Sims: Not price, but market size preventing more gas development
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Kristen Nelson Petroleum News
Is there a lot of natural gas remaining in Cook Inlet?
Yes, Enstar President John Sims told the Resource Development Council March 21.
Would offering producers a higher price lead to development of more volumes?
That hasn't worked.
Sims said Enstar has offered higher priced contracts but that didn't result in additional volumes of natural gas offered under contract.
He said it's not the market price for Cook Inlet natural gas that's holding back exploration and production to meet the looming natural gas shortage, it's the small market size, which means companies can't, in a reasonable amount of time, earn returns from the needed massive investment.
The problem is the expense -- in the millions or billions -- for development and the very small and isolated market, Sims said.
With fewer than 800,000 people in the state, and natural gas usage of just 70 billion cubic feet per year, companies can't earn a return on their investment in a reasonable amount of time, he said.
In the Lower 48, by contrast, there is a population of millions and a correspondingly large and connected market for resources from any new project.
Enstar's role Enstar's role in the natural gas market is as a certificated public utility, which means it has a duty to serve not shared by producers, independent power producers or anyone else, Sims said.
It must provide gas.
And not just to residential and retail customers.
Other utilities in Enstar's service area can call on Enstar to provide them with gas service, he said, as when Homer Electric Association wasn't able to renew its contract for natural gas and turned to Enstar.
HEA had been an Enstar transportation customer, but after it requested to be a gas sales customer, Enstar is now on the hook for HEA, he said, and over several months was able to negotiate a contract with Hilcorp for the volumes needed to serve HEA.
But, Sims said, the contract covering the HEA volumes isn't the type of firm contract Enstar has for its own volumes, which includes a penalty for non-delivery. The HEA contract excludes that provision.
And it isn't just HEA, Sims said: other utilities, Chugach Electric Association and Matanuska Electric Association, are also in Enstar's service territory. It happened in the past with Fairbanks Natural Gas: it came to Enstar when its contracted supplier in Cook Inlet couldn't deliver, he said.
Enstar's share of the 70 bcf per year gas requirement is about half, 35 bcf, and with the addition of HEA is up to some 40 bcf.
The old HEA contract ends this March, and Enstar's contract for the HEA volumes starts April 1.
Enstar's own existing contract runs through 2033, but contracts for the other utilities expire before then.
Scope of the problem Sims said the group studying how to resolve the problem, Enstar and the other utilities working with BRG and Cornerstone, isn't ready to reveal the full draft of its Phase II report, but he said Phase II has whittled the utilities' options down to four.
And none of those options meet the 2028 4-year milestone when some gas contracts start to expire.
Liquefied natural gas is needed, and shipments would need to begin arriving in 2027 to get volumes into storage for 2028.
Permitting is the greatest time unknown in the process -- Federal Energy Regulatory Commission and U.S. Corps of Engineers permitting durations, and the time to modify or construct in-water piers.
None of the proposed projects meets the 2028 date, with three of the four having start dates in 2029 or 2030, while a fourth starts only in 2032.
Legislative action needed What can be done locally?
Sims said incentives from the Legislature -- tied to firm contracts for Cook Inlet utilities -- are essential because of the inability of the market to provide the needed investment.
There are a lot of ideas being floated in Juneau, he said, but urged focus on solutions the producers have told legislators are necessary for investment, particularly royalty reduction. Sims said royalty reductions would need to be tied to firm contracts with the utilities for the gas.
While strong support for Cook Inlet exploration and production is needed in the short term, the long-term focus needs to be on action on a large natural gas supply project.
Storage, carbon sequestration In addition to more supply, more gas storage is also needed.
Sims said CINGSA, Cook Inlet Natural Gas Storge Alaska, a subsidiary of Enstar, has won approval from the Regulatory Commission of Alaska to add two wells at its Kenai-area storage facility, providing additional production capability.
In response to a question from the audience, Sims said additional storage in Cook Inlet beyond CINGSA is also needed.
Renewables can provide power, but natural gas will continue to be required when wind and solar aren't available, and to meet peak needs, he said. A functioning transmission system is crucial for renewables to work, and Sims urged support for the $200 million needed from the Legislature to match federal funds available to upgrade the transmission system.
Carbon sequestration is also important because it is becoming a requirement for companies to gain financing -- Sims said it is as crucial as storage.
Residents and businesses are on the hook for cost impacts and illustrated the impact on the Anchorage School District -- not even Enstar's largest customer -- with the cost of gas alone $4.9 million in 2023, a 30% increase would mean a $1.47 million per year impact, Sims said.
The utilities group is working to minimize impacts, but he said the longer it takes to make a decision, to pick an option, the fewer options will be available and those at higher rates.
--KRISTEN NELSON
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