Legislature works to help new gas development, adding supply in Cook Inlet

State legislators were startled at the seriousness of the strain on the Southcentral Alaska natural gas system during recent cold weather as well as new information that imports of liquefied natural gas, or LNG, likely can’t be done in time to bridge a projected annual gas supply gap expected to begin in 2027.

Enstar Natural Gas Co. president John Sims says the soonest an LNG import system could be in place is 2030. By then gas production from producing fields in Cook Inlet will be in sharp decline, the state Division of Oil and Gas told legislators in separate hearings.

Also, any imported LNG is expected to be twice as expensive as gas from producing fields in Cook Inlet, Sims said, or about $16 per thousand cubic feet instead for LNG compared with about $8 per thousand cubic feet for existing Cook Inlet gas production.

However, if there’s a silver lining to this it is that the Legislature is now motivated to help producers in the Inlet drill and produce new gas, and fast. There appears a path forward that could get at least some new gas into production quickly if the Legislature can move get a bill granting a reduction in state royalty during this session of the Legislature.

HEX LLC, which owns the Kitchen Lights gas field in upper Cook Inlet, says it can drill new wells and have new gas flowing in a matter of months is a bill allowing a royalty reduction can pass the Legislature.

Rep. George Rauscher, R-Palmer, has sponsored one bill reducing the royalty and Gov. Mike Dunleavy has sponsored another. Either would help HEX get to work right away on new drilling.

Even more gas could be developed if a mechanism can be found to help BlueCrest Energy finance development of a substantial proved gas deposit at the Cosmopolitan oil field offshore Anchor Point, near Homer.

The gas deposit is estimated at 235 billion cubic feet . It overlies, and is separate from, oil at Cosmopolitan now being produced. For the gas BlueCrest needs a production platform and pipelines, which will cost about $400 million, its CEO, Benji Johnson, told legislators. The company is producing the deeper oil at Cosmopolitan with high-angle lateral wells drilled about three miles from shore but lateral drilling can’t be done with the shallower gas deposit, Johnson said. So far BlueCrest has been unable to finance the $400 million investment partly because of the unique nature of the small Alaska regional gas market.

If the state could help with at least some of this financing Bluecrest could have the gas in production possibly within three years and 50 million cubic feet of new gas production on-line, Johnson said. A state loan guarantee may be the easiest way to do this because it wouldn’t involve the state putting up cash.

The Alaska Industrial Development and Export Authority, the state development finance corporation, has helped both BlueCrest and HEX with loans to do drilling, but a $400 million commitment may stretch AIDEA’s capacity.

However, the state itself might issue a guarantee. It has a good credit rating and relatively low levels of debt to backstop a loan guarantee. Its current borrowing capacity is $1.4 billion, according to the state Department of Revenue. However, this may take new legislation to accomplish.

HEX has a different problem at Kitchen Lights, Mark Slaughter, the company’s chief commercial officer, told legislators in briefings. The company has partners with royalty shares and this, combined with the state’s 12.5 percent royalty, raises the combined royalty payout to 30 percent of royalties paid on gross revenues, Slaughter said.

This heavy royalty burden makes it difficult for HEX to borrow for new drilling even into known gas deposits near the company’s Julius R platform, which is operating at the Kitchen Lights field. HEX has tried unsuccessfully to renegotiate the partners’ royalties, Slaughter said. Given that, the the easiest way to solve the problem would be if the state could reduce its 12.5 percent royalty.

With this, HEX could finance $3 million needed to drill prospects near its platform and possibly have new gas in 60 days, Slaughter said. The initial drilling could add 10 million to 20 million cubic feet per day of gas production, he said.

There is other new legislation in the mix, too. Sen. Cathy Giessel, R-Anch., the Senate Majority Leader who also cochairs the Senate Resources Committee, has a bill in that would expand the capability to store gas in the Cook Inlet region.

Additional storage is needed to augment the Cook Inlet Natural Gas Storage Alaska, or CINGSA, facility near Kenai, which is owned partly and operated by Enstar Natural Gas. Hilcorp Energy owns gas storage elsewhere in the region.