‘A positive piece of news’ — New contract between Enstar and small producer could help delay looming gas shortage

Enstar Natural Gas has signed a supply contract with a Cook Inlet producer that could provide some breathing room as Southcentral Alaska utilities face a critical shortage of local gas.

John Sims, the president of Enstar, told the Alaska House Resources Committee on Monday that the five-year gas supply contract with Furie Operating Alaska is set to begin in 2026. As the contract enters its second year, it is expected to provide significantly more gas than Furie currently sells to Enstar.

About 150,000 customers rely on Enstar gas that heats homes and buildings across Anchorage and Southcentral Alaska. The company uses more gas than all the electric utilities in Southcentral combined.

Sims told the committee that the contract is “a positive piece of news for Cook Inlet.”

The gas from Furie will supplement Enstar’s overall gas supply. It can push off timelines for potential gas shortfalls, Sims told the committee.

But he warned there’s a risk the gas may not be available as planned. Some of the gas supply will depend on future drilling.

“What’s really important to understand is there’s massive development risk with these projects,” Sims said.

He said explorers in Cook Inlet have had only 9% success drilling exploration wells that yielded commercial discoveries of gas over the last 15 years.

Mark Slaughter, Furie’s chief commercial officer, said in an interview on Monday that some additional drilling at the Kitchen Lights Unit needs to be conducted to provide the full volumes of gas for each year of the contract.

A well drilled in October in the Cook Inlet unit would provide part of the gas, Slaughter said.

“We’re an Alaskan-owned company and it’s important that Alaskans fix this problem,” he said.

The contract would provide an estimated 3 billion cubic feet of gas in 2026, Sims said. That’s less than 10% of Enstar’s annual gas demand.

That’s the amount Furie currently sells to Enstar, Slaughter said.

But the amount would jump much higher, to 9.5 billion cubic feet of gas annually, for three years starting in 2027. At that point, it would represent about 25% of Enstar’s annual gas demand.

The contract would fall to 7 billion cubic feet in 2030, Sims told the committee.

Another important step was a preliminary determination by the Alaska Department of Natural Resources last week calling for approval of Furie’s request for reduced state royalties on the company’s gas production, Slaughter said.

If the agency approves the reduction in the coming weeks, the state’s royalty on gas produced from the unit will fall to 3%, from 12.5%, for seven leases in the unit, Slaughter said.

The lower rate will remain in place until the Kitchen Lights Unit reaches $712 million in gross revenues, after a period that would start retroactively on Sept. 1, according to the 37-page preliminary determination, signed by Natural Resources Commissioner John Boyle.

Reducing the state royalty will allow drilling that prolongs the life of the field and provides more financial benefit to the state, the report says.

The unit, created in 2007, has only three producing wells. Each is at risk of no longer producing as a result of declining reservoir pressures, it says.

The royalty reduction could extend the life of the field by at least 10.5 years, according to a scenario modeled by the state.

Furie had estimated that without relief, the unit could begin ceasing operation in June, when operating costs could exceed revenues, the preliminary determination says.

A longer-lasting unit would provide total state revenue of at least $37.6 million, more than the $2.7 million expected if nothing is changed, the report says.

“Maintaining a stable Cook Inlet gas supply is in the state of Alaska’s best interest,” the preliminary determination says. “DNR has a mandate to assure local gas can continue to be produced. By granting royalty relief ... it will make (the Kitchen Lights Unit) more economic to maintain production, develop and increase local gas production.”

Enstar spokeswoman Lindsay Hobson said on Tuesday that a gas shortfall is a possibility as early as next winter. The concern has prompted Enstar and other utilities to pursue a plan to import natural gas to Alaska.

“We’re still looking for gas for next winter (to meet full demand),” Hobson said.

“While the (Furie contract) is great news for right now, we can’t pump the brakes on any future development,” Hobson said. “We have to continue to plan and be prepared.”

Alaskans got an idea of the potential problems during a severe cold snap last winter, when equipment at an underground gas storage reservoir in Cook Inlet failed to produce gas as expected. If the situation had worsened, Southcentral residents would have been asked to reduce energy use.

The new contract with Furie will begin in March 2026, as the producer’s current contract with Enstar ends.

Future drilling would also be needed to help provide all the gas for the new contract, Slaughter said. Furie hopes to drill three wells next year if it can use Hilcorp’s jackup rig, a mobile drilling platform, like it did in October.

The overall price of gas for Enstar ratepayers would rise with the new contract, but by a fractional amount, since Enstar gets most of its gas elsewhere — primarily from Cook Inlet’s dominant producer, Hilcorp.

The gas cost adjustment is the amount ratepayers pay for gas. It’s the largest portion of a bill, and is approved annually by the Regulatory Commission of Alaska.

Enstar’s current gas cost adjustment for its overall gas supply is $9.07 for every thousand cubic feet.

Furie’s price for gas would be $13.69 without royalty relief under the new contract, Sims said. Furie’s price would be blended with prices for Enstar’s full gas supply.

If Furie receives royalty relief, then its price would fall to $12.30, he said.

The contract will be filed with the Regulatory Commission of Alaska by the end of this year.