Southcentral utilities will decide on imports
Alaska Natural Resources Commissioner Dan Sullivan, seen testifying in Juneau about Gov. Sean Parnell’s latest oil tax proposal on Jan. 22, told another legislative committee he is concerned about the precedent that could be set if Southcentral utilities decide to import natural gas from British Columbia.
Gas and electric utilities in Southcentral Alaska say they will decide in February on a plan to import liquefied natural gas or compressed natural gas to supplement declining production from Cook Inlet gas fields, the companies told state legislators in a Jan. 23 briefing.
The gas would most likely come from British Columbia.
Gov. Sean Parnell says he is skeptical of the plan. In a statement issued Jan. 23 Parnell urged the utilities to be patient and give Cook Inlet producers and new explorers in the Inlet a chance to prove up new gas.
Anchorage Mayor Dan Sullivan disagrees with Parnell.
“There is tremendous activity in Cook Inlet but activity and deliverability of gas are two different things, and right now we have a situation where utilities cannot get enough gas under contract to give them confidence,” Sullivan told the House Energy Committee in a Jan. 23 hearing.
The utilities say they can’t afford to wait for the explorers. Regional gas supplies are likely to dip below annual utility demand in 2014 and for certain in 2015, and there is no assurance the existing producers will make investments needed to coax enough additional gas from the mature fields, or that explorers will make a find, the utilities told the House Energy Committee Jan. 23.
The local gas supply is strained already. Moira Smith, Enstar Natural Gas Co. vice president and general counsel, told the House committee that Enstar came close to not having enough gas during a December cold snap.
To assure future gas, the utility group is looking at proposals from three compressed natural gas providers who would ship by sea, and five liquefied natural gas providers, Smith said.
The utility group includes Enstar, the natural gas utility serving Southcentral Alaska; Chugach Electric Association, the largest electric utility in Alaska; Anchorage’s city-owned Municipal Light and Power, and Matanuska Electric Association.
“Our analysis (of the proposals) will be done in February and we’ll make a decision then,” Smith, of Enstar, told the lawmakers. “The marine proposals we’re looking at are for 15 years, over which we’d have to amortize any new assets. We’re also asking our suppliers for a shorter, five-year supply option.”
State of concern
Parnell and other state officials, though, are concerned that if the utilities lock in long-term contracts with LNG or CNG suppliers, the imports will discourage explorers in the Inlet.
However, if the explorers’ current drilling is successful and discoveries are made, the capital investments related to imports, possibly including new vessel construction, could become stranded assets for the utilities. The investments will also still have to be paid for by consumers through increased rates.
The utilities have said they will seek pre-approval this spring from the Regulatory Commission of Alaska for engineering and other expenses related to import facilities, so they can include the charges in billings to consumers.
Parnell believes the utilities are moving too fast.
“We remain concerned about the ability of Cook Inlet gas supplies to meet the needs of Alaskans in the near-term,” the governor said in his statement. “However, the utilities’ talk of importing Canadian gas first to fill the short-term gap in supply should change to a discussion about ensuring that all of Alaska’s gas sources are used first, both in the near and long-term.
“We should ensure that any import contracts meet a short-term gap in supply, and do not finance Canadian gas facilities over the long term.”
Brad Evans, general manager of Chugach Electric, said there could well be more supply soon in Cook Inlet, but his problem is that it can’t be guaranteed.
“We can’t be optimists about gas supply — it runs counter to our responsibilities,” to customers, Evans told the House committee. “We’ve had our eye on this (shortage problem) for some time and I fell prey myself to the optimism over the renaissance of Cook Inlet exploration. But now a decision has to be made. We barely have enough time, and I’m afraid the solution may be less than optimal.
“If I take a black eye from this, I’d rather have that than a blackout.”
The utilities’ assessment of supply is based on known proven reserves confirmed by existing wells, but in its analysis the state Division of Oil and Gas says there is at least an additional one-third volume of proven gas if reserves “behind the pipe” are considered.
This is gas that could be produced with additional investment in compression and drilling by producers.
