Cook Inlet may face gas shortage by decade’s end, state officials estimate

Southcentral Alaska may run out of available natural gas by the end of the decade, according to a new analysis conducted by the Alaska Department of Natural Resources.

The analysis, presented Monday in a hearing of the Senate Resources Committee, is the most detailed look so far at the possibility that Anchorage and surrounding areas could be threatened with electrical brownouts and a heating shortage, just as they were amid a similar natural gas shortage a decade ago.

“All that is history, but it feels like we might be repeating it again,” said Sen. Cathy Giessel, R-Anchorage and the committee’s co-chair.

The problem isn’t one of supply, DNR officials told the committee. Cook Inlet, the source of Southcentral’s natural gas, has more than 19 trillion cubic feet of available natural gas, the U.S. Geological Survey concluded in 2011, and subsequent estimates haven’t varied much from that figure.

That’s enough gas for 270 years of current demand, based on DNR’s estimate that Cook Inlet uses about 70 billion cubic feet per year.

The problem is that Cook Inlet’s existing oil and gas companies aren’t drilling enough new gas production wells to bring that gas to the surface and offset the long-term declines in existing wells, said DNR commissioner-designee John Boyle. 

“We see Cook Inlet demand exceeding supply at some point in the future,” he said.

Different economic circumstances — cheaper drilling, or changes in demand, for example — could change the trend. But for the moment, DNR is projecting that by sometime between 2027 and 2031, there will be more demand for Cook Inlet gas than there is gas to go around.

“We do see an environment where there’s a need for policy discussion around whether or not the path that we’re on is sustainable for providing energy for Southcentral into the future,” Boyle said.

Cook Inlet has the highest natural gas prices in North America, said Sen. Bill Wielechowski, D-Anchorage, and tax rates are miniscule — less than 3%, based on current prices and a tax ceiling of 17.7 cents per cubic foot of gas.  

“If prices are high and taxes are low, why aren’t companies drilling?” he said.

Cook Inlet also has high production costs and low demand for gas, relative to global standards, which makes it a niche market, DNR officials said.

“We have a very limited amount of companies that are interested in investing and being in the space,” Boyle said.

He added that existing producers are also handicapped by environmental standards set by banks and investment firms that prohibit them from backing oil and gas in the Arctic.

“Even Cook Inlet counts as sort of Arctic under some of their criteria,” Boyle said, “So they’re facing a lot of constraints in terms of being able to access outside capital in order to move forward on some of these actually promising developments.”

Giessel said she’s been told by BlueCrest Energy, a firm active in Cook Inlet, that they have a large proven natural gas deposit that hasn’t been developed because doing so would require an expensive offshore platform.

Members of the committee speculated about ways to encourage production in Cook Inlet but noted that traditional tax incentives probably won’t work because tax rates are already almost nonexistent.

“It’s not a lever we could pull to incentivize more production,” said Sen. Forrest Dunbar, D-Anchorage.

During the last projected shortage, the state approved an expensive system of cashable tax credits, ultimately paying more than $1.4 billion to oil and gas producers before it was eliminated. 

That system created a debt that the state will finish paying next year, and Giessel called that program a “crazy idea.”

Wielechowski suggested that the state could perhaps pay a large Alaska Native corporation like Doyon Ltd. or Arctic Slope Regional Corporation to drill in Cook Inlet on its behalf.

Southcentral’s electric utilities are scheduled to testify Wednesday in front of the committee and present their ideas and concerns.

“It’s a crazy situation. I think it’s going to require some different ways of thinking about this,” Wielechowski said.