DOG: Cook Inlet can provide through 2018

New State of Alaska report suggests that with proper investment, Cook Inlet basin can meet gas demand for several more years

Eric Lidji

For Petroleum News

With the U.S. Geological Survey recently saying the Cook Inlet basin could hold more gas than previously thought, the next question is whether that gas is economic.

The State of Alaska believes so.

With the right amount of investment and storage, the Cook Inlet could meet Southcentral gas demand through at least 2018, according to a new Division of Oil and Gas report.

And if that investment yields good results, it might push the timeline out to 2021.

The 34-page report compared the Cook Inlet basin to a 1990 pick-up truck: “In both cases we have been served well and the prospect for more years is likely if we continue to invest. Failure to provide sufficient investment will accelerate the end date. Conversely, even if we were to continue to invest, at some point it will become more economical to buy a new truck or in the case of gas supply to import from another source.”

As a basin-wide look, the study evaluated the potential of the whole region, but didn’t claim to say whether any individual project is economic or not. Specifically, the study tried to figure out how much gas could be produced at various rates of return.

DOG estimated that the region needs around 90 billion cubic feet per year, a figure that does not include demand for a potential liquefied natural gas export operation.

By defining a “project” as one season of work at an existing field and two seasons at a new field, the report identified 39 potential projects in the Cook Inlet, 26 in existing fields, 12 in new fields and one basin-wide compression project. The study team then performed an economic analysis on each project, considering costs under the existing fiscal system and timelines for bringing new production online. It considered various probabilities for success, as well as three potential rates of return: 10, 15 and 20 percent.

The report measured the commercial viability of the Cook Inlet by calculating the internal rate of return and expected monetary value of the basin, and compared those metrics against a projected supply curve for the basin. The IRR results “strongly suggest” that the basin contains economic natural gas, while “some of the EMV’s are small compared to other projects available for investment worldwide,” the report concluded.

For the supply curve analysis, DOG relied on its 2009 study of the potential reserves remaining in the basin. That report estimated that the Cook Inlet still holds at least 863 billion cubic feet of proved, developed and producing reserves, and could possibly hold much more depending on the amount of industry investment pumped into the region.

The 2011 report considers the currently producing fields and undeveloped prospects indentified in the 2009 study, but not exploration or unconventional development. The report also focuses exclusively on the potential of the basin, without considering the impact of possible LNG imports, or of North Slope gas being shipped to Southcentral.

Conjecture and contradictions

After considering projected regional demand, known drilling programs on the horizon and plans to bring more efficient power generation online, a group of Southcentral utilities recently said Alaska will need to start exporting LNG into the region as soon as 2014 to stave off a 2 bcf shortfall. That could easily climb to 27 bcf by 2017 and 47 bcf in 2018 if gas is needed to power operations at the proposed Donlin Creek mine.

Less than a week later, the USGS issued a report suggesting that the basin could hold 19 trillion cubic feet of undiscovered gas and 599 million barrels of undiscovered oil.

At least two independent companies — Escopeta Oil and Buccaneer Energy — believe at least some of those resources exist in their offshore leaseholds. Escopeta plans to drill at its Kitchen Lights unit this summer, while Buccaneer is aiming to drill at its Southern Cross and North West Cook Inlet units later this year, or more likely next summer.

But while those companies prepare for the first offshore exploration in the Cook Inlet in many years, the State of Alaska is considering plans to bring North Slope natural gas into the region through either a standalone pipeline or a spur off a pipeline into Canada.

The Alaska Gasline Development Corp. recently issued a report showing that the standalone pipeline could be built for $7.52 billion and come online as soon as 2019.