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Vol. 17, No. 45 Week of November 04, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

On the precipice edge

Utility executives describe the conundrum of declining Cook Inlet gas production

Alan Bailey

Petroleum News

Talk of the Cook Inlet’s natural gas production cliff— the precipice down which the region’s gas production would slide as aging gas fields go into decline — began around 10 years ago. And, while some people have made dire warnings about the specter of future power cuts or worse, as utility gas supplies drop to levels below utility gas demand, others have characterized the situation as an erstwhile bountiful gas oversupply adjusting into balance with demand.

With the possibility of large volumes of as-yet undiscovered natural gas in the Cook Inlet basin, surely rising gas prices, as gas supplies tighten, will encourage more gas exploration and development, thus aligning rates of supply with rates of usage?

Complicating people’s perceptions of the situation is the existence of a liquefied natural gas export facility on the Kenai Peninsula, with that facility continuing to ship Cook Inlet gas to customers in the Pacific Rim, even as the warning bells sound at the production cliff’s edge.

Latest situation

During an Oct. 14 public meeting of the Regulatory Commission of Alaska, the Southcentral Alaska gas and power utilities described the latest situation regarding their gas supplies.

And the bottom line?

Gas supplies are likely to fall short of demand in 2015, possibly 2014, requiring the import of out-of-state gas to fill the local supply gap, the utilities say.

The basis of this uncomfortable prediction is an analysis of Cook Inlet gas production that consultancy firm Petrotechnical Resources of Alaska, or PRA, has carried out for the utilities. PRA has used both gas-field production decline curves and investigations of the production data for individual gas wells to predict the overall decline in production from the Cook Inlet basin over the next few years.

PRA has found that, in the absence of new development drilling in existing gas fields, gas supplies would drop below predicted local gas demand in 2014. Continued drilling at rates consistent with the current level of activity of gas producers would move the shortfall into 2015, PRA says.

PRA managing partner Tom Walsh told the commission that, given the level of rigor of the analysis and the use of well-established analysis techniques, he feels very confident in the validity of his company’s findings.

“We have a very clear understanding of how much remaining reserves exist in Cook Inlet in existing fields,” Walsh said.

Lee Thibert, senior vice president of Chugach Electric Association, said that low gas prices in North America have caused large oil companies to lose interest in gas development, instead moving their investment dollars into high-priced oil. That has had an impact on gas development in Alaska, he said.

Efforts under way

However, since the pending Cook Inlet gas supply crisis has been predicted for several years, efforts have been under way for some time to figure out how to deal with the problem. And those efforts have resulted in some effective actions, Thibert said.

For example, Alaska lawmakers passed legislation for tax incentives to encourage new Cook Inlet gas exploration and development. As a consequence several companies have entered the Cook Inlet oil and gas industry in recent years and are now pursuing aggressive exploration and development programs. There are now two jack-up drilling rigs operating in the waters of Cook Inlet.

On the Kenai Peninsula Armstrong Cook Inlet has brought the North Fork gas field on line, while Buccaneer Energy’s new Kenai Loop field is now in production. But these new fields, while making valuable additions to gas supplies, are too small to make a substantive different to the gas supply decline curve, Walsh cautioned.

Similarly, development activities by Aurora Gas and Cook Inlet Energy “don’t create thick skins on the decline curve that we’ve been looking at,” Walsh said.

Hilcorp Energy, a newcomer to the Cook Inlet basin, is pursuing a particularly aggressive program of development in the existing Cook Inlet oil and gas fields. But although this program gives reason for some optimism for the future, PRA does not think that development drilling will take place at the rate necessary to prevent a short-term gas supply problem.

Too late

And although there are now several companies actively exploring in the Cook Inlet basin, the typical lead time required to bring a new gas field on line makes it extremely unlikely that a new field of sufficient size could start delivering gas soon enough to head off a gas shortfall by 2014 or 2015.

“We’re all very excited by these (exploration) activities. It shows that the incentive program is working,” Walsh said. “… but again it just doesn’t meet our timeline.”

