Exploration yields more gas, less oil than thought

Report paints mixed picture for future of Cook Inlet Basin

Posted: Thursday, February 17, 2005


  Production platforms stand in Cook Inlet against a backdrop of Mount Spurr. Oil and natural gas prices have increased over the past year, and exploration efforts have had mixed resorts. Clarion file photo by M. Scott M

Production platforms stand in Cook Inlet against a backdrop of Mount Spurr. Oil and natural gas prices have increased over the past year, and exploration efforts have had mixed resorts.

Clarion file photo by M. Scott M

For the first time in seven years, the proven reserves of Cook Inlet natural gas have grown rather than declined, thanks to recent efforts by industry to explore for and tap new pockets and to rework existing wells.

A report released by the Kenai Peninsula Borough Community and Economic Development Division's Oil and Gas Office cites state Division of Oil and Gas data showing that proven reserves of gas in the Cook Inlet Basin grew by a net 57 billion cubic feet (bcf). More significantly, enough gas was found to make up for gas consumed in 2004.

The result, according to the Cook Inlet Oil and Gas 2004 Annual Report, is that annual production is expected to remain above 200 bcf until at least 2007. The 2003 annual report had previously predicted a decline to below that threshold by this year.

The report's author, Bill Popp, the borough's liaison to the oil and gas industry, said 200 bcf per year is considered a threshold because it is a round number that can meet current demand.

"Below that you start to see issues of demand destruction," Popp said. That is, industrial plants start shutting down and other users begin shifting to alternative fuels, lowering overall demand.

Popp said it is possible next year's report could see the threshold pushed back even further.

"It's kind of the nature of the beast," he said, adding that gas supply contracts are driving exploration efforts and those efforts appear to be confirming what past studies have postulated — that there is more gas out there to be found.

State oil and gas data cited in the report was current through Dec. 31, 2003. Most other data reflects information through 2004, Popp said.

The report also updated the 2003 version's 10-year forecast. The latest numbers predict 157 bcf more production over the next decade than had been predicted just a year ago.

The report credits rising demand and increasing Cook Inlet gas market prices as spurring industry interest in further exploration and intensified production effort.

A U.S. Department of Energy study released in June 2004 estimated a potential 13 trillion to 17 trillion cubic feet (tcf) of natural gas remains to be discovered in the Cook Inlet Basin. The effort to actually find just half of that, however, would cost at least $5 billion — and that's if those reserves were onshore, the DOE study said.

Put simply, the borough study said, at today's average annual "prevailing value" of $2.82 per thousand cubic feet (mcf), 8 trillion cubic feet of gas would be worth some $22.56 billion gross.

Ninety-five percent of all inlet gas reserves were discovered prior to 1970, and most of that was by accident during exploration for oil. The DOE study noted that natural gas wasn't a focus of exploration efforts until the late 1990s. Thus, given a substantial exploration investment there would be a "high likelihood" of finding significant new reserves, the borough report said.

Gas prices statewide are on the rise. According to the DOE, Alaska's residential consumers have seen the price of delivered gas increase by 21 percent since 1999. Commercial, industrial and power generating utility customers have watched their gas costs go even higher, rising by 64 percent, 40 percent and 47 percent, respectively, over the same time period.

While these statewide average prices aren't specific to one area, the upward trend tracks recent price shifts in the Cook Inlet Basin.

Since 1999, according to the Alaska Department of Revenue, the annual average prevailing value of Cook Inlet natural gas increased by 87 percent between 1999 and last year, moving from $1.52 per mcf to $2.83 per mcf.

If that seems like a lot, consider that gas prices in broader U.S. markets have jumped 160 percent in the same six-year stretch. After hovering around the $2-per-mcf level for most of the 1990s, gas prices began rising quickly as national demand grew and a national shortage became apparent. That trend, here and elsewhere, is expected to continue.

Part of the reason for the rapid rise in the Cook Inlet gas price was an intentional change instituted by the Regulatory Commission of Alaska, which in 2001 approved a gas sales agreement between Unocal and Enstar Natural Gas Co., tying the price to futures prices in the Lower 48 — the so-called Henry Hub, a natural gas pipeline hub in Lou-isiana that often serves as a benchmark for wholesale U.S. natural gas prices.

The RCA believed 2001 prices were too low to stimulate exploration. Tying the price to the Henry Hub was thought to provide the needed encouragement, and to some degree, it has worked. Several companies actively are exploring or planning exploration efforts this year.

On the oil side of things, estimates of proven reserves and total annual production rates generally fell between 1997 and 2000. Then in 2001, those estimates rose when it appeared Forest Oil Company's Osprey platform would push reserves and production significantly higher. However, a re-evaluation of data resulted in a lowering of the initial estimates. Similar re-evaluations lowered expectations for reserves at the Granite Point, McArthur River and Middle Ground Shoals units, as well.

According to the borough report, proven reserves in the Cook Inlet Basin were 80 million barrels of oil with a total annual production rate of just under 9.1 million barrels, based on Alaska Department of Natural Resources data.

Inlet oil reserves will be depleted by the end of 2016 unless new reserves are found, DNR said. That's particularly significant because Tesoro's Nikiski refinery now consumes all Cook Inlet oil production. Inlet oil represents a third of Tesoro's feedstock. Without that supply, Tesoro would have to import all its oil, either from the North Slope or via ships from overseas sources, meaning increased tanker traffic in Cook Inlet.

Potentially, the inlet basin may hold in excess of 1 billion barrels of undiscovered, yet recoverable oil, according to the U.S. Minerals Management. Exploration and recovery, however, could be very expensive. It may take a variety of federal and state incentives to push industry to explore, the borough report noted.

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