From go to slow: Cook Inlet oil and gas exploration and development dismal: on the one hand there are several large fields discovered in the 1960s and 1970s that were the "anchor" discoveries, essentially paying for the infrastructure. On the other hand, there are several small fields, most also discovered in the 1960s and 1970s. Medium-sized fields are missing from this mix.

• Author: Bradner, Mike

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Political factors are now looming large in industry's consideration of further Cook Inlet oil and gas development, and there are now major uncertainties facing companies that work in the Inlet. It's a dramatic change from late last year, when things were looking very promising for new work, in terms of both crude oil and natural gas.

In mid-2006, the Legislature enacted a new state oil and gas production tax law that included an Investment Tax Credit, which made Cook Inlet projects attractive. This was very encouraging for Chevron in its plans for major investments in aging oil production platforms in the Inlet, Chevron managers have said.

Chevron operates most of the Inlet's offshore platforms and is the major oil producer in Southcentral Alaska. It acquired the Cook Inlet oil and gas assets of Unocal, the previous owner.

Another encouraging development was that Marathon Oil Co., the region's major producer of natural gas, had negotiated a multi-year gas sales contract with Enstar Natural Gas Co., the regional gas utility. This would have met Enstar's needs and would also have given Marathon the market it needs to develop more gas in existing gas fields and also to do more exploration.

RED LIGHT

Now things have changed. The Regulatory Commission of Alaska turned down the Marathon contract in late December, arguing that its price terms were inappropriate. Marathon and Enstar were quite vexed over the turndown of the contract, mainly because the RCA did not give the companies any guidance in its decision as to how they should structure a contract that would be acceptable.

Marathon and Enstar had invested substantial time and resources in negotiating the contract and presenting it to the RCA. What is really important, they point out, is that the Southcentral utilities and gas producers are really in the dark as to how the state regulatory commission may rule on future gas sales contracts.

The decision leaves Enstar with a gap in its long-term gas supply needs that it is now trying to fill with new contracts, but the question on how to price the gas in a way that the regulatory commission will approve is unresolved. Meanwhile, Marathon's plans for new gas development are delayed.

OLD HENRY HUB

The crux of the issue for the RCA is that Marathon and Enstar proposed to base the price of the gas on the Henry Hub gas market index, a price commonly used for commercial transactions in the U.S. A gas supply contract Chevron has with Enstar that was agreed on with Unocal (since purchased by Chevron) and approved by the...