A state project for the possible construction of a pipeline to bring North Slope gas into Southcentral Alaska is under way. But that pipeline cannot be completed until at least 2020, Thibert said.

Reduced demand

On the other side of the supply and demand equation, Thibert explained that the utilities are reducing gas demand through improved operational efficiency.

For example, Chugach Electric and Anchorage utility Municipal Light & Power are building a new gas-fired power station in south Anchorage, Thibert said. The new state-of-the art, high efficiency plant will take over power generation from old, inefficient gas-fired generation capacity. Homer Electric Association is establishing a similar high-efficiency power station at Nikiski on the Kenai Peninsula, in anticipation of having to generate its own power after 2013, rather than buy power from Chugach Electric as at present. Matanuska Electric Association is bringing its new high-efficiency gas-fired power plant at Eklutna on line in 2015, when its supply contract with Chugach Electric also ends. And Municipal Light & Power is installing new high-efficiency generation units in its existing power plant in 2015-16.

Other ways of reducing gas demand include the operation of a new wind farm on Fire Island, near Anchorage; capacity expansions at two hydroelectric power plants; and the encouragement of energy conservation by electricity consumers, Thibert said.

A proposed major hydroelectric power plant at Watana on the Susitna River would substantially reduce gas demand but would not come on line until perhaps 2023.

LNG exports

As gas production drops, the Kenai Peninsula LNG facility appears set to shut in its operations by the time that its LNG export license expires in 2013, thus eliminating that source of gas demand.

The LNG facility, originally built in the 1960s to monetize excess natural gas discovered during a search for oil in the Cook Inlet basin, has provided a continuing market for Cook Inlet gas and has enabled large gas fields to operate at maximum efficiency, thus supporting the viability of the Cook Inlet gas industry. And the facility has in the past provided an invaluable service during cold winter weather by diverting some of its gas supplies to the local utilities, to ensure adequate utility gas delivery during periods of peak demand.

The gas demand projections that PRA has used in forecasting potential future gas shortages take into account demand reductions from factors such as improved power generation efficiency and the closure of the LNG facility.

From the perspective of gas deliverability — the rate at which gas can be delivered to gas users, especially in the winter — a newly opened gas storage facility on the Kenai Peninsula operated by Cook Inlet Natural Gas Storage Alaska, or CINGSA, is now playing a key role in enabling utilities to warehouse summer produced gas for delivery during the winter.


Enstar Natural Gas Co., the main Southcentral gas utility, now depends on CINGSA gas to meet its winter needs. Colleen Starring, president of Enstar, told the commission that with 91 million cubic feet per day of deliverability contracted with CINGSA, on top of the some 248 million cubic feet per day under contract with gas producers, Enstar anticipates having sufficient gas to meet demand during the coldest weather in the coming winter.

“With the addition of CINGSA … we’ll be able to meet all of the requirements,” Starring said.

But with a gas supply contract with Marathon ending on Dec. 31 and the guaranteed volume of supplies from a contract with Hilcorp lowering at the same time, Enstar is short of gas under contract in 2013.

“So in 2013 we’re about 4.5 to 5 billion cubic feet short of our overall volumetric requirements of right around 34.2 (bcf) … and then that gap continues to grow,” Starring said. “We have been in perpetual negotiation with any and all comers to replace that gas.”

Bidding system

Although Enstar is short of gas under firm contract after the beginning of 2013, the utility anticipates being able to obtain sufficient gas to meet its winter needs by using a gas bidding system that it implemented in early 2011. The bidding system runs on a day-to-day basis and operates rather like a spot market for gas.

The bidding system worked effectively in the winter of 2011-12, but with gas prices “all over the board, as you would expect,” Starring said.

Starring said that the planned purchase by Hilcorp of Marathon’s Cook Inlet assets has made negotiations with Hilcorp over new gas supply contracts very difficult. An investigation into the purchase by the Federal Trade Commission is holding up completion of the purchase and, meantime, Hilcorp is reluctant to enter into any long-term gas supply contract, Starring said.

