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Vol. 14, No. 41 Week of October 11, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Railbelt crossroads

Gas-dependent SC Alaska tries to determine how to meet energy needs

Alan Bailey

Petroleum News

As the Municipality of Anchorage prepares for the possibility of natural gas shortages during the cold of the coming winter, shortages that would cause the electric utilities to activate contingency plans for reduced gas usage and that might ultimately lead to rolling power blackouts, people may be shocked that a state rich in fossil fuel resources is struggling to meet the energy needs of its own inhabitants.

In fact, the whole Alaska Railbelt, including the City of Fairbanks far to the north of Alaska, to some extent shares an energy destiny united by an interlinked electricity grid; power generation issues at one point on the grid inevitably impact power generation elsewhere on the grid.

So, how did the Railbelt reach the current situation and what’s to be done about it?

Modern era

The modern era of energy supplies in Southcentral Alaska dates back to the 1960s and 1970s, the heyday of oil exploration in and around Cook Inlet, following the discovery of oil at Swanson River on the Kenai Peninsula but predating the rush for the Cook Inlet exit door following the discovery of the giant Prudhoe Bay oil field on the North Slope.

Cook Inlet oil exploration resulted in the successful development of several oil fields, but it also resulted in the discovery of large amounts of natural gas and the development of some large gas fields. A gas industry was established, consisting primarily of new LNG and fertilizer plants at Nikiski on the Kenai Peninsula, to use the excess gas that had been discovered.

The excess and, therefore, cheap gas also found a ready side market with local electricity and gas utilities, thus establishing natural gas as the primary means of heating Southcentral homes and business, and as the primary fuel for generating electricity.

But the Southcentral gas industry has transitioned through a classic oil and gas production profile, with production rapidly peaking and then going into a long, slow decline. With the decline in gas production, the Nikiski fertilizer plant shut its doors in 2007. And although, at about the time that fertilizer production stopped, ConocoPhillips and Marathon, the owners of the LNG plant, successfully applied for an extension of the LNG export license through to 2011, the owners are now monitoring the availability of gas for the plant before deciding on whether to apply for a further license extension.

Utility gas supplies have severely tightened, with Enstar Natural Gas Co., the main Southcentral gas utility, projecting a shortfall in supplies around 2014 or 2015.

Deliverability

However, the immediate issue relating to utility gas supplies is achieving sufficient deliverability — the ability to flow enough gas from the gas fields — to meet peak demand during the coldest periods of the winter. In the severe cold of January 2009 the utility gas system came close to its deliverability limits, so that with gas deliverability having declined further since then, a gas deliverability shortfall looms if there is a severe cold snap in the winter of 2009-10.

Part of the deliverability problem is the lack of sufficient gas storage to save excess summer gas for use during the winter, despite the fact that Marathon and Chevron have established three storage facilities in depleted underground reservoirs. But, unfortunately, new storage facilities take years rather than months to develop, and are expensive.

Enstar is working with Houston-based ANR Pipeline Co. to fast track the development of a new storage facility, to plug what Enstar sees as an otherwise inevitable deliverability gap in 2011. Aurora Gas also wants to develop a gas storage facility at its Nicolai Creek gas field. And part of the looming deliverability problem for 2011 is the possible closure of the LNG plant — the plant currently provides an invaluable service by diverting gas supplies otherwise intended for LNG production, to meet utility gas deliverability shortfalls.

Unfortunately, given the amount of capital tied up in the existing natural gas infrastructure, any large-scale transition from gas to electricity as a prime means of space heating in buildings would be extremely expensive and take several years to accomplish. Apart from the necessity of building new power generation, transmission and distribution capacity, Southcentral residents would need to replace gas-fired boilers and other equipment in homes and businesses.

More to find

But there undoubtedly is more gas to find in the Cook Inlet basin.

The problem is that, despite a U.S. Department of Energy statistical analysis of existing gas fields that suggested the existence of 10 trillion to 14 trillion cubic feet of undiscovered gas in the basin, no one knows how much undiscovered gas is truly there. And the Cook Inlet region is a difficult and expensive place to explore in, given the combination of remote terrain, little support infrastructure, harsh winter climate, challenging geology and an undersized support industry.

Apart from a small handful of large offshore structures that require ultra-expensive drilling from a jack-up rig, the main structures in the basin have already been drilled — much new exploration needs to focus on smaller, subtle gas prospects.

