Advertisement

Enstar president warns of natural gas shortfall, delayed solutions for Southcentral Alaska

Jan. 24—The head of the largest utility in Southcentral Alaska expressed dire concerns this week that the state's natural gas shortage may come quicker than people have come to expect, raising the risk for power interruptions in the future.

John Sims, president of gas company Enstar, said in an interview if everything runs smoothly — meaning no gas-supply interruptions or cold weather causing excess demand — the region should have the gas it needs for the near-term.

"But I start to get really, really concerned in, in 2027, 2028," he said.

Enstar provides gas to heat home and buildings in the Anchorage and Matanuska-Susitna areas, and portions of the Kenai Peninsula. It serves 150,000 customers.

Sims said he's also worried that power companies' plans to receive imported liquefied natural gas to fill the gap may not be possible until 2028, due to permitting timelines at state and federal agencies.

That's a year later than estimated by an initial report issued last summer by a working group involving the utilities along the Railbelt from Homer to Fairbanks, and state entities.

Members of the Regulatory Commission of Alaska have raised similar points, saying the looming gas shortfall in the region could lead to potentially catastrophic outcomes if utilities aren't prepared.

On Wednesday, the commission began a series of meetings with power companies to hear their plans for rationing power, if needed, to protect vital facilities such as hospitals and to prevent blackouts or forced power outages. The commission met first with the relatively small Homer Electric Association, serving much of the Kenai Peninsula.

Hilcorp, producing more than 80% of the gas used in the Railbelt, warned Enstar and other utilities in 2022 that it did not have enough natural gas reserves in the basin to provide for new gas supply contracts after existing ones expire in the coming years.

The warning has sent utilities scrambling to find new sources of power, including renewable energy projects that could require lengthy timelines to complete, and potentially costly imports of liquefied natural gas. Alaska Gov. Mike Dunleavy has proposed legislation for temporary royalty rate reductions on oil and gas production from new pools, in an attempt to incentivize investments.

Electric utilities have said they are evaluating opportunities to import liquified natural gas to avoid any supply gaps.

Hilcorp said this week in a statement it will meet the obligations of its gas supply agreements with utilities. In 2024, it will spend hundreds of millions of dollars to develop its leases in the Cook Inlet basin, Hilcorp said.

[Report: Alaska's Railbelt can shift to renewables, but that would require big capital investment]

"However, it's important to note that the natural gas under Hilcorp's leasehold alone cannot continue to meet nearly all Railbelt gas demand," the company said in a statement. "Railbelt utilities and other gas producers need to identify additional sources of natural gas supply for Southcentral Alaska."

"We will continue to collaborate with Railbelt utilities, state and local governments, and the public to find energy solutions for Alaska," Hilcorp said.

A one-year extension for Homer Electric

Homer Electric, serving about 25,000 members, is the region's first electric utility to have its gas contract with Hilcorp to expire.

The contract expires this spring, on March 31.

But Enstar, the region's largest natural gas buyer, has recently worked out an arrangement that would provide Homer Electric with a one-year extension, Sims said.

Enstar's gas-supply contract with Hilcorp is set to end in 2033, Sims said. Hilcorp provides about 90% of Enstar's gas, said Sims.

To extend Homer Electric's contract, Enstar amended its gas supply contract with Hilcorp to accept an additional 3.5 billion cubic feet of gas for a yearlong period, close to a 10% increase in what Enstar normally buys for its own customers.

Enstar will sell the extra gas to Homer Electric Association for the 12 months, Sims said.

A Homer Electric spokeswoman said the utility signed a contract with Enstar to buy the gas.

The changes will be submitted to the regulatory commission for approval, Enstar and Homer Electric officials said.

Sims said Hilcorp is not obligated to explain how it's making the extra gas available. Hilcorp did not respond to that question from a reporter.

Sims said the extra gas is likely coming from Cook Inlet gas that would have been used to meet future needs.

[Royalty-free lease offerings in Alaska's Cook Inlet basin draw tepid response]

"I think ultimately, what we've done is we've moved gas volumes from one year and just brought them forward," he said.

Under the deal with Hilcorp, Enstar agreed to more quickly draw down some of the gas stored in its parent company's underground storage reservoir, Cook Inlet Natural Gas Storage Alaska.

It essentially means there will be "a little bit less in the tank" that could be available for a potential future emergency, Sims said.

A potential financial penalty that ensures Hilcorp delivers its gas will be waived, for an amount over the next three years that applies to the extra delivery of 3.5 billion cubic feet, Sims said.

