A recent hiccup in oil production at two Cook Inlet platforms caused by a natural gas shortage has brought to light a question the local oil and gas industry might be forced to ask itself in the near future.
How will a forecasted shortage of natural gas affect the ability of Cook Inlet energy companies to power their own operations?
Industry officials said oil production from some smaller area oil and gas companies could be affected by the looming Cook Inlet gas shortage and newer exploration companies likely would take shortages into consideration when developing their plans. But other larger producers could fare better at maintaining operations.
Although those effects aren’t yet certain, officials from several local energy companies, including Tesoro’s oil refinery, are either eyeing the situation closely or have adjusted their operations to hopefully skirt the ramifications of a gas shortage.
On Nov. 15, XTO Energy had to suspend oil production at two Cook Inlet platforms due to a lack of natural gas used to power the platforms, a company spokesman confirmed in an email. Since then, XTO has purchased enough gas to start up oil production again, but the two platforms were not fully operational as of Tuesday.
Henry Haney, an assistant professor of process technology at Kenai Peninsula College, said the two XTO platforms that stopped oil production do not produce from wells that contain high levels of natural gas, unlike some other Cook Inlet platforms. Most of the Cook Inlet platforms produce enough gas to power themselves and then send the excess to shore, Haney said.
“They use that gas for powering the platform, but they also use it for gas lift, which is a secondary recovery system for producing oil out of a formation,” Haney said. “So if there is not enough gas, then, just like you do in your home, you have to start backing up on some things.”
Cathy Foerster, chair of the Alaska Oil and Gas Conservation Commission, said she has not heard any industry concerns about the effects of looming gas shortages to arrive by 2015 if Cook Inlet production doesn’t drastically increase.
But, Foerster said smaller, independent operators who focus on only oil production would likely feel most of the gas shortage consequences.
“Most of the people that are out there who are producing oil are producing gas also,” she said. “So they’ll be using their own sources of gas to fill their production operations needs. But it would be the little guys, and XTO would be a good example.”
Cook Inlet Energy CEO David Hall said his company rearranged recent drilling plans from repairing an old oil well to reviving a natural gas well after considering gas shortage forecasts.
“On the Osprey (platform) we decided to put a work over gas well in front of a crude oil well and we hope that will be successful,” he said. “We want to make sure we are not going to be without gas to support and maintain our own operations. If all goes as planned we hope to be a net gas exporter as well to alleviate some of the gas deficit that many people are currently experiencing in the inlet.”
Hall said he has heard of several other area companies seeking gas but finding it hard to come by “at any price.”
“We do have emergency back up generation that can support our current operations and we think we are protected there and we are not going to see any disruption in production,” he said. “But we do understand the heightened concerns of fuel gas and that’s why we want to put our fate in our own hands and have our own source.”
Tesoro External Affairs Manager Matt Gill said officials at the Nikiski refinery have “significant concerns” about Cook Inlet natural gas supply and price.
“It is going to have some substantial impacts on the cost to produce the transportation fuels that we make,” he said.
Gas is used to process and heat crude oil and run the refinery’s generators, Gill said. Tesoro has a base natural gas contract but also buys spot market gas from Cook Inlet producers as needed.
“Since July of 2012 that gas has been largely unavailable regardless of price, which is of big concern to us,” he said. “When it did become available, it was somewhere three to five times higher than it was prior to July.”
When the refinery is short on natural gas supply, Gill said Tesoro has to burn the propane and butane it produces as a by-product of the crude oil refining process to run the facility.
“It is a whole lot more expensive than going out and buying natural gas normally,” he said. “One of the problems with that is if we are burning the propane, the propane market here in Alaska is short and our customers have to go out and find it elsewhere.”
Gill said when the refinery is forced to burn its own butane it takes away what would normally be blended into gasoline. That in turn makes it harder to produce the same amount of gasoline “so we end up having to import gas to keep the market supplied,” he said.
Kara Moriarty, executive director of the Alaska Oil and Gas Association said gas shortages are an industry concern, but an industry-wide solution would be hard to identify.
“I know companies have talked about what gas supply and gas price could do to the operation of their businesses, whether it is a production business or an exploration business, that’s all cost of doing business is how you power yourself,” she said. “So it is something everybody is looking at but we don’t have a solution or any certain path that at this point as an industry we are either advocating for or against.”
Moriarty said low gas supply and high gas prices would not necessarily be a deterrent for exploration in the area even though those items factor into a company’s decision to invest in an area.
“Nobody has said to me, ‘Well, I’m not bidding on a lease sale because there is no gas supply and there is no way I am going to power my operations,’” she said. “... I have heard folks say they are worried about what the cost increase (would be) because of the gas situation ... what that does to their economics and for the refinery what that will mean to the consumer.”
When asked if the fear that exploration companies will be scared off by gas shortages and the high cost of powering operations in the area, Foerster said any such fear that “might exist for that will be offset by the comfort that if you go exploring for oil and instead you find gas, you’ll be able to sell it.”
Brian Smith can be reached at email@example.com.