Utilities and oil and gas companies are securing new natural gas supplies for Southcentral Alaska, but they aren't finding new gas fast enough to offset the likely need for imported liquefied natural gas in a few years, Colleen Starring, president of Enstar Natural Gas Co., told a business group in Anchorage.
One bright spot is that gas utility Enstar will begin receiving natural gas from the small North Fork field on the Kenai Peninsula this spring under a contract with Armstrong Oil and Gas Co., a Denver-based independent company that owns the field, Starring told the Resource Development Council Jan. 20.
Starring said others are drilling for gas on the Kenai Peninsula, including Texas-based independent Buccaneer Alaska LLC, which plans a new exploration to search for gas just south of the city of Kenai.
The area has been explored since the 1960s, but Buccaneer hopes to find gas others have missed, company vice president Mark Landt said. The company is working to secure a drilling rig and plans to be drilled by March.
Buccaneer also plans to bring a jack-up rig to Cook Inlet next summer to drill for both oil and gas offshore.
Starring credited new state exploration incentives for spurring the activity in Cook Inlet.
Enstar itself is now completing a $21 million, 8-inch pipeline built from an existing pipeline from Ninilchik 22 miles to Anchor Point, where it will link with a smaller pipeline being built by Armstrong from the North Fork field, Starring said.
Armstrong has drilled two wells at the field that will supply Enstar, and will drill three more in 2011, she said. Under its contact, Enstar has the first rights to purchase this gas.
The addition of Armstrong's gas will help Enstar's supply needs in 2011, but the utility is still short 1 billion cubic feet of its projected 33 billion cubic foot requirement for the year, Starring said. To secure this gas the utility has instituted a new system Jan. 1 to bid for any gas available on a short-term basis from producers that hold existing contracts, she said.
The new system works like a spot market for local gas, and it is the first time it has been done in Alaska.
"It is working. We have received bids (to supply increments of gas) in a range of prices. Those will be folded into our overall cost of gas and reviewed by the Regulatory Commission of Alaska," Starring said. "I can't tell you what the prices are that we're paying but it's not cheap."
Enstar now pays between $7 and $11 per thousand cubic feet for gas under its existing long-term contracts, but incremental short-term gas can be purchased at higher prices.
The bulk of Enstar's 2011 need - for 32 billion feet - is being supplied under four contracts, two with Marathon Oil Co., one with Unocal Corp. and one with ConocoPhillips Alaska Inc. that is on a "nonfirm" basis, which means the company will supply the gas if it is available, but is not contractually obligated to supply the gas.
This is the first year Enstar has not had all of its gas needs covered by contracts, Starring told RDC.
Enstar's supply situation may become more uncertain in the next two or three years because Unocal, now owned by Chevron, has an option to "step down" in the amount of gas it has contracted to supply, Starring said. The company has exercised this option for three years in a now, which indicates it may so do again.
The annual supply of gas is just one issue for Enstar and other utilities. The other is deliverability, or the ability to get delivery of gas in winter when demand peaks. The utilities have huge seasonal swings in demand from summer to winter, and aging production wells can no longer supply enough gas to meet the utilities' needs in very cold weather.
The solution to this is gas storage, gas produced in summer when demand is low is injected into an old gas field and then withdrawn in the winter, when demand can outstrip what the producing wells can provide. Gas storage owned by utilities is common in the Lower 48, but Alaska's first utility-owned storage facility is planned.
Cook Inlet Natural Gas Storage Alaska LLC, or CINGSA, is a joint-venture company that has been formed to do the project, and is 70 percent owned by Enstar's parent Semco Energy with 30 percent owned by Mid-American Energy Holdings.
CINGSA hopes to start soon on a $180 million gas storage project near Kenai. The company hopes to secure approvals for tariffs and rates from the Regulatory Commission of Alaska by Jan. 31, Starring said.
Earlier this month the RCA approved a certificate for CINGSA, which establishes it as a utility with a service area covering a large part of the Southcentral Alaska. The service area gives the company the right, but not an exclusive one, to build other gas storage facilities in the region.
The first project would be located in the old Cannery Loop gas field just south of the city of Kenai. One of the sandstone intervals in the reservoir, now depleted, would be used to store the gas. The field is owned and operated by Marathon Oil Co., which would do a sub-lease to the gas storage company.
If final approval of tariffs and rates happens by Jan. 31, Semco and Mid-American Energy would be able to approve needed capital expenditures in February and construction will get under way shortly afterward, Starring said. The joint-venture company would spend about $70 million this year and $70 million in 2012. The goal is to have the project finished so that gas can be injected for storage in mid-2012.
The first seasonal withdrawals of stored gas would be in the winter of 2012 and 2013, Starring said. The facility will be able to store 11 billion cubic feet of gas, and allow withdrawals of up to 150 million cubic feet of gas. Enstar hopes the project can eventually be expanded to be able to hold 17 billion cubic feet of gas.
Enstar, Chugach Electric Association and Anchorage's city-owned Municipal Light and Power have signed up as initial customers with the storage company. Homer Electric Association has agreed to use the facility for gas storage in its second year, Starring said.
Gas storage would ease Enstar's short-term gas deliverability problem in winter, but it does not solve the longer-term problem of declining overall supply.
At some point between 2013 and 2015, Cook Inlet's aging gas wells will not produce enough to meet year-round local demand, and if the rate of exploration isn't stepped up sharply, the region will come up short, Starring said.
At that point, gas will have to be brought into the region from somewhere else. Building a pipeline from the North Slope, where there are large gas reserves, might be a long-term answer, but a pipeline would take several years to construct. It can't be done to meet the shortfall timeline, Starring said.
The only practical answer is to import liquefied natural gas, she said. Enstar is working on possible LNG-import alternatives along with the regional electric utilities, Starring said.
There are several ways this could be done. If imports are done seasonally, facilities could be built on the Kenai Peninsula, she said. If year-round imports of LNG are needed, the docking and regasification facility might have to be somewhere else in the region, she said.
What is known, however, is that the U.S. Federal Energy Regulatory Commission will need at least 18 months to review a proposal for an LNG import facility, and FERC licensing is needed before construction can begin.
That makes timing critical to have a facility in place by 2013 to 2015, Starring said.
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