Energy

Hilcorp warns Alaska utilities about uncertain Cook Inlet natural gas supplies

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Officials with several Alaska utilities say they’ve been informed by Hilcorp that the company does not currently have enough natural gas reserves in Cook Inlet to provide for new gas contracts. Those contracts face renewal in the next two to 11 years.

The oil and gas company has said an ongoing drilling program could change that, the utilities say. Also, the state says Cook Inlet has plenty of gas awaiting discovery to meet future needs, while Hilcorp has an ambitious plan to continue investing in the Inlet, at least in the next few years.

Also, the utilities generally say they don’t have short-term concerns about gas supply, and Southcentral Alaska isn’t facing the situation from around a decade ago, as concerns about gas availability in the winter prompted discussions about rolling brownouts and voluntary reductions in home heat.

But the notice still provides a significant challenge for six utilities from Homer to Fairbanks, along with two state agencies.

The utilities and the state announced last week that they have launched a concerted effort to collectively begin planning for the Railbelt’s long-term energy needs for the coming years and decades.

It’s also led to questions about Hilcorp’s long-term plans for the Inlet, a basin with decades-old infrastructure and declining gas and oil. A state official said Hilcorp has indicated it wants to reduce its role in the Inlet in the decades ahead.

A Hilcorp spokesman said in an email Monday that it expects to spend hundreds of millions of dollars in Cook Inlet to produce gas there in the coming years.

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“Since coming to Alaska, Hilcorp has invested nearly a billion dollars on natural gas projects in the Cook Inlet,” said the spokesman, Luke Miller. “We anticipate spending hundreds of millions of dollars in the next few years and drilling 17 new wells this year to produce additional natural gas for Alaskan homes and businesses. We are proud of the work we have done to revitalize the Cook Inlet basin and fuel local Alaskan markets over the last decade. Hilcorp is committed to continuing our investment into the future and satisfying the commitments we have made to local end users.”

The company is the dominant energy supplier for more than half the state’s population, providing around 85% of the gas that heats and powers homes and businesses across much of Alaska. The gas it produces from the Cook Inlet basin travels in pipes to be generated into electricity at power plants or to eventually reach homes for heating.

The new group, which has begun holding meetings but does not yet have a name, will look for ways to diversify the utilities’ energy supply, including with new sources of renewable power or gas, members said.

The groups consists of the largest utilities in Alaska: Enstar Natural Gas and Chugach Electric Association based in Anchorage, and Matanuska Electric Association in the Palmer-Wasilla area. They’re teaming up with Homer Electric Association and, in Fairbanks, Golden Valley Electric Association and the Interior Gas Utility. The Alaska Energy Authority, a quasi-governmental agency created to lower energy prices, and Alaska Department of Natural Resources, which will provide data on gas prospects, round out the members.

“We understand the uncertainty inherent in relying on a single source to meet a significant portion of our demand,” the group said in an announcement last week.

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“Our goal is to work together for long-term solutions,” it said. “This requires a better understanding of each utility’s constraints and needs based on existing contracts and forecasting our collective demand growth into the next decade as well as considering additional options to meet the unique energy needs of our region.”

Hilcorp tells utilities: Don’t rely on us

The utilities that buy gas from Hilcorp say they’ve been told that the company doesn’t have the gas available to meet their next contractual cycle, at least not at the moment. The meeting was held in April, a state official said.

Chugach Electric and Matanuska Electric, the state’s two largest electric utilities, face expiration dates in six years. The contract for Enstar, which provides gas for heat and cooking for more than half the state’s population, expires in 2033.

“This is a matter of being prudent,” said Lindsay Hobson, a spokeswoman with Enstar who’s in the new group. “We need to be proactive in looking at that time frame, and it’s an opportunity to be collaborative to better understand the market.”

Homer Electric faces the first contract expiration date in April 2024, for what state officials have described as a relatively small amount of gas.

Several utility representatives said last week they have no indication that Hilcorp is leaving the Inlet.

“The way they worded it to gas purchasers was not to rely on Hilcorp for gas beyond existing contracts,” said Julie Hasquet, a spokeswoman with Chugach Electric. “I don’t think they’re leaving.”

Curtis Thayer, executive director of the Alaska Energy Authority, said Hilcorp has indicated it wants to play a smaller role in the Inlet in the decades to come.

“(Some of) the utilities have gas contracts for the next 10 years, so it’s not that they’re leaving the Inlet,” Thayer said.

