Published March 6th, 2013
by Senator Hollis French
In 1957 the first major oil discovery in Alaska happened at Swanson River, 20 miles northeast of Kenai. Seven years later, oil discoveries in Cook Inlet gave rise to a boom in offshore development. The search for oil in both locations turned up large reserves of associated natural gas. For many years the activity in oil development helped bring gas to market in Southcentral that was plentiful and cheap.
It was this ample gas supply that gave rise to both the liquified natural gas (LNG) export facility in Kenai and what became the Agrium plant, which used natural gas to produce urea, a crucial component of fertilizer. The LNG export facility began operating in 1969 and has been the only LNG export facility in the nation for over 40 years.
Currently, Cook Inlet supplies 100 percent of the natural gas used in Southcentral Alaska for heating and for making electricity. Concerns over whether there is enough Cook Inlet gas to meet local demand have been voiced for many years. As a policymaker, and as a person who likes to have a warm home in the winter, I’ve been looking at ways to ensure we don’t run out of gas.
How much gas is there?
How much gas is there in Cook Inlet? That simple question requires two answers. First there are reserves, meaning gas in the ground. The leading agency for determining reserves is the United States Geological Survey, and their view is that reserves are plentiful. According to their most recent estimate, Cook Inlet has some 19 trillion cubic feet of gas yet to be discovered and produced. That is well over a 100 year supply.
The second answer has to do with how much of that gas is coming out of the ground every day, and this is where the concerns about running short of gas arise. The daily production of gas in Cook Inlet has been dropping steadily since 2005, when production totaled 200 billion cubic feet per year. Today production is about half of that.
If supply dwindles, why export?
No surprise, Alaskans use more natural gas in winter than in summer. A lot more. Natural gas wells, however, can perform poorly after being throttled back during the summertime period of low demand. This is where the LNG plant has played a critical role in making the Cook Inlet natural gas market function.
The export facility has kept demand for natural gas strong in the summer. During those months, excess gas is turned into liquid and exported.
The export facility also connected the Southcentral gas producers to the rest of the world. This is important because in global terms, the Southcentral market is very small. Having access to a bigger market helped spur gas production.
Finally, the LNG facility was used to help utility companies meet peak demand on the coldest days of winter. On those days, the plant would cut production of LNG, making more gas available for heating homes and generating electricity.
The shortfall dilemma
Concerns about Cook Inlet gas supplies began to be voiced about ten years ago. The large initial discoveries in Cook Inlet were playing out, and new gas was not being found fast enough. A Department of Natural Resources annual report released in 2000 found that without new discoveries shortfalls could occur as early as 2004 or 2005. Since that time, new studies concluding that shortages are just a few years away have come out at regular intervals. For example, a study done in 2012 concluded that “absent major new large discoveries that can be brought online is 1-2 years, the current pace of development will mean a shortfall in Cook Inlet supply to meet demand in 2014 or 2015.”
The concern over shortfalls led to proposed solutions. Gas from the North Slope is the most obvious and the most popular idea. Far less popular is the notion of importing LNG to Alaska. Yet as long ago as 2005, Enstar said that LNG imports were looking ‘increasingly likely.’
As gas supplies in Cook Inlet tightened the price went up. Higher prices caused the Agrium plant, one of the biggest commercial users of natural gas in Southcentral, to close in 2007. Dwindling supplies have also slowed LNG exports to the point where the LNG plant is on the verge of being shuttered.
The prospect of losing the LNG plant as a go-to source of gas on cold days led to calls for gas storage. Storage facilities, typically small gas reservoirs that have been pumped dry, are common in the lower 48. In 2009 legislation to spur the creation of a gas storage facility passed, and in 2012 CINGSA, an acronym for Cook Inlet Natural Gas Storage Alaska, began operation in Kenai. The storage facility came just in the nick of time. This December, during a cold snap, supplies of gas from the storage well were being used to heat our homes.
What’s next for Cook Inlet gas supplies? Someday a gas line from the North Slope will come to tidewater in Southcentral and solve the problem for good. In the meantime, some think that we need to import LNG. I am skeptical about the need for imported LNG, as I think that market forces will continue to lead gas explorers to find enough gas to keep ahead of demand.
For example, Hilcorp, an oil and gas company new to Alaska that bought aging wells in Cook Inlet, recently announced that it can produce enough gas to keep Southcentral supplied through 2016. At the same time Greg Lalicker, the company’s president, said, “We’re never going to go out there and say ‘let’s start drilling wells right now to produce gas five years from now or 10 years from now.’ That’s just a waste of capital.”
His comments highlight an issue that our Department of Natural Resources has pointed out in its analysis of Cook Inlet gas supplies. In a presentation this year DNR said, “Because the Cook Inlet basin is isolated from the gas spot market [in the lower 48], the amount of gas available for delivery at any given moment is largely a function of sales contracts. Operators have no commercial reason to drill for more gas until they can contract it for sale.” In other words, gas supplies will look tenuous for the foreseeable future.
While this process plays out, I have filed legislation to keep the tax credit alive that brought about CINGSA, the gas storage facility. In a basin that is not currently exporting gas, additional storage is the best way to ensure a stable market for producers and a stable supply of gas in the cold months of winter. Having a big reservoir of gas on hand at all times seems like good Alaskan common sense.