inlet, there haven’t been enough of them to bridge the gap.

“The problem is they aren't being successful, and we're not seeing the type of activity we were forecasting,” he said.

Bob Shavelson, executive director of Cook Inletkeeper, a nonprofit that aims to protect the Cook Inlet watershed, said that for the last 30 years Cook Inlet has pushed its gas elsewhere, though both the Kenai LNG plant -- the ConocoPhilips-owned plant in Nikiski that processes and exports LNG, mostly to Japan -- and the now-shuttered Agrium fertilizer plant.

Some estimate that up to a third of Cook Inlet’s natural gas has been exported over the last four decades. How much? About 2.27 trillion cubic feet -- or enough gas to supply Anchorage for 33 years at the current rate (utilities expect to use 68 billion cubic feet of gas in 2012.)

Shavelson, whose group advocates for such renewable energy as wind and hydro, said natural gas can be “the bridge to renewables.”

“We exported the bulk of our resource,” he said. “We knew this day would come, and here we are flat-footed.”

New future for Kenai LNG plant?

Northern Economics plans to finish its analysis on what type of natural gas to import by the end of the year. Based on that analysis, the utilities are expected to decide by March.

The utilities have also been in contact with ConocoPhillips on whether the Kenai LNG plant might play a role by modifying it to convert LNG back to gas.

The company planned to close the facility in 2011, but this past summer began exporting the first of four cargo shipments of LNG to Japan, which needed energy after the tsunami's destruction of the Fukushima nuclear power plant last year.

Conoco spokeswoman Amy Burnett said in an email that the final shipment of LNG left the Nikiski plant last week. The plant is still operational, but Conoco’s export license sunsets in March. The facility could be modified to re-gasify LNG.

So when's the deadline for bringing either option online? It all depends on how Cook Inlet’s natural gas fields play out.

“Before we’re short” on gas supplies, Steyer acknowledged. “But that's still a little bit of a moving target itself.”

Contact Suzanna Caldwell at suzanna(at)alaskadispatch.com

Correction: An earlier version of this article listed the price of natural gas and liquefied natural gas in terms of per million cubic feet. That was incorrect. The story has been corrected to reflect that pricing is based per thousand cubic feet.