Report confirms bleak outlook for gas

Analysis to be given to borough assembly tonight

Posted: Tuesday, November 19, 2002

At current demand, the known reserves of natural gas in the Cook Inlet Basin will last about 10 years, and unless more gas is found here or piped in from elsewhere, the Kenai Peninsula Borough economy could suffer.

That bit of sobering news is part of an analysis of current trends in the oil and gas industry compiled from several industry, state and federal sources and delivered in a report to the borough assembly by Bill Popp, the borough's oil and gas liaison.

The assembly is expected to formally accept the report at tonight's meeting.

Popp, a member of the assembly until early July, was hired by the borough primarily to help promote a natural gas pipeline to the peninsula. In a lengthy memo to the assembly, Popp outlined several oil and gas issues, his first such report since assuming the new position.

Current estimates put known reserves of natural gas in the basin at 2.3 trillion cubic feet, according to the Alaska Department of Natural Resources.

"This is the equivalent of a projected 10-year supply at current levels of demand if new reserves are not identified and developed," Popp said in the report.

A 2001 Alaska Oil and Gas Conservation Commission report cited by Popp says Southcentral Alaska consumes about 220 billion cubic feet of gas annually. Other sources noted that some 34 billion cubic feet is used to generate 85 percent of the electrical power used in Southcentral. Natural gas utilities consume another 28 bcf per year, Popp said.

Better than six out of 10 Alaskans use gas produced in the Cook Inlet Basin for heating and lighting homes and businesses, he said.

By far the largest consumers are the Phillips LNG facility and the Agrium urea plant, which together use about 132 bcf per year.

Statistics indicate, however, that the known reserves could begin declining next year and that the decline will accelerate, reaching near depletion by 2012, Popp said.

"Immediate effects of this potential decline may be felt in the market as early as this winter, with the possibility of supplies being outstripped by demand during peak-use days if the Southcentral region incurs protracted stretches of subzero temperatures," Popp warned. Shortages could become more pronounced by 2006, he added.

"The economic impacts of these potential shortages for the Kenai Peninsula Borough are of specific concern to the administration," Popp said.

If shortages were to severely impact Agrium and Phillips, it could put as many as 1,000 jobs directly at risk and cut deep into the borough's tax base, he said. The two plants generate almost $3 million in annual property taxes and their payroll and supply purchases pump more than $130 million into the economy, he said.

Avoiding future shortages will mean finding and exploiting new reserves, Popp said. From 1 trillion to 3.4 trillion cubic feet of gas is estimated to lay undiscovered beneath the basin. Companies such as Marathon Oil Company, Unocal, Aurora Gas, Northstar Energy, ConocoPhillips and some smaller companies have met with some success, but even at best, Popp said government projected consumption rates suggest that those supplies may only extend the basin gas supply out from five to 15 years.

Long-term, ensuring a steady supply of gas to the peninsula will require piping it from elsewhere, such as the North Slope. But there are considerable hurdles to clear before a pipeline is built, not the least of which is that at the current estimated cost of delivering gas to the peninsula, a pipeline simply isn't feasible economically.

"Efforts will need to be made to reduce, wherever possible, the delivered price of Alaskan North Slope natural gas to the Southcentral region if this option is going to prove to be a viable answer to the long-term gas supply needs of the Southcentral region," Popp said.

As for oil, Popp said the Cook Inlet region is unlikely ever to return to the halcyon days of 1973 when the annual production peaked at nearly 83 million barrels. Today, that rate is just 11.5 million barrels.

"The Cook Inlet Basin is now recognized as a mature field," Popp said. "This means that the likelihood of finding new oil deposits of similar size to those found in the 1960s is unlikely."

On the other hand, new seismic imaging techniques and directional drilling are being employed, at least raising the chances that if there are significant deposits out there, they will be found.

As an example, Popp pointed to the Redoubt Shoals Field, which had been explored without success. But in the 1980s, new techniques succeeded in finding oil. Production is expected to begin in the near future and could boost annual oil production in the inlet to 20 million barrels, Popp said.

The most likely sources of new oil, however, lie not in the upper inlet, but in the federal waters of the Outer Continental Shelf. Federal waters begin south of Ninilchik. A pair of lease sales covering the lower inlet and Shelikof Strait is scheduled for 2004 and 2006.

Popp's report also noted the need to revamp the state natural resource permitting process, which he said has slowed exploration and production in the inlet region. He has recommended that the borough encourage changes in the permitting process, as well as advocate for new incentives to promote exploration and development of marginal fields.

Popp was in Houston attending an oil and gas symposium and unavailable for further comment.

"There may be incentives we can give them, but it won't be in reducing property taxes," said assembly member Chris Moss of Homer. "If we did that, they'd just have to pay it to the state."

The oil and gas industry members pay a tax rate of about 20 mills to the state from which the borough takes its mill levy. If the borough reduces its own property tax rate, that money would simply remain with the state, offering no real cut to the oil companies, but a loss to the borough.

Assembly President Pete Sprague said he expects there will be some discussion of the report at tonight's assembly meeting. Its contents aren't new news, but the report was useful in any case, he said.

"It was good to get basically a summary of where we've been and where we are," Sprague said. "There are definitely things to think about, like regulatory issues and future prospects."

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