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A branch in the road
The question of how to address natural gas supplies in Alaska at a critical point
Alan Bailey for fPetroleum News
With firm contracts for natural gas supplies to Southcentral Alaska gas and electricity utilities expected to fall short of gas demand in the next three years, the utilities and the gas producers will need to make some critical decisions over how best to ensure the continuity of energy supplies to Alaska residents and businesses. And in a May 20 meeting of Commonwealth North, several experts in the subject presented their assessments of the situation.
Dr. Brett Watson of the University of Alaska's Institute of Social and Economic Research provided a high level perspective of the problem. He likened the situation to walking along a trail, with bridge construction needed as a short term solution to crossing a stream and longer term decisions to make regarding a subsequent fork in the trail. There are two choices when we reach that fork: either build a large asset to bring North Slope gas to Southcentral Alaska or import liquefied natural gas to the Cook Inlet, Watson said.
The dependence on natural gas In dealing with this problem, the first premise is that Alaska is dependent on natural gas for a large portion of its energy, with more than half of the homes in the state heated using natural gas and natural gas being used for 70% of electricity generation. Natural gas is a key energy source for commercial and industrial users.
But Cook Inlet natural gas, currently the only source of gas for these uses, is facing depletion. The problem is one of economic depletion, rather than physical depletion of potential gas sources, Watson said. Essentially, the cost of pulling gas from the ground in the Cook Inlet basin is becoming expensive relative to other potential energy sources and the cost of gas elsewhere in the world, he said.
A 2018 study by the Alaska Department of Natural Resources indicated that securing adequate volumes of Cook Inlet natural gas to meet even a conservative demand scenario would involve costs higher than the costs associated with historic gas pricing, Watson said.
"We are going to see higher utility bills as a consequence of economic depletion in the Cook Inlet basin. That's going to show up on our heating bills and our electricity bills," he said. This impact in Southcentral Alaska would likely propagate across the state, he cautioned.
The decline in Cook Inlet production Derek Nottingham, director of Alaska's Division of Oil and Gas, provided an overview of the current gas production situation in the Cook Inlet. Production has declined from more than 300 billion cubic feet per year in the heyday of the Cook Inlet gas industry to around 70 to 75 bcf currently, Nottingham said. Of particular note is the fact that the biggest production still comes from large legacy gas fields, with production from those fields having declined significantly over the years.
There is sufficient developable gas in the Cook Inlet basin, Nottingham said. The problem is the economics of the development.
"When you're spending tens of millions or hundreds of millions of dollars on these kinds of projects, you need to bring them on at a high enough rate ... otherwise they don't pay out," Nottingham said.
On the other hand, there is still a very active drilling program in the Cook Inlet basin, with 19 development wells, two gas storage wells and two exploration wells being drilled last year, he commented.
Hendrix argues for more production John Hendrix, owner and chief executive officer of Furie Operating Alaska, operator of the Kitchen Lights gas field in the Cook Inlet, argued for the feasibility of bolstering gas supplies through more drilling in the Cook Inlet basin. Furie is conducting development drilling in the Kitchen Lights field.
"We should not be having this conversation. There's gas there. We just have to develop the gas," Hendrix said with regard to discussions over future gas supplies from outside the Cook Inlet. "Bringing gas from the Lower 48 is, to me, a kind of slap in the face ... but we're kind of pushing ourselves in that direction."
On the other hand, given the isolated gas market in Alaska, there is a cap on how much gas can be produced and sold, he added.
He emphasized the distinction between the upstream gas producers, like Furie, and the utilities that sell energy products. While the producers risk capital to bring energy sources online, the utilities can move forward based on Regulatory Commission of Alaska approval of what they are doing, he said.
And decisions on how much capital to put at risk from drilling wells are impacted by issues such as renewable energy replacing gas use, the potential for a future North Slope gas line and the possibility of importing LNG.
Hendrix cited property taxes on gas producer facilities and state royalties as impediments to drilling for more gas production. He also questioned assumptions that Cook Inlet gas is expensive, arguing that the gas is actually the fourth cheapest in the country at the meter.
