Natural gas shortage in Cook Inlet? Not really. What’s short are investors

Cook Inlet natural gas producers say they’re doing everything they can to get more gas into the Southcentral Alaska energy market to stave off possible shortages that could begin as early as 2027, according to a state study.

Hilcorp Energy, the region’s main oil and gas producer,has told state legislators in Juneau that it plans more drilling of gas wells. The company expects to spend $1 billion or more over the next 10 years to find more gas, Luke Saugier, Hilcorp’s senior vice president for Alaska, told the Energy Committee of the state House Feb. 21.

That won’t be enough. State Rep. Tom McKay, R-Anchorage, who chairs the Committee in the state House and who formerly worked in the industry, said 15 new gas wells per year are needed to stem the shortfall. That’s according to the state Department of Natural Resources, MacKay said.

Hilcorp’s plan would drill about half the number needed, MacKay said in a discussion in the committee.

Meanwhile, BlueCrest Energy, which is now producing oil from its Cosmopolitan field just offshore Anchor Point, on the southern Kenai Peninsula, says it has a confirmed gas discovery in a separate reservoir overlaying the oil reservoir but is unable to secure , at least so far, a substantial investment needed to develop the gas.

Benji Johnson, CEO at BlueCrest, told the state House committee that an offshore platform is needed to produce the gas because the deposit is too shallow to drill and produce with long extended-reach horizontal wells, as BlueCrest is doing with the oil reservoir at Cosmopolitan, which is deeper.

The gas deposit has 234 billion cubic feet of proven reserves, Johnson said. If it could be developed it would supply the 70 billion cubic feet yearly demand in Southcentral Alaska for eight to 10 years, Johnson told the legislators.

Another company hobbled by an investment need is Furie Alaska Operating LLC at its Kitchen Lights field. HEX is currently producing gas from its one offshore platform and hopes to increase production with well workovers this year, but also wants to drill more producing wells.

The problem for Furie is that it is challenged to fund the new work because of costs imposed by the state of Alaska, an unusual twist because the state is broadly encouraging new oil and gas development in Cook Inlet.

Furie CEO John Hendrix told legislators that a particular problem is the imposition of the state’s oil and gas property tax on the company’s facilities, and which is being interpreted in a way that impedes new development. Basically, the state is assessing the property based on estimated replacement cost minus depreciation. HEX argues the property should be valued on the basis of its original investment.

Furie has sued the state Department of Revenue on its assessment and the issue is now in court. Meanwhile, the funds that could be used for new gas development at Kitchen Lights is instead going to the state of Alaska, Hendrix told the legislators.

The property tax is only one problem. The state should be doing more to help smaller companies find and develop more gas in the Inlet with other steps like reducing duplicative bonding requirements and considering relief from the state’s 12.5 percent gross royalty and 17.7 cents-per-mcf gas production tax. The state has done both royalty and tax relief in Cook Inlet before.

If new gas cannot be developed in Cook Inlet in the next three to four years the only choice for regional utilities like Enstar Natural Gas, Chugach Electtric Association and Matanuska Electric Association, is to import liquefied natural gas, or LNG, most likely from British Columbia.

The basic infrastructure to do that is in place at the mothballed former ConocoPhillips LNG export plant at Nikiski, which is now owned by Marathon Petroleum. Work would be required on the marine terminal at the plant to enable LNG to be offloaded rather than loaded, but most important the large LNG storage tanks at the plant have been maintained and kept in good condition.

A faster pace in developing renewable energy like new hydro, wind and solar would also help, although it would reduce gas demand for power generation but not space heating, which is soley dependent on gas.