Alaska legislators warned of energy supply gap as large-scale imported gas likely not available until 2030

Feb. 8—JUNEAU — Alaska state legislators were told this week that large-scale imported natural gas will likely only start being available in 2030, as Southcentral Alaska utilities face more immediate shortfalls of Cook Inlet gas.

At a joint House and Senate Resources Committee hearing on Wednesday afternoon, executives from several Cook Inlet gas producers spoke about challenges they're facing to develop more gas, and the help they say they need from the state.

Hilcorp, Cook Inlet's dominant natural gas producer, told lawmakers that new sources of gas supply for Southcentral Alaska must be identified. The Texas-based company is the only operator to have drilled in Cook Inlet since 2019 after major producers pulled out.

"I would submit to you that's a problem," said Luke Saugier, senior vice president of Hilcorp Alaska, on Wednesday.

Railbelt utilities have gas contracts with Hilcorp expiring over the next few years. Enstar, Southcentral Alaska's natural gas utility, has the longest contract that expires in 2033. The utility is facing a supply gap starting next year, after smaller operators failed to produce as much gas as expected.

All of Hilcorp's efforts are directed towards developing fields to fulfill its contractural commitments, said Saugier. But he said the privately-held company cannot meet 100% of Southcentral Alaska's demand.

Republican Alaska Gov. Mike Dunleavy has introduced legislation to reduce royalties on new Cook Inlet gas development to incentivize more production. Several lawmakers have introduced similar measures.

When asked whether royalty relief would help Hilcorp produce more gas to fill supply gaps, Saugier said his answer, "regrettably, must be fairly unsatisfactory. There's a lot of details that go into that answer. We haven't seen the final text of the bill. I really — the short answer is that I can't tell you that because we haven't seen the final text on the bill."

Since Hilcorp told the Railbelt utilities in 2022 that their contracts would not automatically be extended, utility managers have discussed importing natural gas as likely the best available alternative.

However, consultants for Enstar have said that large-scale imported natural gas will not be available until 2030, according to Enstar's president John Sims, referring to a report that has not been made public yet. He said on Wednesday that the utility's consultants had said the main reason for that timeline is because of federal permitting requirements.

"That is a scenario where everything goes absolutely correct," Sims cautioned. "Where we've expedited some permitting processes, and everything flows smoothly. So that was a big gulp. And not something we've considered in the past."

Sims said the preference for Enstar is to get more gas from Cook Inlet producers, but he said that is getting "harder and harder" and available contracts would likely be less secure. Enstar is exploring smaller-scale imported gas options as a backup, which could see prices skyrocket, Sims said.

Anchorage Republican Sen. Cathy Giessel, co-chair of the Senate Resources Committee, said after Wednesday's hearing that she was "shocked" to hear that it could take six years for large-scale imported gas to be available.

Giessel said that more storage is critical. She has proposed legislation for the state to regulate all gas storage facilities in Alaska to ensure there is no price gouging.

During last week's cold snap, supplies were strained and a critical storage facility on the Kenai Peninsula was maxed out. Sims warned that in coming years, residents on the Railbelt can expect similar challenges during warmer temperatures.

Anchorage GOP Rep. Tom McKay, co-chair of the House Resources Committee, said after Wednesday's meeting that there was no need panic, but that a short-term focus should be on expanding gas storage so utilities can prepare for periods of high demand.

Smaller operators

Cook Inlet's two smaller gas producers told lawmakers about the challenges they're facing to help fill the region's looming supply gaps.

Benjamin Johnson, president of BlueCrest Energy, Inc., has long championed the Cosmopolitan Unit, which has proven reserves to supply around three years of the Railbelt's total gas needs. The problem has been finding investors, he said.

Johnson said BlueCrest needs $400 million to produce gas from the unit, largely to buy a platform that will also need permitting. He said the company has not drilled a well since 2018, but if the state guaranteed the loan, investment would likely follow.

"We have investors that I believe would come in to a certain degree, and I can't tell you how much that would be, but seeing that the project is going to go forward and the state is behind it — I think they would invest their cash," he said.

Lawmakers have suggested reducing royalty payments paid by producers to incentivize new production, but there have been questions how effective that would be.

A December royalty-free lease sale drew a lackluster response from the industry. Several lawmakers noted that operators already can apply for royalty reductions from the state Department of Natural of Resources.

Johnson told legislators that royalty relief could help BlueCrest, but it would not be make-or-break for the project.

HEX, an Alaska-based independent producer that acquired bankrupt Furie Operating in 2020, is seeking a reduction in royalties. Mark Slaughter, the company's chief financial officer, said the state rejected a previous application, but HEX may apply again.

Slaughter said the hope is to double production from the Kitchen Lights Unit to just over 10% of the Railbelt's annual gas consumption. But he said there are several issues that are "foundational" with the company, stemming from the bankruptcy agreement.

To increase production from the unit in 2024, Slaughter said HEX needs royalty relief from the Legislature, the availability of a gas rig, contractors, state permits to move the rig, and potentially financing for long-term gas production.