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Hilcorp finds enough natural gas to heat Anchorage next 4 winters

Alex DeMarban
An offshore oil and gas platform in Cook Inlet. After acquiring the assets of Marathon Oil, newcomer Hilcorp spent money revitalizing wells that were no longer producing. Loren Holmes photo

Fears of a widespread power shutdown that leaves hundreds of thousands of Alaskans huddling in the frigid dark of winter have temporarily lifted, thanks in part to an aggressive effort by Cook Inlet newcomer Hilcorp Alaska that's making more gas available for utilities.

That doesn't mean the search for costly imports is off the table. In a paradox for a state blessed with one of North America's largest untapped gas basins -- Prudhoe Bay in the Arctic -- Southcentral Alaska utilities continue to review their import options, just in case something goes awry with Hilcorp's ability to deliver enough from nearby Cook Inlet, officials say.

Still, the additional gas means Anchorage can breathe a bit easier for four more winters. Hilcorp is in the process of finalizing agreements with Southcentral utilities to provide gas through March 2018.

"This is a major step toward allaying the fears of Alaskans about the likelihood of a gas shortage" in the short-term, said Kevin Brown, communications manager with Matanuska Electric Association, the state's second-largest electric utility.

That, of course, means gas explorers will have a few more years to discover more gas in an effort to provide a long-term supply, he said.

The sudden turnaround comes after Hilcorp acquired Marathon Oil's assets in the Cook Inlet basin early this year, and the company spent money on revitalizing wells that were no longer producing, said Lori Nelson, manager of external affairs for Hilcorp Alaska. That yielded a bit of a surge.

"We’ve increased oil production by more than 35 percent year over year and increased deliverable gas volumes by about 25 percent," Nelson said.

 Concerns of a gas shortage began to crystallize more than a decade ago, following years of ample production in Cook Inlet basin that allowed gas contracts to exceed 10 years, said Tony Izzo, a fuel supply manager for Matanuska Electric.

Given that gas exploration and development in Alaska can take vast sums of capital and years of effort, Southcentral isn't out of the woods yet, Izzo said.

"The sigh of relief is welcome, but certainly not permanent," said Izzo, a former president of Enstar Natural Gas. "It would take multiple discoveries, or large discoveries, to extend that sigh further."    

Nonetheless, circumstances are much improved from last year, when the state's most populated region was wringing its hands over the possibility that gas supplies could fall short of peak demand, and, in a worst-case scenario, cause a disastrous, wide-scale supply interruption.

Extra gas isn't the only thing bringing relief to Southcentral. A popular home energy rebate program has reduced gas use. Utilities are building efficient power plants, and a new wind farm spins out renewable energy. Also, in a project involving Enstar's parent company, Semco Energy, utilities in quick need of gas can turn to a newly built, $180 million gas storage facility on the Kenai Peninsula that stockpiles supplies during the warmer months when less gas is used.  

And in another key improvement, Matanuska Electric's $250 million Eklutna Generation Station, set to start up in a year and a half, will be able to seamlessly switch its fuel source from natural gas to diesel fuel in an emergency.

Diesel is about three times costlier than natural gas, said Brown, so the utility wouldn't turn to diesel unless forced to. But doing so would reduce Southcentral's overall demand for natural gas, and help avoid a gas shortage.  

"Running on diesel is not something anyone wants to consider, so that's why we're so pleased with the additional exploration going on throughout Cook Inlet and the state," Brown said.

Hilcorp has been a pivotal player in the inlet since acquiring Marathon Oil's assets in the Cook Inlet.

The panic over potential gas shortages last fall and winter was amplified by the fact that the acquisition of Marathon's assets took longer than anyone intended, she said. The $375 million deal included the purchase of more than 150 wells across several fields.

"We were basically sitting blind until the acquisition (was) completed," Nelson said. "But once that was done in January of this year, we were able to take a look at the books and go through the reserves certification and find out that we were sitting in a much more positive position than we had originally forecast."

The Houston, Tex.-based company calls itself the third largest privately held oil and gas explorer in the nation. It's doing in Cook Inlet what it has done elsewhere: Wringing oil and gas out of legacy fields abandoned by larger companies, she said.  

"We come in, we turn production around, and we take our wins bit by bit," Nelson said. "Simply stated, we're spending the money it takes to fight that decline curve and increase production."

Chugach Electric Association, the state's largest electric utility, has also inked an agreement with Hilcorp through early 2018. The contract has been submitted to the Regulatory Commission of Alaska for approval.

Matanuska Electric's contract with Hilcorp is expected to be filed with the RCA soon as well, as is a contract involving Enstar, the state's largest gas utility. Those and other contracts are expected to be similar, following the terms laid out in the consent decree allowing Hilcorp to acquire Marathon's assets.   

So what happens after 2018?

Southcentral could be right back to where it was last fall, with a gas shortage increasingly likely. Utilities that formed a group to prepare for that scenario continue to work on the problem, and costly gas imports from out of state remain one option, Izzo said.  

"We are realistic and we know 2018 is not that far away," Izzo said. "So we are working on those next steps regarding fuel supply … and we're also continuing to work to ensure that there's an alternate plan should we need one."

Nelson said Hilcorp is optimistic it can meet Southcentral's gas needs beyond 2018.

"'We're certainly confident we'll be here in the long term and hopefully producing enough gas to support the utilities. I can't say what the market will be at that point, that's their job to tell us, but we certainly hope to be a big part of it," she said.  

Contact Alex DeMarban that alex(at)alaskadispatch.com