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More questions than answers on CI gas Senate Resources Committee hears industry and agency perspectives on concerns about natural gas supplies from the Cook Inlet basin By Alan Bailey Petroleum News
Most people seem to agree on the scope of the problem, but finding solutions to the vexing question of ensuring adequate future energy supplies for the residents of Southcentral Alaska, given dwindling gas production and deliverability from the Cook Inlet basin, appears as far away as ever. And on June 5, presumably in the interests of finding clarity over what needs to be done, the Senate Resources Committee invited a series of officials from companies involved in the Cook Inlet gas industry, as well as primary landowners and state agency officials, to the Anchorage Legislative Information Office, to present their perspectives on the gas supply situation.
Kevin Banks, director of Alaska’s Division of Oil and Gas, showed the committee a gas demand and deliverability graph depicting a Cook Inlet production profile that would drop below demand after 2012 if no new gas wells are drilled. But as a consequence of new development drilling that is taking place as producers bring new gas reserves on line to meet gas supply contractual commitments, a potential 470 billion cubic feet of additional gas could extend that time frame to 2019, assuming that the Kenai Peninsula LNG plant ceases operations after 2011, Banks said.
Gas storage Of immediate concern is the ability of the current gas wells to deliver gas sufficiently rapidly to meet peak utility gas demand during the cold Alaska winter, and several presenters homed in on the need for gas storage to boost winter deliverability using gas warehoused during the summer.
Marathon and Chevron currently operate three below-ground gas storage facilities in depleted gas fields, to enable these companies to meet their contractual obligations for the delivery of utility gas in the winter. And the Kenai LNG plant plays a vital role in gas deliverability by curtailing its production to free up additional utility gas when necessary. But additional storage capacity appears to be needed to meet the gas deliverability challenge.
Tax credits for investments in storage might encourage new gas storage development, John Zager, Chevron’s Alaska assets manager, told the committee.
“The state gets a much better bang for the buck for storage investments than they do on (investments in) a single well,” Zager said. “Storage theoretically can be year after year and it can help move larger volumes of gas from the summer into the winter and manage these peak issues that we have.”
Zager said that all forms of storage, including below-ground storage in depleted gas fields and above-ground storage are needed — different types of storage have different characteristics to meet different needs, such as meeting peak demand during severe winter cold snaps.
“Really to manage this well you need a portfolio of storage opportunities,” Zager said.
The operation of independent facilities for third-party use is another possibility that could bring new market opportunities such as the sale of winter gas to utilities during the summer. And Aurora Gas hopes to establish a facility of this type in its Nicolai Creek gas field on the west side of Cook Inlet, Bruce Webb, the company’s manager of land and regulatory affairs, told the committee.
“Preliminary technical review by our consultants has revealed that we do in fact have a viable reservoir conducive to gas storage operations,” Webb said.
Aurora Gas plans to conduct a technical presentation to interested parties in the near future, to gauge the level of interest in the project. And the company is working with the Alaska Department of Natural Resources to agree on lease terms for the facility, he said.
On the other hand, Cook Inlet Region Inc., a Native regional corporation with major land holdings around Cook Inlet, has determined that the development of third-party gas storage on its land is uneconomic at present, Ethan Schutt, CIRI vice president for land and legal affairs, told the committee.
But Chugach Electric Association, a major Anchorage electric utility, thinks that the provision of third-party gas storage is critical to establishing competitive market pricing for Cook Inlet gas, by allowing new producers to enter the market, perhaps selling utility gas on a daily basis.
“Third-party storage would be the beginning of a (gas) spot market,” Suzanne Gibson, Chugach’s director of energy resources, told the committee.
The biggest hindrance to the development of new storage facilities is the lack of underground reservoirs available to independent operators, she said. Gas prices Mark Slaughter, manager of gas supply for Enstar Natural Gas Co, the main Southcentral Alaska gas utility, while agreeing that gas storage forms part of the solution to future Cook Inlet gas supplies, said that appropriate gas pricing is a critical component of the gas supply equation.
“If you pay a high enough price in the free market, someone will go out there and look for gas in those unexplored areas,” Slaughter said. “… At some point the price is high enough to incent people to take the risks.”
“Cook Inlet … is not attracting sufficient capital to increase production or maybe even stem the production (decline) significantly. We need to make the Inlet more attractive to gas explorers and producers,” said Zager. “… New fields are likely to be smaller, with more difficult reservoirs and expensive to develop. … The risk/reward appears to be out of balance.”
Investment capital will flow into a situation where the rate of return is commensurate with the risk — high-cost and technically challenging Cook Inlet gas exploration is competing for capital with gas projects in the Lower 48, projects that have recently been enjoying robust economics, Zager said.