The lack of a spot market for the sale of gas has also proved problematic for new entrants to the Cook Inlet gas business — utility gas supplies tend to be tied up in medium- or long-term contracts.

On the other hand, with quite a low density of oil and gas wells, the Cook Inlet basin remains relatively underexplored. And Cook Inlet newcomer Armstrong Oil and Gas has expressed confidence in the Cook Inlet as an exploration region, having signed a gas supply contract with Enstar for gas from the North Fork field in the southern Kenai Peninsula.

Exploration uptick

In fact, the early 2000s saw an uptick in Cook Inlet gas exploration drilling, presumably as a consequence of upward signals in Cook Inlet gas prices as the gas supply situation tightened. And established gas producers in the basin have done some exploration and development drilling in recent years, apparently to assure their abilities to meet their contracted gas supply obligations.

But much more new drilling is needed to make any progress in turning back the tide of declining gas supplies. Meantime, in what one Regulatory Commission of Alaska commissioner has characterized as the “Cook Inlet gas war,” RCA, the gas producers, the utilities and the State of Alaska have wrangled over establishing appropriate price levels for Cook Inlet utility gas. Gas producers need incentives to find and produce new gas, while gas consumers want to minimize their gas costs.

As an alternative to Cook Inlet gas supplies, there are proposals to bring North Slope gas to Cook Inlet, either through a direct “bullet line,” or through a spur line from a main North Slope gas export line. But the economics of bringing North Slope gas to Southcentral would require industrial gas demand, perhaps from an LNG or petrochemical plant located in Southcentral.

And, at current trends of Cook Inlet gas decline, North Slope-sourced gas would be unlikely to become available in Southcentral before Cook Inlet gas supplies fall short of demand. That raises the specter of possibly having to import foreign LNG through the Nikiski LNG plant, to boost utility gas supplies. The import of LNG, although straightforward to arrange, would require Alaskans to swallow copious quantities of their pride in a state that boasts major oil and gas resources.

Alternative sources

But what about alternative sources of energy?

The obvious alternative to natural gas is coal, a fuel that exists in great abundance in several regions of Alaska, including on the western side of Cook Inlet and at Healy on the north side of the Alaska Range, where it is currently mined. Fairbanks-based Golden Valley Electric Association operates a coal-fired power station at Healy and is planning to bring a mothballed clean coal plant online at Healy as well.

But coal has suffered from a tarnished environmental image in recent years and tends to be particularly intensive in its production of carbon dioxide, the gas that has become the bęte noire of the global warming debate. Clean coal power plants, especially those involving the sequestration of carbon dioxide, are expensive to construct and may be expensive to operate. And the future economics of any fossil fuel, including natural gas, is uncertain because of the possibility of future cap and trade regulation of carbon dioxide emissions.

Hydropower is another possibility. The modest-sized hydroelectric system at Bradley Lake on the Kenai Peninsula, for example, has proved very successful in providing power for the Railbelt grid. And two potential larger hydropower systems are under consideration: a 300-megawatt system at Lake Chakachamna, 80 miles northwest of Anchorage, and the 1,200-megawatt Susitna project, involving the damming of the Susitna River at a couple of locations south of the Alaska Range. The Susitna system could approximately meet the current power load for the whole of the Railbelt but would require major upgrades to the electrical intertie between Fairbanks and Anchorage.

Wind power looks to be coming into fruition with the likely construction of a wind farm on Fire Island, in Cook Inlet offshore Anchorage. This project should make a modest but valuable contribution to Railbelt electricity supplies. Other wind farm sites appear to be possibilities.

A proposed tidal power system, using the huge tidal range of Cook Inlet and located in Knik Arm adjacent to Anchorage, could also make a modest but valuable contribution to power supplies and is undergoing environmental analysis, with a possible prototype turbine installation in the offing. A much larger tidal power system has been proposed for Turnagain Arm on the west side of Anchorage. Any tidal system would need to accommodate environmental concerns, especially concerns about the movement of fish and the possible impact on the Endangered-Species-Act-listed Cook Inlet beluga whale.

There’s also a company investigating the possibility of farming geothermal energy from the flanks of Mount Spurr, the closest active volcano to Anchorage.

Commercial issues

But any major power generation project, such as a Susitna Dam or a large coal-fired plant, will run into commercial issues relating to the size of the Alaska Railbelt power market and the fact that the Railbelt grid, a small power grid in comparison with those of more typical North American populations centers, is operated by no less than six independent power utilities. And, while the implementation of a major new power plant by one utility would likely impact the economics of power generation by the other utilities, it’s also unlikely that any one utility has the financial wherewithal to build the type of massive plant that would achieve the economies of scale necessary for least-cost power generation.

