A word from the president: The Cook Inlet Gas Wars

By: Margie Brown, CIRI president and CEO

The state of Alaska needs to take another look at Cook Inlet as a gas basin. A year and a half ago I shared my concerns with you about the need to find and develop additional natural gas reserves in Cook Inlet. The region’s legacy fields, which have provided reliable, low-cost fuel for space heating and electrical power generation for more than a generation, are running out. I feared that neglecting the need to prove up additional reserves would inevitably cause a spike in natural gas and electric rates in the Railbelt where two-thirds of Alaska’s population lives.

Today, this concern is becoming widespread and pronounced among business leaders and public policy makers. Significant new Cook Inlet basin gas discoveries have been elusive and the few exploratory wells that are slated to be drilled next winter are not likely to eliminate the problem.

One solution that has garnered a lot of attention is a proposal to build a 20-inch diameter “bullet line” to transport North Slope natural gas to Railbelt consumers. Gov. Sarah Palin recently asked the state legislature to consider funding measures that would facilitate this project.

A state bullet line subsidy could cost the state as much as $4 billion. That is a lot of money and lawmakers wisely responded by saying they need more information about the proposal and its economics before they act.

It would be more cost effective to encourage exploration in the Cook Inlet gas basin. Bullet line gas would be expensive, even after state contributions, because it has to be shipped more than 700 miles. And alternative solutions such as importing LNG from Asia would also be expensive because they would tie Railbelt gas supplies to volatile international markets. The best solution is to continue using locally produced Cook Inlet gas.

The first significant Cook Inlet basin gas was discovered in the Kenai gas field in 1959. It was a huge find that has provided Railbelt energy consumers with significantly lower-than-average gas prices for many years.

The problem is that Railbelt consumers depend upon natural gas to meet most of their heating and power needs. They get virtually all of their gas from Cook Inlet, but the region’s proven gas reserves and production are dwindling. However, Department of Energy experts estimate that the region still has trillions of cubic feet undiscovered gas, enough to last more than 50 years at current consumption rates. If this is the case, why is there not more exploration for Cook Inlet gas?

Lack of exploration may be related to the unusual nature of the Railbelt gas market, which is isolated and disconnected from other world energy markets. Typical market forces of supply and demand do not work smoothly to set energy prices in the Railbelt. Consequently, the challenge is to find a price point that balances consumer needs for affordable energy against producer needs to earn fair returns from gas exploration and development investments.

This situation was recently characterized as a war-the Cook Inlet Gas Wars between the Railbelt utilities and Cook Inlet gas producers by a commissioner on the Regulatory Commission of Alaska (RCA), the government organization charged with protecting consumer interests by regulating gas and electricity prices. The RCA has resisted efforts to consider national and world energy prices when it sets Cook Inlet gas price limits. Gas producers argue that this policy harms consumers’ long-term interests by undervaluing Cook Inlet gas so that the region is not competitive in national and world exploration and development markets. Railbelt utilities counter that consumers are better off when gas price limits follow historic stranded gas structures that have been in place for years. Recent bullet line discussions are now complicating this issue.

A major commitment to natural gas importation, from the North Slope or abroad, would destroy the long-term economics of Cook Inlet gas production. What irony it would be if natural gas importation ends up killing Cook Inlet gas production, and in the process does nothing to alleviate the Railbelt’s overdependence on natural gas and its inherent price volatility.

The state of Alaska has a legitimate role using its considerable resources to ensure that Alaska’s energy needs are met. However, while the state considers spending billions on the bullet line, it should first develop programs that encourage and reward Cook Inlet gas exploration. All things considered, Cook Inlet gas is likely to be the cheapest and most efficient way to fulfill Alaska’s short- and mid-term energy needs.