As Alaska lawmakers discuss looming gas shortages predicted by utilities, many on both sides of the gavel have made mention of how importing liquefied natural gas to meet immediate demand might affect the existing market and production levels in the future.
Representatives from a research firm predicting the gas shortages and officials from other utilities were asked by lawmakers recently if importing LNG would disincentivize Cook Inlet exploration or the need for a North Slope gas pipeline. They have also been asked how importing likely higher-priced LNG would affect local gas prices for consumers in the long-term.
Dan Sullivan, Alaska Department of Natural Resources commissioner, said he has been making mention of these “red flags” to lawmakers as importing gas could “stifle” and “undermine” the Cook Inlet’s gas renaissance, among other effects.
“We’re trying to ... point out to the committee that if we start going down the long term, large-volume import option we need to be aware and think through the implications of that for a whole host of different reasons,” he said Wednesday to the House Energy committee.
Matt Berman, a professor of economics at the University of Anchorage Alaska’s Institute of Social and Economic Research, said in an interview with the Clarion Tuesday that importing LNG would increase Alaska’s low price of natural gas.
“If we are importing LNG in reasonable quantities, then you would, over the long run, expect the contracts for Cook Inlet gas to be renegotiated upward,” he said. “It is possible that wouldn’t happen, but it is likely that it would.”
However, Berman said it is hard to know what price Alaska utilities could get for imported LNG.
“It is really a difficult market to pin down because there are all these prices all over the place and you think, ‘How can that be?’” he said. “It is because they are based on long-term contracts that were signed on different periods of time or different scarcities and they are locked in for many years.”
Berman said the Regulatory Commission of Alaska doesn’t have a good benchmark for what an LNG import price should be as it’s really never happened in the state. That benchmark price could have lasting effects, he said.
“If the utilities come in and say, ‘We need to import LNG because there is not enough gas locally and here is the cost to import,’ and once the RCA approves that, it makes it difficult to deny a local contract for the same terms,” he said.
Berman reasoned that importing LNG could disincentivize Cook Inlet gas exploration only if the volume of imported LNG is so high that it dominates the market and the opportunity for new gas.
But, future market growth and the size of the consumer base could grow to make room for more gas, he said.
“I don’t have any idea how the volumes would be structured, but you currently have quite a bit of gas still under contract,” he said. “So once you build an LNG terminal to import, you have to size it, figure out what is the capacity for it and fill it up. I think even if you design it for the current market, over time the market would currently grow and there will be room for more local gas.”
Kara Moriarty, executive director of the Alaska Oil and Gas Association, said she was unsure if LNG imports would be needed and said she would never speculate about the market price of natural gas.
“(Speculating) is just something that I would never do and it really just depends on if the state has to look at imports, are we talking short-term contracts? Are we talking long-term contracts?” she said. “What I can tell you is that my members in Cook Inlet are doing everything they can to increase production, both oil and gas, in the inlet.”
Moriarty said it was also premature to speculate about how LNG imports would shape producers’ desires to explore and increase gas production as it would depend on the length of any LNG contract utilities could find.
“It is all about economics,” she said. “If it makes economic sense for them to continue they will and if it doesn’t they won’t.”
During a recent presentation to the Legislature, Petrotechnical Resources of Alaska’s Bill Van Dyke said he thought Cook Inlet gas would always be competitive and LNG imports wouldn’t drive producers out of business in the future. What sort of legacy that leaves, however, is another matter, he said.
“I would say maybe importing gas to Alaska gives us a bit of a black eye,” he said. “I’m not sure whether it does or not. But if it is the choice between a black eye and a black out, I’ll take the black eye.”
Sen. Cathy Giessel, R-Anchorage, said in an interview with the Clarion that she has heard utilities say it was their intention to “do no harm” to Cook Inlet gas production, but that she was interested and waiting to see what they decided.
“Regardless, whatever the decision is, it has to be economic and for these producers it has to meet their requirement to provide that reliable energy to their consumers,” said Giessel, who represents northern portions of the Kenai Peninsula and is the chair of the Senate Resources Committee.
In regard to the question of lasting higher prices as a result of importing LNG, Giessel agreed that it was an “unknown” but said she had faith in the RCA to ultimately defend consumers.
“I don’t see there is much there we can do at this point aside from road access on the western side of Cook Inlet,” she said when asked what the Legislature can do to help the situation. “... Otherwise I believe that economics need to drive this and I haven’t heard any suggestions from the utilities.”
In a presentation last week, ENSTAR’s Moira Smith said the regional gas supplier is looking at all options — LNG, compressed natural gas and the possibility of LNG trucking from the North Slope. Regardless of where the gas comes from, an import project would take a lot of capital investment consumers would pay for, she said.
“If you say, ‘Do an import project, but make sure it is only five years long to make sure the impact on the market is as minimal as possible,’ and again number one is not discouraging production in Cook Inlet but if you say, ‘Make it five years,’ then the capital expenses have to become amortized over that short, short period or you pay a very expensive escape clause in those contracts,” she said.
Brian Smith can be reached at email@example.com.