Enstar's perspective John Sims, president of Anchorage based Enstar Natural Gas Co., presented a utility's view of the situation. The challenge for gas exploration and development is the enormous risk involved, he said, commenting that a number of potential producers had tried to enter the Cook Inlet market but had gone bankrupt, having made commitments that they could not deliver on.
At the same time Enstar is now running into a "just in time" gas inventory situation that is very challenging for both the producers and the utilities. Gas production in the Cook Inlet basin is dominated by Hilcorp Alaska. Furie is also a significant gas producer and is doing an amazing job investing capital and working as hard as it can to fix the problem, Sims said. But if Furie's plans work out, they would still only represent 11% of the market, he added.
"We have to find a replacement for all the rest. And so that's our issue," Sims said.
Sims also expressed confidence that a gas pipeline will be built from the North Slope to the Cook Inlet. The Alaska Gasline Development Corp. has an agreement with Glenfarne Energy Transition to move ahead with front-end engineering and design of the gas line. Meanwhile, Enstar has an exclusivity agreement to work with Glenfarne on the potential development of an LNG import facility on the Kenai Peninsula.
Sims said that an LNG import facility would become a short-term bridge for the delivery of natural gas, until a North Slope pipeline goes into operation. But if the pipeline is not constructed, the hope would be to continue to purchase gas from the Cook Inlet producers, with the LNG import facility as a backup, to ensure adequate gas supplies.
The evolving electricity industry Arthur Miller, chief executive officer of Anchorage based Chugach Electric Association, said that the electricity industry has changed significantly over the past 20 years as a consequence of decentralization of the power grid, increasing amounts of distributed power generation and a heightened awareness of decarbonization. And the industry has been seeing significant advances in the technology that it uses.
"As we move forward we are constantly looking at different technologies to adopt into our generation stream," Miller said, while also commenting that Chugach Electric has more than $600 million invested in gas fueled power generation plants.
"But on top of that we have other renewable options growing all the time, every day, as efficiencies become more paramount," Miller said.
The utility's board of directors has set decarbonization goals of at least 35% by 2030 and at least 50% by 2040, provided that these targets can be achieved without negative impacts on electricity rates and power supply reliability, he said. The utility's current generation mix involves 80% gas fueled generation and 20% renewables, predominantly hydropower. Approximately 60% of the utility's gas supplies come from the utility's working ownership interest in the Beluga gas field, with the remainder of the gas being supplied by Hilcorp, under a contract that expires at the end of March 2028.
More gas needed April 1, 2028 Chugach Electric does not have any assurance of the level of gas supplies from Hilcorp after the termination of the current contract. And so far no other Cook Inlet gas producer or supplier has offered to meet the utility's needs from April 1, 2028, Miller said. He also said that Chugach Electric supports continued development in the Cook Inlet basin.
"Our fundamental question is we need gas at the beginning of April of 2028, really earlier than that, to make sure we have reliable electric service," Miller said.
He said that the economic life of the Beluga field is expected to run through 2033 but could last longer.
Miller also commented that his utility does have some arrangements in place to help ameliorate the situation, at least in the short term, including the supply from Hilcorp of underlifted gas, starting in 2028, and a gas exchange agreement with Marathon that would start on April 1, 2028. He also commented that gas storage is critical to the situation. Chugach Electric stores gas in the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula, Hilcorp is planning to offer storage services and Chugach Electric is investigating the possibility of gas storage in the Beluga field. The utility also has the use of a new battery storage system to help manage fluctuations in power generation and demand and thereby reduce fuel costs.
Importing LNG Chugach Electric has formed an agreement with Hilcorp affiliate Harvest Alaska and Marathon Petroleum Corp. for Harvest to convert Marathon's existing LNG export facility on the Kenai Peninsula into an LNG import facility that would meet Chugach Electric's needs for gas supply continuity. The use of imported LNG could increase customers' electricity bills by up to 10%, Miller said. He also commented that the timeline for Enstar's plan with Glenfarne for an LNG import facility would not meet Chugach Electric's requirements. Sims commented that part of the concept for engaging Glenfarne in the LNG import facility is that the import facility might be converted to an export facility, if the North Slope pipeline is constructed.
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