Southcentral Alaska and the Railbelt face a looming energy supply crisis and have but a few short years, perhaps less than a decade, to find viable solutions that can deliver adequate energy at a reasonable price to avoid serious financial consequences, the Kenai Peninsula Borough’s energy industry expert said Tuesday.
“It is a crisis of timing and economics,” Bill Popp told a Kenai Chapter of the Support Industry Alliance luncheon at Paradisos in Kenai. Popp serves as the borough’s liaison to the oil, gas and mining industries. His address Tuesday focused on the critical nature of the energy dilemma and the realities with which Alaskans must come to grips.
“It is a crisis requiring comprehensive strategies that must involve all levels of government working in partnership with industry if we are to secure our energy future,” he said.
Any solutions, he continued, will live or die by their respective economics; will require significant investment; and must be founded in common sense. He then went on to discuss crude supplies and refined fuels, the prospects for natural gas, and the need for investigating alternative energy resources.
While some estimates suggest there may be billions of barrels of undiscovered oil reserves in Cook Inlet, the fact is that inlet fields, which produced 246,000 barrels of oil a day in 1972, are today producing perhaps 16,000 barrels per day. That decline has tremendous implications for the state’s energy security, he said.
Last summer’s shutdown at Prudhoe Bay revealed the Achilles’ heel of Alaska’s energy security the crude oil supply state refineries must have to produce fuels needed to keep Alaska’s economy afloat, Popp said, citing the following figures to demonstrate his point: Tesoro Refinery, key in producing jet fuel, heating fuel, gasoline and power-generation fuels, gets 74 percent of its crude supply from outside the Cook Inlet area, 35 percent from outside the country.
“While this mix of crude sources saved our bacon in Southcentral Alaska when Prudhoe Bay was shut down, it is becoming glaringly apparent that Alaska is growing less and less energy independent with each passing year,” he said.
The bulk of crude used by in-state refineries comes from the North Slope, and three of the four refineries are completely dependent on slope supply. Some 16 percent of the crude used by Alaska refineries is imported. Unless in-state crude production increases, particularly in Cook Inlet, Popp warned, that foreign percentage will only grow, making the state ever more vulnerable to events affecting world oil markets.
The problems that could arise out of a loss of critical fuels such as jet fuel, gasoline and diesel, for whatever reason, become apparent when one looks at how Alaska depends on them. For instance, Popp noted, roughly 21 million barrels of jet fuel were produced in Alaska in 2004, but to meet demand, some 10 million barrels more had to be imported. A similar condition applies to diesel fuels. Options for meeting demand if in-state production is ever curtailed are limited, Popp said.
Looking at gasoline, Popp referenced a common complaint heard from Alaskans about why prices at the pump aren’t lower, given that much of the gasoline we use is produced here. Alaska ranks just ahead of the District of Columbia in gasoline use in the United States, Popp noted. That’s not a lot, and economies of scale tend to set the gasoline price unfortunately for us fairly high.
With respect to jet fuel, however, economies of scale have the opposite effect. While jet fuel prices have risen 265 percent in the United States over the past 10 years, Alaska’s jet fuel prices have remained within pennies of the average U.S. price throughout that period.
“The simple reason for this minimal price difference is volume,” Popp said. “Alaska now ranks fourth out of all U.S. states in total jet fuel consumption, as of 2004.”
That fact has helped spur massive growth in the air cargo industry in Alaska, and in particular Anchorage, he said.
Yet, that industry, too, could suffer if Alaska’s supply of crude oil is interrupted, he warned.
The answer, or at least part of it, is to find and exploit new oil reserves. There are perhaps as many as 1.2 billion barrels yet to be found in upper Cook Inlet, according to the U.S. Department of Energy. There may be another billion barrels beneath Outer Continental Shelf waters, and maybe 300 million barrels left in existing fields that new recovery technologies may bring to the surface.
“The real challenge is cost,” Popp said. “Billions of dollars will need to be invested in the next 20 to 30 years to make these potential oil reserves a reality.” The state, he added, must be ready to “jump start” investment if necessary.
As for gas, Cook Inlet production peaked in 1996 at 223 billion cubic feet (bcf), but as of 2005, was 208 bcf. Proven reserves, however, have been measured at 1.65 trillion cubic feet, about an 8-year supply. Meanwhile, prevailing prices have gone up 197 percent in six years.
“The law of supply and demand is flexing its muscle in Cook Inlet,” Popp said. Nevertheless, natural gas is a good deal compared to other fuels, he noted.
Two years ago, analysts were predicting that demand by Alaska utilities for natural gas would exceed supply by 2012. New exploration and development in the past six years have pushed that date back to 2014. However, Agrium’s decision to shut down fertilizer production until spring, and Tesoro’s recent announcement that its natural gas supply had been curtailed, are “canaries in the coal mine” signaling the coming natural gas crisis, Popp said.
Railbelt Alaska may solve its supply problem with new exploration in Cook Inlet, Popp said, but it won’t be cheap. Estimates suggest it might take $5 billion to develop 8 trillion cubic feet of new reserves. Still, 8 trillion cubic feet of gas is worth more than $36 billion in 2006 dollars, he said.
Prudence demands looking beyond just Cook Inlet for gas. But gas delivered from the North Slope by pipeline spur, bullet or otherwise won’t solve all the problems unless the price can be lowered well below current estimates, Popp said. Either that, or the finished products produced by Cook Inlet industries will have to rise enough to support increased gas costs.
The bottom line, however, is that a pipeline must be pursued aggressively, along with other options for future energy supplies, such as coal bed methane, coal, coal gasification, hydroelectric, wind, tidal, nuclear, and imported LNG. Along with that, energy conservation measures should be employed, Popp said. Conservation measures could be undertaken quickly. Other solutions would take more lead time. For all, cost will be a key factor both in terms of investment on the front end and on the consumer’s end as well.
While the difficulties ahead are many, there is the opportunity for “a renaissance of exploration in Cook Inlet,” Popp said. An important factor in seeing that become reality will be supplying educated, trained workers to Alaska’s energy industries in the coming years. A shortage already is apparent, Popp said.
Hal Spence can be reached at email@example.com.
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