Providing coverage of Alaska and northern Canada's oil and gas industry
March 2010

Vol. 15, No. 13 Week of March 28, 2010

Cook Inlet needs $2.8B

Study assesses investment in new CI wells to maintain adequate Southcentral gas

Alan Bailey

Petroleum News

Anew study into Southcentral Alaska utility natural gas supplies from the gas fields of the Cook Inlet basin has concluded that gas producers will likely have to sink up to $2.8 billion into new gas wells, just to ensure that annual supply volumes can meet annual utility demand through 2020.

The study, conducted by Petrotechnical Resources of Alaska for utilities Enstar Natural Gas Co., Chugach Electric Association and Municipal Light & Power, also found that obstacles to drilling sufficient new wells in the near future are likely to result in a need to import LNG into Southcentral, to plug a pending gas supply gap, Tom Walsh, managing partner of PRA, told a meeting of the Resource Development Council March 19.

Declining gas supplies from the Cook Inlet’s aging gas fields has been causing increasing angst in Southcentral, where natural gas forms the primary fuel for electricity generation and for the heating of homes and business premises. Most of the gas comes from just five established gas fields: the Beluga River, Trading Bay, North Cook Inlet, Kenai and Ninilchik fields, Walsh said.

Shrinking market

“We have to recognize that the basin is in decline, the market is shrinking,” Walsh said, pointing out that the Agrium fertilizer plant, an erstwhile major industrial gas consumer on the Kenai Peninsula, has closed its doors and that the export license for the Kenai Peninsula LNG plant ends in 2011. “… It’s really all about the utilities at this point and it’s going to require a fair bit of investment to keep our utility companies going.”

The study focused on the adequacy of gas supply volumes averaged over complete years, rather than a related but different issue regarding gas deliverability, the maximum rate at which gas can be delivered to consumers during peak demand in the cold winter months. A pending winter deliverability shortfall is driving a need for new Cook Inlet basin gas storage facilities, to store summer gas for winter use.

As the aging gas fields decline and as the existing gas supply contracts between Southcentral utilities and Cook Inlet gas producers move toward the ends of their terms, the Southcentral utilities face pending supply shortages. Enstar Natural Gas Co., the main gas utility of the region, has adequate contacted supplies to meet its needs until the end of 2010 but faces a potential 25 percent shortfall in 2011, Walsh said. Chugach Electric Association, a major Anchorage electric utility, faces a rapidly escalating shortage in contracted gas supplies after the spring of 2011, although Municipal Light & Power, the other major Anchorage electric utility, has secured adequate gas supplies through to 2015, he said.

And the shortage of future gas supply contracts is also putting the dampers on new gas field development.

“Contracts drive the (development) activity,” Walsh said. “So that lag in contracts … means that going forward we’re not motivating the activity in the basin that’s required to create more gas supplies.”

Assess investment needs

The primary purposes of the new PRA Cook Inlet gas study were to review the findings of a 2009 Alaska Department of Natural Resources analysis of potential remaining Cook Inlet gas reserves and to assess the level of investment in new Cook Inlet gas development, needed to assure continued, adequate gas supplies, Walsh said. The DNR study had found a shortfall in annual gas supplies from existing Cook Inlet gas wells starting in 2013 and growing thereafter unless the producers drill new gas wells.

A PRA analysis of field-level production decline rates essentially confirmed the DNR findings, although PRA estimated near-term production to be a little higher than in the DNR estimates, with that early supply boost offset by a slightly lower production rate in later years.

“We don’t have enough gas from our existing well set to meet demand in the year 2013,” Walsh said.

PRA analyzed individual well decline rates for wells drilled between 2001 and 2009, to predict the likely performance of any new wells drilled in the future, to assess the future needs for the drilling of wells to maintain adequate gas supplies and to gain insights into predicting a time at which local Cook Inlet gas supplies will no longer meet local gas demand, despite new drilling.

But that last question — the timing of an ultimate gas supply shortfall — is essentially an economic conundrum with no certain answer, Walsh said.

“It really is a chicken and egg. It’s a question of how much investment you are willing to make,” Walsh said.

New wells declining

And, when it comes to the economics of gas development, a key finding of the PRA analysis turned out to be a multiyear decline in the initial production rates from new wells, a decline that points to the need to drill wells at an increasing frequency to maintain gas production levels.

“We’re getting to leaner and leaner wells as we go forward,” Walsh said.

In the past couple of years Cook Inlet drilling has averaged out at 13.6 new gas wells per year, primarily in support of existing gas supply contracts, Walsh said. And plugging the results of the well decline rate analysis into that average well count indicates that continuing the current rate of field development drilling would move the Cook Inlet utility gas supply shortage from 2013 to 2018 while costing perhaps $2 billion, he said.

Extending adequate gas supplies beyond 2018 would require the drilling of more and more wells each year, with a total of 185 new wells at an estimated total cost of $1.9 billion to $2.8 billion required to extend the supplies to 2020, the PRA study found.

“We’re talking about a significantly larger number of wells being drilled going forward, with a market that’s contracting,” Walsh said. “… So it’s kind of a tall order.”

And the escalating cost of maintaining utility gas supplies for Southcentral Alaska will push up the price of energy, he said.

“There’s no way around that,” Walsh said. “No matter what we do, if we import, if we have an in-state (gas) line, that’s the direction we’re heading.”

Import LNG

In the absence of a successful near-term drilling program, utility gas supplies will start to fall short in 2013. And, with supply alternatives such as the building of a “bullet” gas line from the North Slope being impractical to implement by then, a short-term local gas supply shortfall will inevitably lead to the import of LNG into Southcentral Alaska from elsewhere, Walsh said.

“The bullet line will not be built by 2016 or maybe 2017. It’s not an option for the short term,” Walsh said. “So really there’s no way out besides investing in the Cook Inlet basin to get us to that stage. … That’s the reality of it. We need … to take immediate action to make sure that we have gas going forward.”

The utilities urgently need new gas supply contracts sufficiently attractive to support new development in the Cook Inlet basin, with predictable timelines and standards for Regulatory Commission of Alaska contract approval, he said.

“Although we’d all like to see very inexpensive gas in the Cook Inlet basin, things are going to start to move in an upward direction,” Walsh said. “If we’re going to motivate explorers and developers, it’s got to be on good terms for them as well.”

Meantime utilities must secure access to new gas storage facilities, both to enable the management of peak winter gas demand and to encourage new gas development by opening up the Cook Inlet gas market, he said.

Multiple actions

Initiatives to increase customer awareness of the difficult gas supply situation and to encourage energy conservation must continue; there needs to be streamlining of the procedures for land access for exploration, field development and pipeline construction; and the commercial playing field of the Cook Inlet basin, in terms of issues such as gas supply contract terms and production taxes, needs to attract new gas producers into the basin, Walsh said.

There is a market in Cook Inlet for local gas, regardless of any plans to bring gas to Southcentral Alaska from the North Slope, he said.

“If we can … actively explore and develop these resources and reserves that are out there we can stave off the need for the import of gas,” Walsh said. “… Local gas is still a good deal now. … The (gas) price will probably point to a local supply rather than a bullet line or LNG imports. … I think there’s a very viable (gas) market here in the basin.”

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