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The electric utilities get about 80% of their energy from natural gas, with most of the rest from hydropower, primarily from the state-owned hydroelectric project at Bradley Lake near Homer. A small amount of solar and wind energy completes the picture, he said.

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Besides Hilcorp, a few small companies provide a fraction of the Inlet’s gas, Thayer said.

Driving the formation of the new group, in part, is that “Hilcorp has indicated they would not like to have 80% of Cook Inlet (gas production),” he said. “They’d like to see that decrease over the next couple decades.”

The group will consider what the longer-term energy picture in the Cook Inlet region will look like, Thayer said.

Ramping up renewables

Also driving the discussion, Thayer said, is the electric utilities’ preexisting planning to increase their renewable-based power, and a bill from Gov. Mike Dunleavy to dramatically increase renewable energy use in Alaska in the next two decades.

The state energy authority will lead the new group’s efforts to look at renewable opportunities, such as large-scale wind, solar or tidal projects that the authority may be able to support with loans, Thayer said. They could be independent power projects, owned by companies that sell their power to the utilities, he said.

The Bradley Lake hydroelectric project could also be expanded to provide more power, he said.

Hilcorp has played a critical role in Cook Inlet, once the state’s top oil and gas region until the giant Prudhoe Bay field was developed in the 1970s on the North Slope. The company arrived in the Inlet more than a decade ago, as the state offered generous tax credits to oil and gas companies to incentivize production.

The Houston, Texas-based company has been credited with helping resolve concerns about declining gas supply in the Inlet in winter that surfaced around that time. Also, utilities in the new group helped develop an underground natural gas storage area in a depleted gas reservoir in the Inlet, ensuring that a bank of gas is available to avoid potential winter shutdowns.

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In more recent years, Hilcorp has turned much of its attention to the North Slope, becoming the operator of Prudhoe Bay, after acquiring BP’s assets in 2020.

Homer Electric isn’t currently concerned, said Brad Janorschke, the general manager for the utility, in an interview last week. But long-term solutions that include more renewables will need to be figured out, he said.

The utility is closely watching the situation involving Hilcorp and the Cook Inlet gas supply, he wrote in May 10 report to members.

“Hilcorp held a meeting with their stakeholders to inform them that while they have sufficient gas for their existing fuels contracts, they did not have firm gas available beyond that,” Janorschke wrote.

Hilcorp told the utilities it won’t be able to provide gas for new contracts, unless ongoing drilling turns up new gas reserves, Janorschke wrote.

“My understanding is they want to see what happens with this drilling season before proceeding with signing any gas contracts,” Janorschke said in the interview.

Utilities will always need natural gas to make power, since renewable energy is seasonal and fickle, he said.

State confident in gas reserves

An official with the Alaska Department of Natural Resources said Cook Inlet still has ample gas to meet future needs.

“There are several fields with large amounts of known natural gas reserves that companies are working on developing — if these projects are successful, they could provide significant additional volumes for the utilities to place under contract,” said John Crowther, deputy commissioner for Natural Resources, in an email.

Crowther said the state can provide geological and other data about gas opportunities. The state is also evaluating regulatory requirements and fiscal terms in Cook Inlet that may be obstacles to development, he said.

The Interior Gas Utility in Fairbanks buys a small amount of gas from Hilcorp, under a contract that will not end for 10 years if the utility opts to renew it periodically, said Elena Sudduth, a spokeswoman with the utility.

The utility might have to look beyond Cook Inlet for gas, she said.

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A direct pipeline from the North Slope to Fairbanks could provide gas for the utility, which is small but quickly growing, she said. The utility could also receive gas from an offtake pipe from the proposed large gas line project, an idea long discussed by Alaska political leaders and oil companies but never built.

Golden Valley Electric makes most of its power from coal but buys gas-generated electricity from Southcentral utilities to reduce costs, said Meadow Bailey, a spokeswoman with the utility.

The utility is concerned that if additional sources of gas are not found, there will be less gas-generated power for Golden Valley to buy. That energy source provides a strong value for the utility, Bailey said.

She said the new group can look for solutions.

“We are definitely concerned because we rely on the other Railbelt utilities to generate electricity for us using natural gas,” she said. “It benefits our members to use as much natural-gas-generated electricity as we can.”

Correction: An earlier version of this article incorrectly said Hilcorp had not replied to a request for comment.

Alex DeMarban

Alex DeMarban is a longtime Alaska journalist who covers business, the oil and gas industries and general assignments. Reach him at 907-257-4317 or alex@adn.com.

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