Cook Inlet gas crunch likely to push up prices as lawmakers search for solutions

Alaska lawmakers are searching for solutions to a looming shortage of natural gas that threatens power and heating for much of the state’s population. The state’s largest gas utility is warning that shortfalls could come as soon as next year – and imports are years off.

Throughout Southcentral Alaska, heaters, stoves, and, notably, electric power plants rely on gas.

“70% of the population live along the Railbelt and depend on Cook Inlet gas,” said Sen. Cathy Giessel, R-Anchorage, who chairs the Senate Energy Committee.

Lots of the state’s gas is up on the North Slope, but it’s more or less stuck there until or unless the state builds a pipeline south – which would take longer than the state has time to wait, according to Sen. Bert Stedman, R-Sitka.

“We can’t wait 10 years,” he said. “So we need to move forward.”

That means continuing to rely on gas from Cook Inlet, most of which comes from Hilcorp, the Texas-based oil and gas company that dominates gas production in the Cook Inlet basin. 

And though the company says it plans to keep drilling, Hilcorp Senior Vice President Luke Saugier told a joint meeting of the House and Senate Resource Committees that they’re expecting production to decline.

“Part of the reason we’re all here is because the gas under Hilcorp’s leasehold cannot meet 100% of the demand that there is today in the Cook Inlet market,” he told the committee on Wednesday. “So we need other sources of energy.”

Not everybody buys that – Sen. Bill Wielechowski, D-Anchorage, and Rep. Donna Mears, D-Anchorage, asked a series of questions suggesting the company can and should produce more – but Hilcorp says it’s investing hundreds of millions of dollars in drilling each year. 

“We’re the only company that’s drilled any wells since 2019. And I would submit to you that that’s a problem,” Hilcorp’s Saugier said. “That’s not a good situation for us to be in as a community.”

Saugier told the committee that sustained drilling is essential, since production starts to decline immediately after a new gas well is tapped.

Hilcorp warned utilities in 2022 that it could not keep supplying gas at existing levels. Saugier says that’s because it’s only allowed to write contracts based on its proven reserves of gas, and it’s expecting production to fall by nearly half over the next five years.

Hilcorp expects to provide roughly 55 billion cubic feet of gas this year, nearly 80% of total demand. But the company warns that it’s expecting production to fall to 32 billion cubic feet of gas per year starting in 2029.

Enstar, the Southcentral gas utility, told lawmakers that most electric utilities’ contracts with Hilcorp expire in 2027 and 2028. And it’s unclear where gas will come from once they expire. 

“The more we slip on this, the worse this problem gets,” said Enstar President John Sims. 

Sims told the committee he’s not confident there will be enough gas to meet demand next year. And Sims said gearing up to import liquefied natural gas from Outside will take until at least 2030 – and that’s if “everything goes absolutely correct,” he said.

“That was a big gulp, and not something we had considered in the past and places more emphasis on the discussion that we have today,” Sims said.

Sims says smaller-scale backup plans would triple current gas prices. And even once imports are online, he estimated prices would be 60% higher than they are now.

“There’s no unsubsidized energy solution that will reduce the cost of power or space heating in the next 10 years,” he said. “If the market provides it, it’s going to be more expensive. That is the bottom line.”

So, in the short term, the focus is on boosting production in Cook Inlet. And two smaller gas producers told the committee that they’re facing significant hurdles in bringing new gas online.

“We know the gas is there. The question is a matter of getting the funding to develop that gas,” said Benjamin Johnson, the CEO of BlueCrest Energy, an oil and gas company focused on developing deposits three miles off the coast of the southern Kenai Peninsula.

Right now, BlueCrest operates a shore-based drilling and production rig that tunnels miles underground to reach the Cosmopolitan Unit. And Johnson says surveys and test wells have confirmed that there’s a large gas deposit above the oil.

To get at the gas, Johnson says BlueCrest would have to invest some $400 million in an offshore platform and drilling program, and Johnson says the company has struggled to find investors. He suggested the state could invest in the company or provide a loan.

Lawmakers are considering several bills that would reduce various state royalties and taxes on gas in an effort to juice production. And Johnson says that would be helpful – to an extent. 

“Certainly, royalty relief improves the economics of the project. In this case, it’s not a make or break as to whether an investor will come in or not,” Johnson told the committee.

Another Cook Inlet gas driller, HEX, told the committee that royalty cuts would have a much more significant impact. Chief Commercial Officer Mark Slaughter says royalty relief would allow its subsidiary Furie to drill two new wells this summer.

But fundamentally, the Railbelt is a small market with limited prospects for growth. Slaughter said long-term threats to the gas market, including gas imports, rising renewable energy generation and North Slope gas, make it difficult to justify larger investments in Cook Inlet.

But would royalty relief go far enough towards increasing gas supplies from the region’s overwhelmingly predominant producer? Hilcorp’s Saugier says he’s not sure if any of the circulating bills would do enough to push the company to drill more in the short term.

Lawmakers are still exploring the best ways forward. But House Energy Committee Chair Rep. Tom McKay, R-Anchorage, said he’s confident they’ll find a solution.

“I think the public needs to realize that this is not a time to panic. This is not a time to get emotional. This is not a time to become irrational,” he said at the close of the hearing. “We have lots of assets. We have lots of reserves. We have the capability to solve this problem in this building, and I believe we very well do we’ll do so.”