Explorers are finding new natural gas in Cook Inlet. Talk of gas shortages and the need to import liquefied natural gas has faded.
Southcentral consumers can be excused for a bit of whiplash on this. Last winter we feared running out of gas. Now we might have, just maybe, a surplus?
This turnaround happened so fast that at least one of the explorers, Buccaneer Energy, is worried about finding enough customers for its newly-discovered gas. A competitor, Hilcorp Energy, has also developed new gas and signed up to meet local utility needs into early 2018, beating out explorers like Buccaneer.
With ConocoPhillips' liquefied natural gas plant near Kenai mothballed, there's no access to markets outside Alaska.
The possibility of a gas surplus is doubly embarrassing because the Alaska public is paying most of the costs of the new drilling through generous incentives approved by the Legislature, which was spooked by apparent shortages.
How did all this happen, and so quickly? Was there really a gas shortage? Were the utilities crying wolf when they told the public that gas might have to be imported? Were the producing companies warehousing gas they knew was there?
This is enough to give rise to conspiracy theories. I don't suspect devious motives, but the matter is complicated, so let's dissect it.
Cook Inlet's aging gas fields, found decades ago, are indeed running down. No new gas has been found in years because no one was exploring. Gas prices were low and exploration didn't pencil out.
Geologists, though, believe there is a lot of undiscovered gas in Cook Inlet. Recent Cook Inlet offshore discoveries by Buccaneer and another independent oil company, Furie Operating Alaska, bear that out. A locally-based company, NordAq Energy, has also discovered new onshore gas on the Kenai Peninsula.
So why the talk of importing?
The regional utilities, Enstar Natural Gas, Chugach Electric, Matanuska Electric and Anchorage's city-owned Municipal Light and Power, have a legal obligation to ensure that consumers will have secure service and supplies of gas and electricity, which is mostly generated with gas.
Before recent discoveries, no one could guarantee there was undeveloped gas waiting to be discovered, or found in the old gas fields. Things didn't look good, in fact. Chevron and Marathon, two large companies, left the Inlet, saying they had better prospects elsewhere. Independent companies like Buccaneer, Hilcorp and Apache Corp. came in. Hilcorp bought Chevron's and Marathon's old fields.
But here's a twist: The U.S. Federal Trade Commission convened an antitrust investigation of Hilcorp's purchase of Marathon's gas fields. This lasted almost a year, essentially freezing all Inlet development activity, because all the producers were subpoenaed by the FTC and nothing was done unless the lawyers approved it.
The state intervened and finally got the FTC to back off by negotiating a state consent decree with Hilcorp, but meanwhile almost a year was lost, from early 2012 to late 2012. Hilcorp couldn't legally take possession of Marathon's gas wells until last February, and until then, no one, not even Hilcorp, really knew how much gas was in the old Marathon fields.
The utilities, particularly Enstar Natural Gas, were nervous. A new gas storage facility had been built to help the utilities get through midwinter cold snaps, but even with that, available gas reserve numbers pointed to shortages as early as 2014 and 2015.
This looked serious, so as a contingency, the utilities, with some polite nudging from the Regulatory Commission of Alaska, began preparing to import LNG, which was ironic because at the time ConocoPhillips was still exporting gas from its LNG plant near Kenai (plant operations have since been suspended).
The Legislature had moved to encourage new exploration, for both gas and oil, with new tax credits.
The industry responded promptly. Two new jack-up rigs were brought to the Inlet, one by Furie and one by Buccaneer, and new drilling has gotten results.
We're still not out of the woods, however. Buccaneer and Furie can't yet say their new discoveries can be commercially produced, so there are no guarantees yet. Hilcorp feels confident it can squeeze enough new gas out of the old fields to supply the utilities (once the regulatory commission approves the new contracts, the company will be obligated).
I still have a queasy feeling about this, however. These are old gas fields. Hilcorp will have to invest money to get new gas. I hope the gas is really there. Marathon and Chevron obviously weren't enthusiastic about the prospects or they wouldn't have left.
The solution for the explorers is a restart of the LNG plant, or possibly a reopening of the Agrium Corp. fertilizer plant, also near Kenai, which closed in 2007 due to gas shortages. However, both ConocoPhillips and Agrium have to be sure the explorers really have enough gas beyond the utilities' needs to supply them.
If enough new gas is available, the plants' reopening will be a big shot in the arm for the Kenai Peninsula. It will also keep explorers drilling for gas because they know they have a market.
As a longer-term backup, last spring legislators also approved legislation to expedite a state-backed gas pipeline from the North Slope as a contingency in case a large industry-backed project fails to proceed. This line couldn't be built until 2019 or so, so there could still be a gas supply shortage if new gas doesn't materialize.
For now, let's keep those plans to import LNG on the table. If things turn out badly, we still might need to do it.
Tim Bradner writes on business and economics topics for Alaska publications. From 1970 to 1984, he worked for BP, a major North Slope oil company. Some of that time was spent as a lobbyist for the company in Juneau.
Tim Bradner
Economy