"Because this is gas that Hilcorp hadn't planned on delivering at this point in time, they negotiated to reduce the amount that they were obligated to provide if they can't deliver," Sims said.

Also, the amended contract will slightly boost Enstar's gas-cost adjustment, affecting all Enstar customers.

The average annual residential gas bill in the service area will rise slightly, by $3.82, a representative with Enstar said. The average annual bill is about $1,585.

Enstar concerned about its own gas supply

Hilcorp's gas supply contract with the Chugach Electric Association, the largest power utility in Alaska, is set to end in 2028.

"Chugach is confident that we will meet the gas needs of our members," said Arthur Miller, chief executive of Chugach Electric.

Chugach is unique among power utilities in the Railbelt because it has a two-thirds working interest in the Beluga River Unit gas field that provides most of the utility's gas needs, he said. The remaining 40% is met through its contract with Hilcorp.

"As has been discussed, we are actively evaluating opportunities to import liquified natural gas to fill any gas supply needs in 2027 and beyond," Miller said in a prepared statement. "Chugach is expected to make a decision on importing LNG in the first or second quarter of this year."

[Electric utilities push back on proposal from Native village and Anchorage Assembly leaders to remove Eklutna River hydropower dam]

Chugach also has a long-term gas storage arrangement for gas storage with Cook Inlet Natural Gas Storage Alaska, and is looking for additional gas storage. The storage supplements gas supply when demand rises in winter.

Homer Electric has previously said it is working with the Railbelt utilities to identify future sources of fuel, including renewable energy and importing liquefied natural gas.

As long as Hilcorp meets its contractual obligations and Enstar does not have deliverability issues, Matanuska Electric said its members are covered. Matanuska Electric's gas supply contract with Hilcorp ends in 2028.

"We do recognize that things are getting tighter in the Cook Inlet and we are not seeing signs of improvement, which raises some concerns," Julie Estey, a spokeswoman with Matanuska Electric, said in an email. "With reliability as our member's number one priority, we have plans in place to manage gas shortfall situations in coordination with Enstar and the other electric utilities."

"MEA's dual fuel engines at the Eklutna Generation Station allow us to switch seamlessly to diesel to provide continuous power to our members during critical situations and can also be an asset to the larger system by reducing demand," Estey said.

Matanuska Electric will provide more details on that subject at regulatory commission meetings in the future, Estey said.

Enstar also receives gas Bluecrest and from Furie, now HEX, Sims said.

John Hendrix, president of HEX, a small Cook Inlet producer, said the company has always met and will continue meeting its contractual obligations to utilities. Hendrix said its current gas supply contracts with Enstar end in April 2026.

HEX provides only 5% of the gas needed by the Railbelt utilities, he said.

Hendrix said the state should equalize royalty payments so they're fair to every producer in Cook Inlet. That would benefit fields like the Kitchen Lights Unit owned by HEX, which has high royalty payments, he said.

"This is a solvable problem," he said. "There's gas in Cook Inlet."

Benji Johnson, president of BlueCrest Energy, another small Cook Inlet producer, said the company has met and continues to meet its gas supply contracts.

BlueCrest has a large, proven but undeveloped offshore field called Cosmopolitan, he said. "There is no question that the gas is there and could make up market shortages for many years," he said in a text.

[Chugach files plan with regulators to create community solar farm that members can buy power from]

Experts have said Cook Inlet remains home to large amounts of gas, but the huge cost of exploration and development, in such a small market, often make new drilling uneconomical.

Johnson said developing Cosmopolitan will require big investments to install a new offshore platform and subsea pipelines, and then drill for gas, he said. The company is working with potential investors, but doesn't have a final investment commitment, he said. Alaska has a reputation as an unstable tax regime for producers, so investors look elsewhere, he said.

Sims said he worries that Enstar, as early as 2027 or 2028, may begin to face a shortfall in its own gas supply.

He said some of the solutions to the dilemma could include expedited state and federal permitting timelines to allow liquefied natural gas imports to begin as quickly as possible.

Incentives such as those proposed by the governor might also help result in unexpected supplies of new gas, Sims said. The state and federal government should fully support Cook Inlet producers to boost their chances of success he said.

Sims said consulting firms for Enstar and the electric utilities will soon provide the regulatory commission with an update to findings they presented last year about the dilemma.

He said the consultant for Enstar, Berkeley Research Group, is expected to recommend imports of liquefied natural gas as the best near-term solution to avoid shortages in future gas supply.

Utilities will need to move quickly to come up with a plan, he said.

"We don't have a lot of time to dilly-dally and contemplate," he said.