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Alaska LNG Exports Seen Necessary to Cook Inlet Development

Alaska's Cook Inlet was thought to have been played out for natural gas development. However, recent promising producer activity there has moved the state to seek the reopening of a liquefied natural gas (LNG) export facility for fear that without it there may not be a market for the potential gas.

"The state's objective is to foster an environment in Cook Inlet that continues to provide supplies of gas that are adequate to meet demand and can be reliably contracted for by local utilities. This requires market opportunities in the near term that incentivize companies to invest in the exploration and development today that will lead to secure supplies in the future," Alaska Department of Natural Resources' Joseph Balash, acting commissioner, told ConocoPhillips Alaska President Trond-Erik Johansen in a Sept. 5 letter.

ConocoPhillips is operator of the LNG export terminal on the Kenai Peninsula. Operations there were halted last year due to gas supply shortages after an on-again, off-again period for exports from the plant (see Daily GPIAug. 21, 2012Dec. 20, 2011Feb. 11, 2011). The export license for the plant expired March 31 (see Daily GPIMarch 7), ConocoPhillips spokeswoman Amy Burnett told NGI. Now the state wants ConocoPhillips to seek a three-year authorization to renew exports at Kenai.

Burnett said the plant is currently shut down, but it has not yet been mothballed. She acknowledged the state's letter and said the company has not made a decision on whether to reopen the plant, and she could not say when a decision might be made. However, ConocoPhillips supports efforts to develop Cook Inlet reserves, Burnett said.

Until recently, utilities in Alaska's Southcentral region have fretted over how much gas would be available for heating and power generation. It was thought that LNG imports might be necessary in the near future (see Daily GPINov. 21, 2012). But now the Cook Inlet is on a comeback.

A recent Cook Inlet lease sale was the third largest of its kind in nominal dollars and the sixth largest in acreage leased since the state's area-wide lease sale program began in 1999 (see Daily GPIMay 9).

Offshore gas discoveries in the Cook Inlet have recently been made by Houston-based Buccaneer Energy (see Daily GPIJune 26) and Furie Operating Alaska LLC. Buccaneer is also developing the 100% owned Kenai Loop onshore gas project, which has been assessed to have 3.7 million boe in proved probable reserves. The company's offshore Cook Inlet projects have been assessed to have 69.9 million boe in proved probable reserves. Furie is the operator of the Kitchen Lights Unit (83,000 acres), which includes a number of oil and gas leases owned by majority working interest owner and Furie parent Cornucopia Oil and Gas Co. LLC.

"The current supply of local utilities' contracted gas is the result of a resurgence in investments in Cook Inlet during the last several years," Balash said in his letter. "A variety of factors have supported the recent increase, including legislative support for tax credits, ownership transitions, and state advocacy. Recent years have seen significant spending in the Inlet by new companies with substantial exploration budgets, as well as infield developments that are revitalizing existing fields.

Area utilities are contracted up for gas supply through 2018, Balash said. This is in contrast to the previous expectation that LNG imports might be needed by winter 2014-2015. Now the problem is the fear of too much gas with no place to go.

"Without market opportunities for gas discoveries, companies lack the incentive to invest in continued exploration activities...[A] lack of healthy exploration now may lead to supply contractions in the future as existing wells' production levels decline.

"State lands in Cook Inlet hold tremendous amounts of possibly recoverable natural gas, and the United States Geological Survey has estimated that the entire basin may still hold trillions of cubic feet."

And Agrium Inc. could restart a urea and ammonia plant in the region, Balash said, which would support long-term demand for Cook Inlet gas. However, that plant's potential restart is too far off, and resuming exports from Kenai could happen sooner.

"The operation of ConocoPhillips Kenai LNG export facility is needed to sustain exploration and development budgets and activity in the Inlet," Balash said. 

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