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Study: 10 years of gas in inlet: Economics of getting the product to market not yet addressed

Posted: Wednesday, December 23, 2009

A Department of Natural Resources report released on Monday says the Cook Inlet Basin has enough natural gas reserves to meet Southcentral's energy needs for the next 10 years, but it doesn't address some of the economics of getting the gas to market.

According to the report, there's more than a trillion cubic feet of gas left in the 28 producing gas fields in Cook Inlet.

The study, which was launched this past spring as a result of questions about gas shortages and the possibility of blackouts this winter, did not attempt to determine how much gas remains in unexplored resources.

Tom Irwin, the department commissioner, said as part of the release of the study, that about 20 percent of the reserves' original capacity was left but, "The most accessible gas has been produced the remaining gas may carry an increased cost."

Some Southcentral energy providers have echoed those sentiments.

Carri Lockhart, the Alaska production manager for Houston-based Marathon Oil Co., commented on the historical pricing of Southcentral's natural gas supplies at a Nov. 5 Alaska State Chamber of Commerce energy forum held in Anchorage.

"For several decades, Southcentral Alaska has enjoyed unusually low natural gas prices associated with a significant oversupply of natural gas that was a by-product from oil exploration. The current supply-demand situation is vastly different as the two approach equilibrium," Lockhart said.

Cook Inlet, as an oil-producing region, reached its peak in 1970, with more than 80 million barrels produced that year.

According to data provided by the Alaska Oil and Gas Conservation Committee, those numbers have plummeted, and since 2003 the area has put out less than 10 million barrels a year.

Lockhart spoke in November of the potential for a "supply gap" during times of peak demand.

Lockhart said that neither aggressive drilling nor the construction of a line connecting the Southcentral grid to the North Slope would close this gap.

"The matters are complex and appropriate consideration must be given to market access, storage, and infrastructure, not just supply. In terms of drilling, we have an area that is largely under-explored, a supply gap in the very near future, yet rig count is minimal," she said.

Nationwide, estimates of total gas reserves have jumped 58 percent from 2004 to 2008 according to The Associated Press, giving the U.S. a 90-year supply at the current usage rate of about 23 trillion cubic feet per year.

The strong and stable supply has helped to drive natural gas prices down.

Lockhart said the Cook Inlet basin isn't competitive enough for the company to seriously consider investment, compared to projects elsewhere.

"We must strive to find ways to manage subsurface technical risk, operational risk and escalating cost of operations, as well as the market volatility and uncertainty," she said. "These all must be managed in a way that enable projects in Cook Inlet to effectively compete with other global projects in our portfolio for finite funding."

Kevin Banks, director of the state's Oil and Gas Division, told the Anchorage Daily News on Tuesday the problem with Cook Inlet gas production is that it has gone static. Producers are drilling no more wells than it takes to meet contractual obligations to supply utilities, he said.

Phil Steyer, the director of government relations and corporate communications for Chugach Electric Association in Anchorage, said he couldn't guess where prices of Cook Inlet gas would tend.

"Will future volumes cost more to bring to market? That's unknown as yet because we don't have prices for future volumes," Steyer said on Tuesday. "It would be inappropriate to speculate on prices."

Presently, Homer Electric Association, which supplies the Kenai Peninsula with power, buys 90 percent of its electricity from Chugach.

Chugach in turn generates 90 percent of its power from the combustion of natural gas.

HEA spokesperson Joe Gallagher declined to comment on the DNR report, saying, "The deliverability of gas and the ability to produce electricity is something that the producers of gas and folks generating electricity are dealing with. I haven't had a chance to look at the study."

Steyer said Chugach's current gas contracts would run out by early 2011.

He said they buy all their gas from four Cook Inlet suppliers.

Steyer said Chugach reached one future contract deal with ConocoPhillips earlier this year and was working on others.

The Conoco contract is a seven-year deal designed to fill 100 percent of Chugach's unmet needs through April 2011, approximately 50 percent of Chugach's unmet needs from May 2011 through December 2015, and approximately 25 percent in 2016.

"We're in negotiations with other potential suppliers for additional volumes to meet our coming needs," Steyer said on Tuesday.

He said that while long-range, the company is looking to expand its resource base to include renewable energy sources, for now the company remains committed to the use of natural gas. This commitment includes the construction of a new natural gas-fired power plant in Anchorage projected to come online in 2013.

Dante Petri can be reached at dante.petri@peninsulaclarion.com



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