Providing coverage of Alaska and northern Canada's oil and gas industry
March 2012

Vol. 17, No. 13 Week of March 25, 2012

No respite ahead

PRA now projects Cook Inlet natural gas supply shortfall in 2014 or 2015

Alan Bailey

Petroleum News

A new flurry of exploration activity in the Cook Inlet basin in recent years and reports of some possible new gas fields on the horizon would seem to bode well for the future of the utility natural gas supply situation in Southcentral Alaska. But, in the near term at least, the continuing decline of aging gas fields would appear to still present a significant cause for concern.

In 2010 Petrotechnical Resources of Alaska, or PRA, completed a study for Southcentral utilities Enstar Natural Gas Co., Chugach Electric Association and Municipal Light & Power, assessing what might be involved in maintaining adequate utility gas supplies from the Cook Inlet basin through to 2020. The study came to a similar conclusion to a 2009 study conducted by the Alaska Department of Natural Resources: Both studies found that without the drilling of more new gas wells, utility gas supplies would fall short of demand in 2013. Heading off that 2013 shortfall and keeping adequate gas flowing through utility pipelines until 2020 would require an accelerating rate of gas well drilling, with 185 new wells needed at a likely total cost somewhere in the range of $1.9 billion to $2.8 billion, the PRA study found.

New update

PRA has now updated its 2010 study, retaining the original analysis of field decline rates and the original cost analysis, but plugging in the actual record of gas wells drilled and field upgrades done since the 2010 study was completed. The new results show that new wells and field upgrades have pushed the gas supply decline curve a little further into the future. But without some major new source of gas coming on line in the near future, supplies now seem set to fall below demand in 2014 or 2015, just a year or two later than the original study had forecast.

Natural gas is the primary source of energy for Southcentral Alaska residents, accounting for about 90 percent of power generation and most of the heating for the region’s buildings. In 2011 85 percent of that gas came from five long-established Cook Inlet gas fields, according to PRA’s updated analysis.

Enstar, Southcentral Alaska’s main gas utility, has seen a shortfall in its firm, contracted gas supplies since January 2011 and since then has depended on gas producers bidding on a day-to-day basis to deliver gas to fill that shortfall, especially during the winter. Recent data provided to Petroleum News by Enstar shows the gap in contracted supplies widening significantly in 2013 and continuing to grow thereafter.

Decline curves

PRA’s analysis of future field production used individual well production decline curves for the five established Cook Inlet fields, thus separating the decline characteristics of the fields from the impacts on production from the drilling of new development wells, Pete Stokes, the consulting petroleum engineer who conducted the study for PRA, told Petroleum News. For a newer field, where there has been no new development drilling since the field came on line, PRA was able assess the production decline profile for the field as a whole without looking at the data for individual wells, Stokes said.

One finding from this analysis was that, as more development wells are drilled, the initial production rate from each new well becomes progressively lower, thus requiring an acceleration in the amount of development drilling required to maintain field production levels — the effect is a bit like maintaining the flow of air from a punctured football by creating more and more punctures as the ball deflates.

And, with no possibility of a gas line from the North Slope to Southcentral Alaska being completed in time to plug the pending gas supply shortfall, PRA’s 2010 report concluded that, in the absence of sufficient drilling to maintain production, the only viable option for sustained supplies of Southcentral utility gas would be the import of liquefied natural gas, or LNG, into the region.

Economic conundrum

In March 2010 Tom Walsh, managing partner of PRA, characterized the Southcentral gas supply situation as an economic conundrum with no certain answer. The accelerated drilling program needed to maintain gas supplies would be expensive and thus translate to a need for higher gas prices. But drilling by gas producers tends to be driven primarily by the producers’ needs to meet commitments in gas supply contracts: The pricing in those contracts needs to be high enough for drilling viability. However, given the current cost of LNG on the Pacific Rim, the import of LNG would appear to be an expensive option. And a June 2011 study by Alaska’s Division of Oil and Gas concluded that sufficient new Cook Inlet gas could be developed to meet supply needs through 2018 to 2020 at lower gas prices than alternative sources of supply.

So what has happened in the Cook Inlet fields since PRA published its 2010 report?

New wells

Essentially, five new wells were completed between November 2009 and October 2010, adding 18.5 million cubic feet per day to the otherwise declining Cook Inlet gas production, and six new wells were completed between November 2010 and October 2011, adding another 9.9 million cubic feet per day of production, Stokes said. New gas compression in the Beluga and Ninilchik fields has also slowed the basin-wide production decline, he said.

That compares with 105 wells completed in the Cook Inlet basin between 2001 and 2009, including 34 wells completed between 2007 and 2009.

Flat demand

The demand side of the gas supply/demand equation looks fairly flat, or may even show a slight future decline, although there is some heightened demand this year from the continuing operation of the Kenai Peninsula LNG facility. Energy needs for a planned gold mine at Donlin Creek near the Kuskokwim River could push up gas demand from 2019 onwards.

Enstar spokesman John Sims told Petroleum News March 20 that energy efficiency improvements in Southcentral residences have significantly reduced the per-customer demand for natural gas, but that Enstar is experiencing a continuing annual increase in its customer base. The overall effect will likely be a continuing slight increase in Enstar’s gas needs, Sims said. On the other hand, power utilities Chugach Electric Association and Municipal Light & Power are building a new state-of-the-art gas-fired power plant in south Anchorage — that plant will make much more efficient use of gas than the utilities’ existing generation facilities.

2014 shortfall?

Putting the supply and demand projections together leads to a forecast of a gas shortfall in 2014. This forecast takes into account new wells recently drilled or permitted to be drilled, but assumes no further wells would be drilled subsequently, Stokes said. Adding10 million cubic feet per day of production each year from the drilling of perhaps three to four new wells annually, either in existing fields or in new fields to be developed, reduces the size of the shortfall but still leaves the region short of gas in 2014. Doubling that drilling rate, to add 20 million cubic feet per day of new production each year, would move the shortfall to 2015. Those assumed drilling rates and production additions reflect the scale of drilling activity seen in the past couple of years, Stokes said.

So, in the absence of major new discoveries that can be brought on line in one to two years, the current pace of field development in the Cook Inlet basin will lead to a gas supply shortage in 2014 or 2015, the revised analysis concluded.

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