“We need to … allow competitive gas pricing in Alaska,” Zager said. “… That gas must be competitively priced, whether it’s coming from the Cook Inlet, whether it’s coming from a bullet line, whether it’s coming from LNG imports. None of those sources of gas will be ‘cheap.’”
“Projects in Alaska must compete with projects worldwide,” echoed Carri Lockhart, production manager for Marathon Oil’s Cook Inlet operations. “… Companies generally invest in projects that provide the best economic returns in this competitive environment.”
And Lockhart discounted the possibility of opening Marathon’s commercially sensitive books, to provide gas production cost data for cost-based pricing. The focus needs to be on the value of the gas, not the cost of the gas, she said.
“The value of gas is not based on cost; it’s based on the next best alternative. That’s where the focus needs to be,” Lockhart said. Besides, Marathon’s cost profile is different from its competitors because of factors such as the relative ages of different gas fields, she said.
Ed Kerr, vice president for land and business for Armstrong Oil and Gas, a subsidiary of which successfully drilled a second well in the North Fork gas field in the southern Kenai Peninsula in 2008, said that the recoverable gas resource per well in the Cook Inlet basin has been declining, a situation that is leading to an increasing number of wells to maintain production, thus exacerbating production costs.
RCA caught in the middle Robert Pickett, chairman of the Regulatory Commission of Alaska, described to the committee some of the issues that the commission faces in relation to Cook Inlet utility gas supplies. RCA sits at the center of the Cook Inlet gas price debate following commission rejection of all utility gas supply contracts proposed since 2001, contracts that the commission said included unacceptably high gas prices, a commission pricing perspective that some people support as protecting the gas-consuming public but that others say is strangling the Cook Inlet gas industry.
RCA regulates the Alaska power and gas utilities, but the commission does not regulate the gas producers. But, under Alaska statutes, RCA must assess utility gas supply agreements, as part of the commission’s regulation of utility tariffs, Pickett explained.
“Our standard of review considers whether the utility acted in a prudent manner, whether the terms of the gas sale agreement are reasonable and whether the gas sale agreement ensures reliable and reasonably priced utility service,” Pickett said.
And, while there is no commonly accepted gas pricing mechanism in the unique Cook Inlet gas market, the commission has to avoid legal challenges to its gas tariff rulings by basing its decisions on the record established from testimony to the commission, Pickett said. Meantime consumers are frustrated by major hikes in gas prices, he said.
“I fully believe we do have a deliverability problem. … In January of 2009 … the system was stretched from the well head clear to the burner tip, and that is something that all of us collectively need to factor into our thought process,” Pickett said. “I will say … that perhaps collectively we have not done the best job of describing to the public what is going on with Cook Inlet gas. I’m on the receiving end of many phone calls. … And I … have been referred to as a rubber stamp for the producers.” Land and market access With much state land already leased for oil and gas activity in the Cook Inlet region, access to land for new gas exploration has become a significant issue.
One issue is access to the Kenai National Wildlife Refuge, a federal refuge that occupies a large part of the Kenai Peninsula. But Robin West, manager of the refuge, told the committee that there is significant acreage within the refuge available for oil and gas leasing, but that no one has expressed an interest in this land in recent years.
CIRI owns major subsurface acreage within the refuge and encourages oil and gas leasing in its lands, Kim Cunningham, director of land resources for CIRI, told the committee.
Access to the gas market for new producers is another significant issue — Armstrong, for example, cannot produce from its North Fork field because of lack of access to the gas infrastructure. And new producers that can hook into the infrastructure need also to break into a market dominated by medium and long-term gas supply contracts.
There’s also a question of whether an explorer could find a large enough market to justify the development of a new large gas field, supposing that such a field were to be found — Lockhart emphasized the critical importance of a large industrial facility such as the Kenai Peninsula LNG plant in underpinning the economics of new gas finds.
“Recognize that the local Cook Inlet (gas) market is relatively small and by itself is unlikely to be sustainable,” Lockhart said. “If a potentially significant natural gas discovery were to be made today, the local Cook Inlet market simply could not support the economic development of the resource.” LNG plant capacity Lockhart also cautioned that the LNG carrier fleet serving the LNG plant has recently been reduced from two vessels to one vessel, thus placing some practical limitations on the plant’s throughput — Zager said that currently the plant is only operating at about half capacity,
So is the Cook Inlet basin fading as a gas production region?
Kerr, citing issues such as high costs and lack of business incentives, said that drilling volumes in the basin have been miniscule compared with gas basins in the Lower 48. In 2007 for example, 14 wells were drilled in the Cook Inlet basin, compared with 999 wells in the San Juan basin and 107 wells in the Big Horn basin.
“It is our opinion that the Cook Inlet is a vastly underexplored province and with good science there’s a tremendous amount of gas yet to be found in the area,” Kerr said.
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