Consultants to the utilities say, however, there is no evidence enough investment in the gas fields will be made and even if they were the projected supply shortfall will still occur. Producers are drilling only half the number of new development wells needed to offset the decline in regional production, Pete Stokes, a consultant with Petrotechnical Resources of Alaska, a firm working for the utilities, said in an interview.
Bill Van Dyke, another consultant with PRA, said drilling more development wells in the existing fields only accelerates production, and doesn’t add new reserves.
“You can boost the production in 2015 and 2016 but that puts you in even more trouble in 2019,” when the existing fields are further depleted, Van Dyke told legislators Jan. 23.
State Natural Resources Commissioner Dan Sullivan (no relation to Anchorage’s mayor) meanwhile said his agency agrees with the utilities that industry investment in the Cook Inlet fields is inadequate.
The reasons for this are varied and may have a lot to do with changing commercial relationships in Cook Inlet. This would include the recent exit of major companies like Chevron and Marathon who have not been investing in the mature fields. Companies like Apache Corp. and Hilcorp Energy, which purchased the Chevron and Marathon assets, are exploring, Sullivan said.
“These are companies that specialize in rejuvenating mature basins, and they’re aggressive in ways Chevron and Marathon were not,” Sullivan said.
What has thrown a big wrench into the Cook Inlet efforts, however, has been the U.S. Federal Trade Commission’s months-long investigation of Hilcorp’s purchase of Marathon’s Alaska properties, which wound up involving all of the regional producers in extended FTC proceedings.
“That essentially froze things for almost a year,” Sullivan said, because Hilcorp has been unable to plan its redevelopment of the Marathon properties, which are mostly gas, until the company can take legal possession of them.
The FTC dropped its investigation in November and turned the proceeding over to the state, which negotiated a Consent Decree with Hilcorp to protect local consumers. The acquisition is expected to be completed in February, Hilcorp has said.
Anchorage Mayor Sullivan told the House committee that Hilcorp representatives met with him Jan. 22, and that he is optimistic the company will be able to make new gas available from the Marathon properties.
“They told me that as soon as the ink dries on the acquisition documents they’ll be talking to the utilities and surveying what their needs are. Hilcorp is aggressive and they have a proven track record,” with old producing fields, Sullivan said.
Meanwhile, Cook Inlet exploration could well yield results, resulting in the utilities’ stranded-investment scenario state officials are worried about.
Alaska-based independent NordAq Energy, is awaiting federal permits to proceed with final testing of a discovery in the Kenai National Wildlife Refuge that could augment local gas supplies by 2015, the year the utilities are forecasting certain shortages certain.
Development of NordAq’s Shadura gas discovery depends on whether permit approvals by the U.S. Fish and Wildlife Service can be obtained in time, NordAq said.
The company can’t yet say the discovery is commercially viable but says it is “highly encouraged” by initial drilling.
One other company, Houston independent Furie Operating Alaska, has reported an offshore gas discovery in Cook Inlet but has not yet released results of confirmation drilling in 2012. The company has applied for permits for a new offshore platform. Furie’s discovery, if developed, not be in production by 2017 or 2018, state officials said.
Yet another independent, Australia-based Buccaneer Energy, will move its jack-up rig Endeavour, now in port in Homer, to a nearby prospect where gas has been discovered to tests its possibility for production. Buccaneer hopes to drill and have tests completed by late spring, the company has said.
DNR Commissioner Sullivan is also concerned about the precedent that would be set for British Columbia if LNG exports of gas to Alaska began. Today Alaska is the only exporter of LNG from North America, even though shipments from the ConocoPhillips plant near Kenai are currently not being made.
The state’s reputation as an LNG exporter is big a selling point in stirring up interest in a large Alaska LNG project, Sullivan has said. However, LNG projects now planned in British Columbia could be big competitors for Alaska.
“Importing gas from British Columbia validates and promotes one of the biggest competitors, that is B.C. gas, to an Alaska large-diameter LNG export project,” Sullivan said in a presentation earlier last week to the Senate Resources Committee.