Cook Inlet oil, gas exploration in flux: Smaller independent companies move into basin as large producers cut back in region

Posted: Friday, February 18, 2011

Oil and gas development on the Kenai Peninsula took a blow after the recent announcement that ConocoPhillips and Marathon Oil are closing the liquefied natural gas plant in Nikiski.

Large oil companies have already been cutting back on exploration in the Cook Inlet, and with fewer contracts to fill, the announcement means there is less incentive to keep looking for new wells.

ConocoPhillips' representative Natalie Lowman said the company will definitely continue to meet it's existing contracts, but she didn't know whether or not it would continue to produce as much gas as they are currently.

"I think that there's some chance that production will go down," Lowman said.

If production doesn't decrease, the company could sell more natural gas to Enstar Natural Gas Co. Enstar supplies much of Southcentral Alaska, and doesn't have enough firm gas contracts to meet demand on cold days. In the past, gas has been diverted to Enstar rather than being sent to the LNG plant when demand exceeded the supply of natural gas.

Employees at the LNG plant were notified of the closure on Feb. 9. Lowman said the company couldn't reach a satisfactory contract with the companies it shipped to in Japan.

But, she said, the plant will just be mothballed. If LNG needs to be imported to meet future demand in southcentral, it could reopen for that -- or for another use.

In the past few years, a number of companies have cut down on exploration and production in the area.

Most recently, Chevron announced in October that they were selling their assets in the Cook Inlet.

That includes 10 offshore rigs, two gas tank farms and interest in companies that operate regional pipelines and several other offshore and land-based oil and gas fields.

Chevron isn't the first. In the late 1990s, Shell announced that they were pulling out of Alaska and sold their Cook Inlet assets. They've since returned to other oil and gas fields, but not on the Peninsula. And at the same time, Force Energy declared bankruptcy after buying some of Marathon's leases just a few years earlier.

By 2007, natural gas production had decreased to the point that Agrium decided to shut down their fertilizer plant. They cited the supply shortage as a primary factor in their decision. Like the LNG plant, that plant provided swing gas when demanded was greater than the local supply.

But smaller companies are continuing exploration in the area, so not all the oil and gas news is doom and gloom.

Buccaneer Energy announced in December that it will undertake a 60-day drilling period this spring, and received approval from Kenai's planning and zoning commission for their project in late January. Drilling is expected to start in March.

And another company, Escopeta Oil, is working on getting permission the bring a jack-up rig to the Inlet.

Bringing the rig isn't a problem, except that the company needs a Jones Act waiver to transport the rig from Texas to the Cook Inlet on a foreign-flagged ship.

The Jones Act was meant to incentivize ship building in America, and requires that ships carrying goods from one port to another within the United States be registered in America.

The company has said it intends to use the rig for natural gas exploration.

Kenai's City Council voted to support that project, but declined to specifically discuss the Jones Act in their support.

Cook Inlet Natural Gas Storage Alaska is also making more development a little more feasible.

Currently, natural gas production exceeds demand in the summer, but in the cold parts of the winter, consumers burn more gas than wells are producing. The proposed CINGSA storage facility would allow a mostly-depleted field to be injected with surplus gas in the summer. Then, customers could use that gas in the winter.

The facility has been approved by the City of Kenai, and received a certificate of public necessity and convenience from the Regulatory Commission of Alaska in January, but is still working through the rest of the permitting process.

On the policy side of development, local legislators are working to bolster production by lowering taxes.

At a city council meeting in December, Sen. Tom Wagoner, R-Kenai, said that would be one of his priorities this session. He also worked on that issue last year.

Representatives Kurt Olson and Mike Chenault, republicans from Soldotna and Nikiski, respectively, have also sponsored legislation that they believe would spur development.

Molly Dischner can be reached at molly.dischner@peninsulaclarion.com.



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