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Monday, August 15, 2011

State: Additional Cook Inlet Investments Could Find New Gas

- State: Additional Cook Inlet Investments Could Find New Gas

Monday, August 15, 2011
Alaska Journal of Commerce
by Tim Bradner

An investment of $1 billion to $2 billion by natural gas producers in additional drilling in gas fields in Southcentral Alaska could meet projected gas supply shortages in the region until 2018 or 2020, possibly eliminating the need for local utilities to import liquefied natural gas.

A recent study by the state Division of Oil and Gas shows that if producers drill eight new production wells per year in the four largest gas fields in Cook Inlet Basin, the fields will produce sufficient new gas to meet the current 90 million cubic feet per day demand in the region at a cost of $10 million to $20 million per well with an additional $100 million investment in compression.

"This study considers what we think it will take, in terms of revenue, to get producers to produce additional gas we believe is in these fields, although we can't say the price that the field operators will feel is acceptable to make the investment," said Joe Balash, deputy commissioner in the state Department of Natural Resources, in the briefing.

ConocoPhillips, Marathon Oil Co. and Chevron Corp. are operators at the four fields included in the study.

The region's utilities, however, are skeptical that investments by producers will actually be made, and are proceeding with plans to have imported LNG available in Cook Inlet within three years.

"We can't take a chance. Our estimates show a supply gas in the region as early as 2014," said Jim Posey, general manager of Anchorage's city-owned Municipal Power & Light, one of several utilities in negotiations with potential LNG suppliers.

Despite what the state study said, Cook Inlet producers are actually drilling about half the new wells needed to sustain current production levels, Posey said. Four new development wells are planned for 2011.

The study by the Division of Oil and Gas examines gas reserves the state believes remain in the four largest gas fields, which include the Beluga, Ninilchik, North Cook Inlet and the McArthur River Grayling gas sands based on data that is public and some that is confidential, and relies on known costs for drilling and compression.

Balash said the state study included only the large producing fields and did not include new gas found though exploration, such as a recent 10 billion-cubic-foot gas discovery made by Buccaneer Energy LLC, an independent, on the Kenai Peninsula.

The study indicates that producers could earn a 20 percent internal rate of return in 2018 at a gas price below $6 per thousand cubic feet (mcf), a price that is about what producers are selling most gas produced in Cook Inlet, and a 15 percent rate of return on a gas price below $5 per mcf.

However, another assessment made in the study is that the net present value of many of the investments in wells will be modest, which could discourage some companies, particularly larger companies, from exploring, Balash said.

"It's quite possible that smaller projects could have quite good rates of return and yet have small net present values. This kind of investment might be very attractive for a small independent and less attractive for a larger company," said Jeff Dykstra, a commercial analyst in the state oil and gas division and one of the authors of the gas study.

Independent companies are in fact showing much more interest in Cook Inlet than are large companies such as the current producers.

"Most companies use several financial indicators in assessing possible investments including rate or return and net present value as well as their cash-flow needs," Bill Barron, director of the state oil and gas division, said in the briefing. Whether an investment will be made depends on a company's internal investment threshold, Barron said.

Information in the study will be used by state legislators next year as they consider additional funds needed for planning a possible $7.9 billion, 24-inch gas pipeline that could be built by the state from the North Slope. The 24-inch pipeline, which could bring gas from the slope to southern Alaska by 2019, is being considered as an alternative if a large 48-inch Alaska gas pipeline is seriously delayed.

Balash said the division will do a second increment to its Cook Inlet gas study taking into consideration a new estimate of technically-recoverable gas resources released by the U.S. Geological Survey. The USGS estimated that Cook Inlet could hold as much as 19 trillion cubic feet of conventional and unconventional gas resources, more than twice the amount of conventional gas discovered so far.

"We will try to determine a minimum economic field size that would allow some of these new resources to be developed," Balash said.

Copyright (c) 2011, Alaska Journal of Commerce, Anchorage

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