Only two bids in state’s Cook Inlet lease sale; Hilcorp warns of future gas shortages

Alaska’s annual Cook Inlet areawide lease sale was hardly a success, Alaska energy analysts are saying.

Bids were opened last Wednesday, May 25, and there were only two offers on two tracts from Alaska-based independent Furie Operating Alaska LLC, which operates the small Kitchen Lights gas field in the inlet.

State officials put the best light on it, however:z “It’s encouraging to see a local producer continuing to invest,” said John Crowther, Alaska Deputy Commissioner of Natural Resources.

“At a time when (regional) utilities are looking to secure new sources of natural gas to meet local energy demand, reinvestment by an existing operator is a good sign,” Crowther said.

There were hopes for more bids, however, particularly given a recent warning to utilities from Hilcorp Energy, the major gas producer in Southcentral Alaska, that gas reserves may not be sufficient to meet demand as existing contracts are renewed.

There are no near-term shortages forecast but the long-term supply is in question. Regional utilities, led by Chugach Electric Association and Matanuska Electric Association, have formed a working group to meet with Hilcorp and state officials on the problem.

Alaska energy analysts said they were’nt surprised at the lease sale results.

“It was indeed an absolute bust (the sale) but the fact is that there just aren’t very many companies operating in Cook Inlet,” said Mary Ann Pease, an energy consultant.

Larry Persily, a former federal energy official, said the poor showing likely indicates that acreage available wasn’t that attractive, and that Hilcorp Energy, the major player in the region, has a large inventory of leases and near-term projects and doesn’t need more acreage.

“Furie, on the other hand, does not have a big lease inventory and needs more acreage if it is to expand,” Persily said.

State geologists say that although Cook Inlet is a mature producing region there are large areas that are still underexplored and the geology is prospective, particularly for gas, but that companies will have to invest to prove up more reserves.

Persily said he thinks Hilcorp is sending a message to the utilities that they will likely have to pay higher prices to secure assured future supply.

“I think they’re saying, ‘utilities, let’s talk. Tell us what you’re willing to pay and we’ll see what we can do,” Persily said.

A key problem in attracting more explorers for gas is that the regional utility market is small and tied up in long-term contracts mostly with Hilcorp, the dominant supplier. “If explorers find more gas they have no one to sell to,” Pease said.

Cook Inlet is an isolated producing region with no connection to Lower 48 gas markets, and in recent years prices have been in the $7/mcf to $8/mcf in most utility contracts, which is much higher than in the Lower 48 states until recently.

Crowther said, “Drawing in new entrants takes time to assess the locality and prospects. As these factors are all quickly developing, we believe industry and investors are still assessing them. Part of our ongoing effort is to help existing operators and potential new entrants see this potential with data support, information to help them secure financing, and, as mentioned, potential new policy and fiscal support.”

Those kinds of additional exploration incentives may require administrative process, coordinated state agency effort, and possibly legislative action. “We believe there may be several potential actions to make development in Cook Inlet more competitive, and these topics are under active deliberation,” Crowther said.

Derek Nottingham, the state Division of Oil and Gas director, said “unleased areas of Cook Inlet are generally further from infrastructure, have less available data about resource potential, or have other regulatory challenges to exploration and development. Also, would-be new entrants to the Cook Inlet market may have less risky opportunities to consider in places in the Lower 48.”

Nottingham also said the current Cook Inlet developers have voiced great difficulty with navigating federal permitting processes under the Biden administration. “Also, elements of the financial industry have taken a “zero tolerance” policy on “arctic drilling” and have mistakenly included the Cook Inlet in the geographical calculus,” he said.

Alaskans are heavily dependent on natural gas for power generation and space heating. The bulk of the state’s population lives in Southcentral and Interior Alaska where most energy needs are met by Cook Inlet gas except for some hydro and, in the Interior Alaska, coal-fired power.

Crowther said the state will be looking at ways to encourage more exploration. “We of course wish to see more companies bidding in future lease sale and we are assessing how the state can support this through making additional data available, helping operators navigate complex permitting and potentially making fiscal (tax or royalty) changes to boost the competitiveness of Cook Inlet,” Crowther said in a statement.

The state previously had an aggressive oil and gas incentive program in place which led to substantial exploration and development in the Inlet but it was terminated in 2017 because of its hefty cost to the state treasury, which at the time was under stress.