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Unhappy about high Alaska natural gas prices? There aren’t easy solutions.

  • Author: Tim Bradner
    | Opinion
  • Updated: July 17, 2020
  • Published July 17, 2020

Hilcorp's Platform A on Sunday, April 2, 2017. (Bill Roth / ADN)

Despite the problems in our economy, let’s count ourselves lucky in some respects. What seemed a serious shortfall in regional energy for Southcentral Alaska a decade ago has been averted.

In 2010 the natural gas fields in the Cook Inlet Basin were being depleted. Utilities like Enstar Natural Gas, Chugach Electric Association, Anchorage’s city-owned Municipal Light and Power and the municipality itself were practicing electricity “brownouts” — and even neighborhood “blackouts” — if gas for power generation were to run low on cold winter days.

It seemed outlandish, but there were serious worries that gas pressure could drop low enough to trip gas meters and shut down furnaces, which could cause buildings to freeze. Utilities began planning for imports of liquefied natural gas, or LNG, to supplement local supplies.

The key problem was that the major gas producers at the time, Chevron Corp. and Marathon Oil Co., weren’t drilling and developing new gas, although geologists said there was plenty of potential for new gas in Cook Inlet.

All that seems a distant memory. Chevron and Marathon left in 2012 and 2013 after selling their aging gas and oil fields to Hilcorp Energy, a medium-sized Texas-based independent company. Hilcorp specializes in reinvigorating aging fields, and it did just that in Cook Inlet, investing big in an aggressive redevelopment program.

We now seem to have plenty of gas thanks to Hilcorp and also a state initiative that facilitated construction of a regional gas storage facility, so that surplus gas produced in summer can be stored for winter.

But let’s keep in mind that we’re paying a price for this.

Let’s give credit to Hilcorp, which is a well-run business. But the company has now come to dominate the regional gas market because there’s no other big supplier. That’s not Hilcorp’s fault.

Still, people note that natural gas prices in Alaska are about four times the national average. Hilcorp’s average sales price across all of its contracts is about $7.50 per thousand cubic feet, or mcf, people familiar with the contracts say. This compares to the average price for gas at Henry Hub, a major Lower 48 gas trading exchange, of $1.78 per mcf for July so far, according to Alaska Department of Revenue data.

What might Hilcorp’s production costs be? That’s confidential, but some people are able to draw an analogy by comparing production costs at the Beluga River onshore gas field, which is operated and partly owned by Hilcorp.

Because Beluga River is partly owned by the city-owned Municipal Light and Power, some of its costs are public, and the production costs for April and May were $2.47 per mcf for May and $2.15 per mcf for April.

This is in an aging onshore Beluga field and wouldn’t apply to the more expensive offshore fields, where Hilcorp also gets gas, or its newer onshore Kenai Peninsula gas wells. Also, remember that the margin between sales price and cost is what pays for steady development and drilling work needed to find new gas within the producing fields.

Still, being virtually the sole supplier in the region there is little pressure on Hilcorp to keep a lid on prices over time. There could be new demands on gas supplies, too. Two big mining projects, Donlin Gold and Pebble, both plan to import gas from Cook Inlet to provide power.

There’s no guarantee these will be built, but if they are constructed, new demand will likely push regional prices up. These will be private gas sales contacts not subject to public regulatory review.

Some think that the Regulatory Commission of Alaska should try to squeeze down Hilcorp’s gas prices for utilities, or at least require the company to make more information available on costs and particularly estimates of remaining gas reserves. None of this information is public now.

A better solution in bringing down regional prices would be to get new competition into the market. One way to do this is to help small companies that have found new gas, like BlueCrest Energy near Anchor Point, get gas into the market.

Another way to get more competition is encourage imported liquefied natural gas, or LNG, which was looked at in 2011. LNG is now very cheap on world markets. The mothballed ConocoPhillips LNG plant at Nikiski, near Kenai, could easily be converted to a regional LNG import facility.

In fact, Marathon Oil, which now owns the plant, is thinking of this to supply energy for its oil refinery, which is nearby. The company has even applied to the Federal Energy Regulatory Commission for permission to work on the conversion. Marathon has a lot of issues on its plate on a corporate level, however, so this project may be on the back burner.

However, there are companies interested in investing in Cook Inlet’s gas supply infrastructure to import LNG and to compete with Hilcorp for regional utility contracts. The belief is that spot cargoes on LNG can be purchased in Asia and landed in Cook Inlet for about $4 per mcf.

There would be additional costs with regasification and storage at Nikiski, but the $3.50 per mcf difference between the landed cost and what Hilcorp is sells gas for leaves room to pay the added costs and offer utilities an attractive price. All this may be academic, however, because Marathon owns this facility and will decide itself what to do with the plant.

Hilcorp’s recent contract with Enstar Natural Gas runs until 2033, and another contract with Matanuska Electric Association runs to 2028. These utilities are the biggest regional purchasers, since Chugach Electric and ML&P mostly supply themselves from their share from the Beluga field.

While this seems to indicate the market is locked up, Enstar does have a provision in its contract with Hilcorp allowing the utility to purchase other gas.

The big Alaska LNG Project could have brought gas to Southcentral Alaska at lower cost — $5 per mcf was estimated — but this project faces challenges.

Summing up, as amazing and distressing as the difference is between Lower 48 prices and what we pay here, there are no easy solutions. We just have to suck it up.

But at least we have the gas. Our homes are warm and the lights are on. That’s worth a lot, actually.

Tim Bradner is copublisher of the Alaska Legislative Digest and Alaska Economic Report.

The views expressed here are the writer’s and are not necessarily endorsed by the Anchorage Daily News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)adn.com. Send submissions shorter than 200 words to letters@adn.com or click here to submit via any web browser. Read our full guidelines for letters and commentaries here.

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