OPINION: Necessary questions about the Cook Inlet gas monopoly

In addressing the Cook Inlet natural gas supply problem facing Southcentral Alaska, one unmistakable feature of the production structure is that only one company (Hilcorp) controls roughly 90% of the production. This implies no judgment regarding the capability or integrity of Hilcorp. But Hilcorp’s historical prowess is taking over old fields and boosting production, rather than developing new ones. For instance, it bought BP’s share of Prudhoe Bay. And Hilcorp originally entered the Cook Inlet market by purchasing Marathon’s assets there. So there is no question that the lack of diversity in Cook Inlet producers eliminates the abundance of opinions that is often useful in solving problems.

It would also be imprudent not to consider the possibility that Hilcorp could be withholding supply to bolster gas sales prices in the next round of contracts. This is not to suggest that they are, but it is a question you have to ask.

Several strategies could address this possibility. The state is entitled to Hilcorp’s geological and engineering data. It could hire a world-class geological/engineering firm to analyze what Hilcorp has while keeping the data confidential. It could sole-source the work because of the urgency of the problem.

Although it would be financially prohibitive to have a small-diameter gas pipeline from the North Slope solely for Alaska demand (a “bullet line”), many years ago there was interest in mixing liquids (ethane, butane, propane) in with the gas on the North Slope and shipping them in a larger, more efficient pipeline to Southcentral Alaska (where the per-unit costs would be reduced), and then stripping the liquids and exporting them. At that time, the liquids had a higher value for oil recovery, but the reservoir has evolved since then, and the value of the gas here has intensified. Although Hilcorp is the operator of Prudhoe Bay oil field, the largest gas reservoir in the state, and such gas would compete with their Cook Inlet business, it may be useful to update the examination of this option.

It might cost around a million dollars to examine these opportunities and take a few months to yield results.

Other smaller companies in Cook Inlet have gas reserves. However, most of them are severely undercapitalized. If that gas is ever to be developed, they are going to need a strong partner. The state of Alaska, or the Municipality of Anchorage, could engage in discussions with other well-capitalized producers to examine what kind of arrangements may be possible to partner with these smaller companies.

There is also a monopoly on the end-use gas sale (as well as the production) side of things. There is one particularly well-known historically successful means of extending resources: conservation. Though it may damper business, the electric and gas utilities have issued very little information and encouragement regarding, for instance, how much gas we save, or how much less our heating or electric bills would be, from, say, turning down thermostats, throttling back water heaters, or dimming or turning off indoor and outdoor lights. It would be good to know.

It should only take a short while to answer these questions. If, at that time, it appears that the supply problem is real and there is no expedient, feasible, affordable, realistic answer, state and local governments should get out of the way of the utilities and facilitate what they need to import gas as soon as possible.

Roger Marks is an economist in private practice in Anchorage. From 1983 to 2008 he was a senior petroleum economist with the state of Alaska Department of Revenue Tax Division. He has no financial ties to the oil industry.

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