Chugach Electric

Thibert said that Chugach Electric’s gas demand would drop significantly in 2013 when the new south Anchorage power plant comes on line. There will be further drops in demand in 2014 and 2015 when the utility stops supplying power for Homer Electric Association and Matanuska Electric Association, with gas demand remaining fairly constant after that.

But despite a resulting drop in projected gas usage of more than 50 percent, Chugach Electric is short of gas under contract in 2015 by about 3 billion cubic feet of the 9 to 10 billion cubic feet that it expects to need, Thibert said. And that shortfall of contracted gas grows to about 6 billion cubic feet in 2016, he said.

Chugach Electric now has gas stored in the CINGSA facility to meet its deliverability needs for peak demand in the coming winter and the utility anticipates its gas deliverability requirements being met through to 2015.

Homer Electric

Mike Salzetti, generation engineer for Homer Electric Association, or HEA, said that his utility has enough gas under contract to operate its new power plant at Nikiski from the time that the plant goes into operation in early 2014.

“HEA is confident that it can meet its gas needs through March 2016,” Salzetti said. “We’re optimistic about our opportunities to meet needs through 2018. And we continue to work cooperatively with the other utilities, state agencies and private entities to mitigate any gas supply issues going forward.”

Homer Electric has also contracted with CINGSA for the storage of gas to meet deliverability needs from 2014 onwards. The utility will also benefit from its share of the expansion of the Bradley Lake hydroelectric facility on the Kenai Peninsula, has obtained a preliminary license to study a potential small hydroelectric plant at Grant Lake on the Peninsula and is working with Ocean Renewable Power Co. on a small-scale tidal power system in the Cook Inlet.

Matanuska Electric

Matanuska Electric Association, or MEA, does not yet have any gas supplies under contract for its new Eklutna power plant, slated to come on line in 2015, Joe Griffith, general manager of MEA, told the commissioners. Griffith said that MEA is in perpetual negotiations with anyone who will discuss potential gas supplies for the plant. The plant will be dual fuel in design, enabling a cutover to diesel fuel “on the fly,” if necessary: MEA will store a minimum of four days of diesel fuel on site, Griffith said.

Griffith expressed concern about the ability of the existing gas pipeline network to deliver gas in adequate quantities to the north side of the network where the Eklutna facility is located. Over the years, the center of gravity of gas production has shifted from the west side of the Cook Inlet to the Kenai Peninsula. And, in particular, MEA would like access to a gas storage facility on the west side.

“I’m concerned about whether we can get the gas from where we know it is today on the Kenai Peninsula around to my plant,” Griffith said.


Jim Posey, general manager of Municipal Light & Power, or ML&P, said that ML&P has sufficient gas to meets its needs through 2014, but is seeking supplemental gas for 2015 to 2019. ML&P owns a portion of the Beluga gas field on the west side of the Cook Inlet and has been obtaining the bulk of its gas from there. But as production from that field declines, the utility has to obtain gas under contract from elsewhere — the utility currently has a short-term gas supply contract with Marathon.

A projected gas shortfall of 3.6 billion cubic feet in 2015 will likely drop to 3.3 billion cubic feet in 2016, after MEA brings new, more efficient power generation equipment on line, but that supply gap will likely rise back to 4.4 billion cubic feet in 2017, Posey said.

Import decision

Given PRA’s supply and demand projections, coupled with growing shortfalls in gas under contract, all of the utilities view the future import of gas into Southcentral as a necessity, at least until sufficient Alaska gas supplies can be restored by some means.

“I have said that for many, many years, despite the best efforts at drilling in the inlet,” Posey said. “I do not look at importing gas as a long-term solution, but if we do it right it is an insurance policy.”

The utilities are moving ahead with a plan to import gas either as liquefied natural gas from overseas, or as compressed natural gas from western Canada — they expect to decide in early 2013 on which import option to implement, before starting to negotiate the necessary gas supply and transportation contracts, and before starting the preliminary engineering of import facilities.

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