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Perspectives on Cook Inlet basin gas An evolving natural gas market brings new challenges and opportunities for utilities and producers as legacy fields decline Alan Bailey Petroleum News
In a world of volatile natural gas prices, the small and isolated gas market of Alaska’s Cook Inlet basin faces some interesting challenges, as production from aging gas fields declines and new players come to the region seeking business opportunities.
On Dec.1 at Law Seminars International’s Energy in Alaska Conference, some experts on the Alaska gas industry provided their perspectives on the Cook Inlet gas market and where that market may be heading.
Utility perspective Nan Thompson, vice president and general counsel to Enstar Natural Gas Co., the main Southcentral Alaska gas utility, provided a utility’s perspective on the market.
Years ago Enstar benefitted from the availability of gas discovered incidentally during exploration for oil, Thompson said. The Cook Inlet producers, anxious to find a market for excess gas, were happy to provide as much gas as the utility needed, she said. However, in the mid-2000s, with gas production dropping, the producers started to seek higher prices, more commensurate with gas prices in the Lower 48, when negotiating new utility contracts.
But, with prices set to rise above the average price that Enstar had been paying for its gas, the utility had to seek Regulatory Commission of Alaska approval for those new contracts.
A major turning point in the utility gas market came in 2006 when, for the first time, the commission turned down an Enstar gas supply contract. The contract, with Marathon Oil Co., would have met all of Enstar’s needs until 2016, Thompson said. Enstar then negotiated two new contracts, this time with Marathon and ConocoPhillips, that would also have ensured firm gas supplies many years into the future, she said. However, in 2008 the commission turned those contracts down.
Price concerns Concerned about the specter of rising gas prices for consumers and with some very aggressive interveners in the supply contract hearings, the commission took exception to contract terms in which Cook Inlet gas prices would be indexed to gas prices at Lower 48 market hubs. The gas producers argued that gas drilling in Alaska needed to be able to compete for capital with drilling elsewhere, Thompson said.
Ironically, although at the time of the hearings Lower 48 gas prices were relatively high, the market prices on which the proposed Cook Inlet prices were to have been based have since dropped. In hindsight, had the contracts been approved, Enstar would have obtained firm gas supplies through to 2016 and consumers would have been paying less for their gas, Thompson said, adding that there was no way of predicting that outcome at the time of the hearings.
“No-one’s crystal ball is perfect,” she said.
But the consequences of the gas supply contracts debacle were changes in the producers’ Cook Inlet drilling plans and long-term changes in the character of the Cook Inlet gas market.
Statute changes With an impasse over approval of new contracts and with Enstar running out of time to make deals that would meet with commission approval, the Alaska Legislature stepped in and changed the Alaska statutes, adding new commission standards for contract approval. Those new standards required the commission to consider the benefits of a utility having a diverse supply portfolio and to take into account gas supply security, Thompson said.
“Since then we’ve had several contracts approved,” she said.
Another consequence of tightening gas supplies has been the construction of underground gas storage facilities, to warehouse summer produced gas for use during periods of high winter gas demand. Some gas producers have implemented their own storage facilities, to ensure the availability of winter gas to meet utility contractual obligations.
CINGSA However, Enstar’s sister company, Cook Inlet Natural Gas Storage Alaska, or CINGSA, is building its own storage facility in a depleted gas field reservoir under the Kenai River on the Kenai Peninsula. This facility, scheduled to go into operation in 2012 and contracted for use by three utilities, will significantly change Enstar’s participation in the gas market.
“What we were faced with was a situation where we couldn’t buy the gas to meet the peak demands without paying a premium price,” Thompson said. “CINGSA will allow us to buy gas in the summer and store it away until we need it in the winter, to deal with the daily (demand) variances, and it’s additional security for our customers.”
Bidding system Also in the winter of 2011, faced with a shortfall in firm, contracted gas supplies, Enstar implemented a system in which producers can bid to supply gas on a day-to-day basis. Using short-term weather forecasts, the utility estimates how much gas it will need for the next day and invites qualified producers to submit bids to meet any anticipated supply shortfall. Bids are confidential and submitted on a competitive basis.
Last winter Enstar purchased about 5 percent of its gas through this system and the utility anticipates purchasing about 3 percent of its gas through the system during this winter, Thompson said.
“The system has worked very well for us,” she said, adding that Enstar may continue to use the system after the CINGSA facility has gone into operation, using the system for short-term purchases of summer gas for storage.
And, acknowledging that the system operates as a competitive market, the commission has now agreed that bids can be made under the terms of gas supply contracts that have not received commission approval, Thompson said.
Meantime, faced with a growing supply shortfall, Enstar has been aggressively seeking new gas suppliers.
“It is in our interests as a utility to encourage competition and encourage as much growth in the market as possible,” Thompson said. “We are eager to buy from new producers.”
Several new companies have entered the Cook Inlet gas production industry — Enstar now has supply contracts with Armstrong Cook Inlet and with Buccaneer Alaska, Thompson said.
LNG imports However, despite some new gas discoveries, an analysis of the numbers of gas wells being drilled and of gas field production declines points to a need to import liquefied natural gas at some point to meet gas supply shortfalls.
“Right now the crossover in my mind is the fourth quarter of 2015,” Thompson said. And, given the time involved in permitting the infrastructure development needed to import LNG, the utilities are already preparing for the LNG import option, she said. This situation could change in the next year or two as other new gas discoveries become proven, she added.
New players Tom Walsh, a managing partner in Petrotechnical Resources of Alaska, commented on the new players that are now operating in the Cook Inlet basin. Hilcorp Energy Co. is buying out Chevron’s interests in the inlet, while Armstrong, Apache Corp., Linc Energy, Cook Inlet Energy, Buccaneer Alaska, NordAq and Furie Operating Alaska (formerly Escopeta Oil) have become active players in the basin. ConocoPhillips and Marathon Oil Co. remain major Cook Inlet producers.
Buccaneer, NordAq and Furie have all recently announced new gas discoveries. It is also very exciting to see two jack-up drilling rigs coming to the inlet, Walsh said.
The local utilities’ needs for new gas supply contracts are driving the Cook Inlet gas market at present, with a gap projected to widen between slowly growing gas demand and steadily falling gas production, Walsh said.
Research done by both the Alaska Department of Natural Resources and the U.S. Geological Survey indicates that there are plentiful oil and gas resources still to be found in the Cook Inlet basin. State tax policies for Cook Inlet have played a major role in encouraging new exploration, including the bringing of the jack-up rigs to the inlet, Walsh said. And high oil prices are motivating a search for new oil resources.
Challenges Challenges for explorers in the Cook Inlet basin include land access, extreme seasonal swings in gas demand, the Endangered Species Act listing of the Cook Inlet beluga whales and the need for an industrial gas market to support a major gas find, Walsh said. It would be wonderful to see more industrial use of natural gas from the basin, he said.
Exports of liquefied natural gas from ConocoPhillips’ LNG facility on the Kenai Peninsula have been curtailed this year, but ConocoPhillips, now the sole owner of the facility, has said that it is interested in retaining all options for the use of the plant — LNG exports could provide an important driver for future exploration and development in the basin, even although the plant will likely have to be used at least temporarily for the import of LNG, Walsh said.
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