EDITORIAL: The domino effect that could tank Alaska’s economy

As February began in Southcentral Alaska, a deep cold snap underscored the necessity of a rock-solid supply of heat and electricity. Twenty-below temperatures sent home boilers into overdrive, and the result was a record level of natural gas consumption. Two weeks later, with temperatures hovering around freezing, the temptation to forget about what 20 below felt like is real. But we need to keep that scenario in the front of our minds because a natural gas supply shortfall is closer than most people realize — and what happens in the next few months will have long-standing ramifications for the price of energy (and just about everything else) in Alaska.

Here’s the background: Southcentral Alaska gets most of its heat and electricity from natural gas, which for decades has come from wells in Cook Inlet. The combination of abundant gas and short transportation from the source has meant that gas was cheap for producers to develop and for utilities to buy. And the result has been relatively low-cost energy that underpinned the economic growth in the region, from Homer to the Mat-Su.

But lately, that economic calculus has been shifting more rapidly than most Alaskans have known. The first alarm bells sounded in 2010, when big oil and gas producers left Cook Inlet because the dwindling proven reserves and small local market didn’t offer enough financial incentive to remain. But the region was bailed out of that potential supply crisis by the arrival of Hilcorp, which took over natural gas production in the Inlet in a relatively seamless transition — which led to unwarranted confidence among Alaskans that the next time such a shortfall loomed, it would inevitably resolve itself without outside intervention. Hilcorp now supplies more than 80% of the gas used by Railbelt utilities.

And so, a decade and change later, we’re on the verge of arriving at a serious multi-year shortfall between when utility gas contracts with Hilcorp expire (and might not be renewed because of supply constraints) and when a stable solution can be put in place. It’s not a pretty picture: The most likely option for supply is imported natural gas, which will cost 50-60% more than Cook Inlet gas today. It also can’t be brought online for years — perhaps not until 2030, according to utilities who have been trying to line up gas supply.

The thought of importing natural gas will feel like a personal affront to Alaskans who know that a massive gas basin exists on the North Slope. But that North Slope gas can’t reach Southcentral without a pipeline estimated to cost $40-60 billion (or, if a “bullet line” were built solely to supply Alaskans, $10 billion). It should be obvious to anyone who has been paying attention that the private sector isn’t clamoring to take on that risk, and the political cost (and economic risk) of making that kind of fiscal commitment with public funds looks too high for it to be a realistic possibility.

And even if a go-forward decision on a gas line were somehow made tomorrow, it would take several years before that gas reached Alaska communities. Homer Electric Association’s gas contract was set to expire six weeks from today before Enstar negotiated what amounts to a yearlong extension on their behalf. Other utilities’ contracts expire in the handful of years to come, with Enstar’s contract the last to expire in 2033. If those contracts lapse without sufficient supply to replace them and before imported gas comes online, the resulting increase in heat and power costs will make the 50-60% increase from imported gas look like chump change. Southcentral’s current gas supply costs roughly $8 per thousand cubic feet of gas; the kind of cobbled-together solutions that will be possible if Cook Inlet gas is insufficient in the coming years could cost nearly four times that. That won’t mean a fourfold increase in the total cost of power, of course, as the shortfall is a fraction of the total quantity of gas. But it will be an amount that will make life difficult for Alaskans across the state.

Because the fact is, the cost of power factors into all other costs in the state. If there’s less low-cost gas available for purchased power in Fairbanks, Golden Valley Electric Association customers will see rate hikes as the cooperative resorts to higher-cost fuel. If power costs go up along the Railbelt, rural communities across the state will receive less aid from the Power Cost Equalization fund, as there will be less of a difference between their energy costs and what urban customers pay. And everything from rent to retail goods to groceries will get more expensive, as the higher cost of heat and power will lead businesses and property owners to charge more to recoup those expenses. If you want to tank an already fragile economy, there’s no easier way to do it than for energy to cost more.

So what’s to be done? Gov. Mike Dunleavy has a bill to reduce royalty obligations for Cook Inlet gas producers to encourage producers to commit to new exploration and production. That’s unlikely to help on its own, as a recent royalty-free lease sale in the Inlet drew little interest. Smaller producers Bluecrest and HEX detailed other incentives they feel would help them commit to more production at a legislative hearing; legislators will have to do the math on whether they feel that kind of state investment makes sense. Utilities are moving toward renewable power sources with more urgency than in past years, but those sources, in addition to being years from coming online, can’t replace more than a fraction of the gas supply without a massive investment; it would take a project on the order of the mothballed Susitna-Watana Dam to provide a full-scale power replacement for gas. It’s a shame our leaders lacked the will and fortitude to pursue Susitna-Watana a decade ago when it should have been built. Today we are paying for their inaction.

The bottom line, Enstar president John Sims says, is this: If legislators don’t take action this year to get more Cook Inlet gas developed in the “bridge years” between now and 2030, our options for avoiding a gas shortfall will be costlier and worse — and all Alaskans will feel the effects. As much as we don’t like it, this will mean using state dollars to encourage production. This could come in the form of subsidies, loan guarantees or a return to tax credits for exploration. And where will the state get the money for a program like this? It will have to come from existing budget sources or new taxes. No matter how you slice it, whether from new taxes, decreased state spending in other areas or costly imported natural gas, life in Alaska is about to get even more expensive. To do our part, we can and should individually conserve gas — setting thermostats lower, being mindful of electricity use, and so forth — but that won’t solve the problem on its own, so we should also be letting legislators know that addressing it this year is not optional.