Renewed promise of cook inlet oil and gas: resources are truly consequential.

• Author: Griffin, Judy
• Position: OIL & GAS

Cook Inlet oil and gas businesses are waiting and wondering. Their costs of exploration and production could rise and affect investment decisions, depending on whether and how the state of Alaska reshapes its capital credits program. Since 2010, those credits have encouraged exploration and production in Cook Inlet.

Oil and gas activity in Cook Inlet may be a tiny fraction of that on the North Slope--Cook Inlet oil production amounting to a mere 3 percent of the North Slope volume--but for consumers in Southcentral Alaska, the Cook Inlet basin resources are truly consequential.

Oil and natural gas from Cook Inlet are the major sources of heat and electricity for Southcentral Alaskans. Natural gas from Cook Inlet provides heat to homes and businesses in Anchorage, the Kenai Peninsula, and the Matanuska-Susitna Borough.

More than 80 percent of the electricity for communities from Homer to Talkeetna is generated from Cook Inlet natural gas, according to the Alaska Oil and Gas Association (AOGA).

Facing declines in the production from Cook Inlet oil and gas fields, Southcentral Alaska communities in 2009 were concerned about energy shortages. Options considered included importing liquefied natural gas and energy conservation.

Then, in 2010, the Alaska Legislature passed the Cook Inlet Recovery Act, or House Bill 280, which expanded capital credits available to Cook Inlet producers and advanced construction of a natural gas storage facility intended to balance supply and demand. Cook Inlet oil and gas activity has increased substantially since availability of the larger tax credits. New wells have been drilled, platforms have been upgraded, natural gas reserve estimates have risen, and oil and gas production have increased.

AOGA reports that since 2010, seventy-five new oil and gas wells have been drilled, new gas fields have been discovered, oil production rose by 80 percent, and the expanded gas storage in the Cook Inlet natural gas storage facility has helped stabilize production.

Recently one Southcentral utility was able to contract for natural gas supplies at reduced costs: Homer Electric Association inked a new deal with Furie Operating Alaska LLC of League City, Texas, to receive future gas from a newly discovered offshore gas resource in the Kitchen Lights Unit north of Nikiski.

Mike Salzetti, Homer Electric Association's manager of fuel supply and renewable energy development, explains that the contract, which is awaiting regulatory approval, provides for gas to be supplied from April 1,2016, through 2018. The agreement is the first in several years for which the price of gas fell. "The cost has been on an upward trend with about a 3 to 4 percent escalation factor each year," says Salzetti. "We will be paying less for gas in 2016 than HEA was paying for gas in 2014."

Exploration, such as reserve delineation in the Cosmopolitan and Kitchen Lights units by companies taking advantage of state incentives, has resulted in discovery of additional producible reserves of oil and gas. In existing production infrastructure, new techniques are being implemented to mitigate problem wells and manage system pressures, also raising estimates of remaining reserves in the Cook Inlet basin.

Although large future sources of gas have been discovered, development of those new fields requires large investments to construct production infrastructure. The currently available resources will not meet the...