And the implementation of a power generation facility feeding electricity to more than one of the major electrical demand centers of the Kenai Peninsula; Anchorage and the Matanuska-Susitna Valley; and Fairbanks would require major and expensive upgrades to the power transmission interties between these centers, interties which currently have fairly limited transmission capacity and represent single points of failure for gridwide power transmission.

And then there’s the knotty question of whether a new major power plant should use natural gas, coal or some form of renewable energy source, a question that might require some form of state policy intervention for its answer. Part of the problem here is that a new major coal-fired plant, for example, might seriously undermine the economics of a new hydro-electric plant, and would also impact the economics of bringing North Slope gas into Southcentral Alaska.

AEA report

A study commissioned by the Alaska Energy Authority and published in 2008 recommended the implementation of a regional power generation and transmission entity that would take over from the existing utilities the development, management and operation of all power generation and transmission in the Railbelt, to achieve economies of scale and a coordinated approach to generation and transmission across the region. The existing utilities would retain management of local power distribution.

In March 2009 then Gov. Sarah Palin introduced a bill in the state Legislature to form a corporation along the lines of the AEA recommendations. But it did not prove possible to adequately deal with the legislation within the remainder of the legislative session, and consideration of the bill was deferred into 2010.

So, it remains to be seen how the various pieces of the Railbelt energy jigsaw puzzle can be assembled, hopefully before the lights go out as power stations run short of fuel.



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Wanted: Operator for Cook Inlet fields

The State of Alaska is looking for a contractor to come up with a longer-term solution for the Cook Inlet basin assets abandoned in bankruptcy proceedings by operator Pacific Energy Resources. Among those contacted by the state for a proposal was Gary Carlson, the former top executive for Forest Oil in Alaska, and executives with companies such as Ramshorn, Armstrong and Fairweather.

Two contractors, Peak Oilfield Service and Chumley’s, have begun winterizing the wells at the West McArthur River oil field and the West Foreland gas field on the west side of Cook Inlet, but Division of Oil and Gas official Alan Dennis, who is in charge of Pacific Energy’s former assets for the state, said the division released an RFP on Oct. 1, looking for a contractor to “basically finish the work we’ve started to winterize the assets and look after (all the assets that were operated by Pacific Energy) for a longer term.”

According to the state’s Request for Proposals, an emergency procurement, “the properties to be maintained and operated under this contract include the West McArthur River oil facility, West Foreland gas facility, Kustatan processing facility, Osprey oil platform, Mosquito Station and associated wells, roads and pipelines.”

The RFP, the purpose and title of which is “Preserve Abandoned Cook Inlet Facilities,” offers bidders three proposals, any combination of which would be considered, Dennis told Petroleum News. The RFP specifies that responses “must demonstrate the ability to perform all three scenarios” as well as having the ability to implement changes at the direction of the state project manager.

The scenarios are as follows: A. ice- cold shutdown; B. warm shutdown; C. “operating the oil field at West McArthur, as well as operating the gas field at West Foreland,” said Dennis. In all scenarios described in the RFP Redoubt and Kustatan would be in cold shutdown.

All of the oil wells at West McArthur are currently shut-in, that process completed by early September, Dennis said.

“One gas well is operational at West Foreland, to run a turbine at West McArthur River. We need the electricity it generates to do the freeze completion work,” he said.

Some, or parts, of the properties in the RFP are not on state land.

“No one else was going to do anything, so we stepped in to preserve the assets until an ultimate outcome is determined for them. While the owners decide what will happen, we’re making sure nothing is spilled on the ground,” Dennis said.

The RFP was sent to the following: Bill Penrose at Fairweather; Randy Frazier at FEPSI, or Fairweather E&P Services Inc.; Mark Nelson and John Lewis at ASRC Energy Services; Ben Cleveland at Peak; Cook Inlet Energy; Mark Landt at Renaissance; Ed Kerr and Ed Teng at Armstrong; Milton Allen at Udelhoven; Jordan “Digger” Smith with Ramshorn (partner in Brooks Range Petroleum); Paul Smith with Nabors; and Gary Carlson. No company name was listed for Carlson in the email that transmitted the RFP.

—Kay Cashman