|
A modest basin brings big benefits Chamber of Commerce report reviews the importance of the Cook Inlet oil and gas industry for Alaska and the Southcentral region Alan Bailey Petroleum News
Although a poor relation to the massive North Slope oil industry, for many years oil and gas production from the Cook Inlet basin has provided jobs for Alaskans; heat and electricity for Southcentral Alaska residents and businesses; and a small but significant contribution to state revenues. But recent concerns about tightening gas supplies from the basin and the dwindling flow of oil from the basin’s aging oil fields have raised questions over the value of the basin to the state and its residents.
Against this background, and seeing concerns from local businesses about the state of the Cook Inlet industry, the Anchorage Chamber of Commerce commissioned consultancy firm Northern Economics to conduct a study quantifying the impact of the Cook Inlet oil and gas industry on Southcentral Alaska. The chamber has recently published a report, titled “The Importance of Cook Inlet Oil and Gas to Southcentral Alaska,” documenting the results of the study.
Production decline The report says that annual gas production from the Cook Inlet basin declined by 50 percent between 2003 and 2012, with the lower production levels causing the cessation of liquefied natural gas exporting and the closure of Agrium’s Kenai Peninsula fertilizer plant.
Annual oil production peaked at 83 million barrels in 1970, declining thereafter, despite modest upticks between 2009 and 2010 and between 2010 and 2011. Production in 2011 was 3.9 million barrels, the report says. Gas production, by comparison, peaked in the late 1990s, before dropping almost continuously after 2001.
In 2011 the U.S. Geological Survey estimated that 19 trillion cubic feet of gas and about 600 million barrels of oil remained undiscovered but technically recoverable in the basin. There has been a recent upsurge in interest in new gas exploration and development, with Hilcorp Alaska signing gas supply contracts with Southcentral utilities through to the first quarter of 2018, the report says.
Gas demand The drop in gas production has been matched by a drop in Southcentral Alaska gas demand, with that drop in demand mainly resulting from curtailment in industrial gas use, primarily the closure of the Kenai Peninsula fertilizer plant and the rundown of LNG exports. Residential gas consumption and the use of gas for power generation have remained fairly steady over the years, while commercial gas consumption has dropped somewhat, the report says.
Natural gas has become the primary fuel for heating residential and business properties in Southcentral, with electricity and fuel oil being the most common heating alternatives, the report says. And Enstar Natural Gas Co., the primary Southcentral gas utility, is in the process of expanding its gas delivery services to the town of Homer, in the southern Kenai Peninsula.
Cook Inlet natural gas also accounts for about 90 percent of Southcentral Alaska electricity generation, the report says.
But in the past decade the price of gas has climbed considerably, rising from less than $2 per thousand cubic feet prior to 2001 to an average price of somewhere in excess of $5 in 2012.
Alternative sources Faced with the possibility of shortages in gas supplies from the Cook Inlet basin, Southcentral utilities have considered obtaining gas from elsewhere. But gas shipped from the North Slope as liquefied natural gas, for example, has been estimated to cost $12 per thousand cubic feet, while LNG from western Canada might cost $13. Gas from LNG shipped in from Sakhalin Island in the Russian Far East might cost $16 per thousand cubic feet, the report says.
Using heating oil, propane or wood pellets as fuel would result in even higher fuel costs. And converting a domestic heating system from natural gas to some alternative fuel would itself cost money, with a new oil-fired boiler or furnace perhaps costing $15,000, for example, the report points out.
Economic benefits The use of Cook Inlet natural gas rather than some other energy source for electricity generation provides Southcentral Alaska residents and business with significant economic benefits. Fairbanks-based Golden Valley Electric Association, which relies heavily on oil for power generation, charged its customers about 20 cents per kilowatt hour for electricity in November 2013, the report says. By comparison, at that same time Southcentral utility Chugach Electric Association charged about 13 cents per kilowatt hour, while Municipal Light & Power and Matanuska Electric Association charged about 14 cents and 15 cents respectively.
The fundamental conclusion from all of this analysis is that the loss of Cook Inlet natural gas as a fuel in Southcentral Alaska would result in a major increase in fuel costs, and corresponding increases in heating and electricity bills. The use of liquefied natural gas from the North Slope, the cheapest alternative source of a gas supply identified in the study, could raise electricity bills by 58 percent, with an 88 percent increase in the combined cost of heating and power generation, the report says.
And although coal presents an alternative to natural gas for power generation in Southcentral, coal is less environmentally friendly than gas, with coal usage producing more carbon dioxide than gas for equivalent amounts of electrical generation, the report says.
Economic impacts The analysts did not conduct a conclusive study of the likely impact of an energy price shock on Southcentral Alaska or on the state as a whole. Evidence from elsewhere in the United States indicates that, faced with a price hike, consumers tend to reduce their energy consumption somewhat in the long term while also accepting an overall increase in their energy expenditure, the report says. And in Southcentral Alaska, given people’s general dependence on natural gas, and given the severity of the region’s winters, it is likely that gas demand would remain fairly insensitive to price. An increase in people’s energy costs would thus cause a corresponding reduction in household disposable income, likely resulting in higher prices for and less spending on regional goods and services, the report says.
It is possible that, faced with escalating gas prices, businesses in Southcentral Alaska would seek substitute energy sources for their electricity supplies. A more likely scenario, however, is the downsizing of the commercial sector, the report says.
The Cook Inlet oil and gas industry also brings significant benefit in terms of employment, accounting for more than 1,100 jobs on the Kenai Peninsula Borough, the report says, adding that jobs in the oil and gas extraction sector are particularly well paid. An economic impact model has indicated that, overall, the industry’s economic output of $2.8 billion accounted for 37 percent of the borough’s total economic output in 2011, the report says.
State royalties from Cook Inlet oil and gas production in 2012 amounted to $67 million, with both the state and the Kenai Peninsula Borough receiving revenues from industry property taxes. The state also makes a small income each year from the sale of Cook Inlet oil and gas leases.
|
