|
Inlet's energy dilemma
House Resources Committee reviews the tough alternatives as gas shortage looms
Kristen Nelson Petroleum News
Cook Inlet natural gas provides the fuel for most Southcentral heat and power, but it's in short supply, with the supply getting shorter.
Is there more gas in the Cook Inlet basin?
Absolutely, members of the Alaska House Resources Committee were told in a March 4 presentation by Trevor Jepsen and Ed King, staff to committee Chair Tom McKay.
But additional Cook Inlet gas will cost more to produce, as it requires development costs in some cases, exploration costs in others and for a third tranche of gas, research and development costs.
The U.S. Geological Survey has estimated there are some 19 trillion cubic feet of natural gas in Cook Inlet, King said, but not all those gas molecules are equal -- not as accessible and not as developable.
He said the Alaska Department of Natural Resources estimates that 820 billion cubic feet of gas are proved and developed, requiring just operating costs to get to market, at some $8 to $10 per thousand cubic feet.
That is the gas that Hilcorp Alaska, Furie and a few smaller producers are currently providing.
Then there is discovered but undeveloped gas, which has development costs, and is likely to cost $11 to $16 per mcf, King said.
The next tranche is undiscovered, economically viable, estimated at $17 to $25 per mcf because of exploration costs.
Beyond that is a tranche of undiscovered but technically recoverable gas, which has research and development costs and is pegged at more than $25 per mcf, which means, King said, it is only recoverable at a price higher than the market would bear.
Survey results What is the view of residents who rely on Cook Inlet gas and pay for it in their utility bills?
Jepsen reviewed results of a survey of Southcentral residents done for Enstar by Dittman Research this past summer.
It showed that while 54% of respondents were aware of an upcoming natural gas shortage, only 1% were aware that importing natural gas was being considered. Jepsen said that may have been because the survey was taken before there was general awareness of options the utilities were considering.
On the issue of who is responsible for ensuring uninterrupted gas supply, he said 41% of residents believe the responsibility lies with government, while 25% said the utilities were responsible and 16% put the primary responsibility on oil and gas companies.
There was strong support for incentives to spur exploration and production in Cook Inlet, 59%, and significant opposition, 72%, to importing natural gas, although 60% would support imports if they were the cheapest option.
There was 87% support for a pipeline to deliver North Slope gas for in-state use, but an even split (49% each), supporting and opposing reducing the permanent fund dividend to help fund such a project.
Alternatives Jepsen said the state would need to decide if it is willing to accept higher cost energy with lower risk or lower-cost energy with higher risk.
Supply could be increased through a reduction in taxes and royalties, by providing subsidies, shifting risks, offering "patient capital" -- public or angel investor capital paid back over a longer period of time-- or by decreasing demand by substituting electricity generation, using alternative heating fuel, increasing efficiency or restricting growth.
Then there is LNG.
The Kenai LNG facility could be converted into a gasification facility to receive small LNG shipments, Jepsen said, with some 1.5 bcf of storage available in above ground tanks. More storage could be added and, he said, underground storage is available, with Senate Bill 220 providing the Regulatory Commission of Alaska authority to regulate natural gas storage facilities.
LNG imports could start as a short-term solution, but if importing LNG is the state's long-term response to the Cook Inlet gas shortage it could also work in the long term.
But McKay warned that getting on the LNG path drives local gas producers to the side and, he said, could snuff out Cook Inlet gas.
He described decisions facing the state as deciding what path you're on -- and if you're willing to stay on it -- because the result could be driving Cook Inlet investors out.
Support for more drilling Jepsen said the goal of House Bill 387, jack-up rig credit, is to get a second jack-up rig in Cook Inlet, one with the capability to drill into deeper south Cook Inlet areas than the existing Spartan 151, which is booked for the foreseeable future.
HB 388, reserve-based lending, would allocate state dollars to a dedicated fund to invest in Cook Inlet, which could be in the form of a loan or a loan guarantee.
On royalty and tax decreases, Jepsen said the market has spoken -- under current tax and royalty structure Cook Inlet is not ideal for investment.
He said while current bills are a step in the right direction, the state could do more to improve project economics and attract investment, especially with a goal of increasing gas production, which has a lower return than oil.
HB 223 would provide 0% royalty on new gas, 50% reduction in royalty on new oil.
In discussing aggressive royalty and tax reductions, Jepsen said while the North Slope represents billions in revenues to the state, Cook Inlet represents only tens of millions, and if imported LNG were used -- and the cost was high-- the impact on the ratepayer would be high.
And on the alternative of North Slope gas, HB 222 would allow investment of funds from the Alaska Permanent Fund to achieve 25% ownership of a gas pipeline from the North Slope.
| 