As February began in Southcentral Alaska, a severe cold snap underscored the need for rock-solid heat and power supplies. Temperatures below 20°C sent home boilers running at full speed, and the result was record natural gas consumption. Two weeks later, with temperatures hovering around freezing, it's tempting to forget what temperatures below 20 degrees felt like. But we need to keep this scenario in mind, because a natural gas supply shortage is closer than most people realize – and what happens in the next few months will have a long-term impact on energy prices (and a justified one). above everything else) in Alaska.
Here's the background: Southcentral Alaska gets most of its heat and electricity from natural gas, which has come from wells in Cook Inlet for decades. The combination of abundant gas and short transportation routes from the source made gas cheap for producers to develop and cheap for utilities to buy. And the result was relatively inexpensive energy that supported economic growth in the region, from Homer to Mat-Su.
But lately, that economic calculus has been changing faster than most Alaskans realize. The first alarm bells rang in 2010 when major oil and gas producers left Cook Inlet because dwindling proven reserves and the small local market did not provide enough financial incentive to stay. However, the region was rescued from this potential supply crisis by the arrival of Hilcorp, which took over natural gas production in the Inlet in a relatively seamless transition—leading to unwarranted confidence among Alaskans that the next time such a deficit threatened, it would inevitably resolve without outside intervention. Hilcorp now supplies more than 80% of the gas used by Railbelt utilities.
And so, a decade and changes later, we find ourselves on the verge of a serious multi-year gap between when supply gas contracts with Hilcorp expire (and may not be renewed due to supply constraints) and when a stable solution can be put in place. It's not a pretty picture: the most likely option for supply is imported natural gas, which today will cost 50-60% more than Cook Inlet gas. It also won't be able to come online for years – possibly not until 2030, according to utilities that have been trying to get gas supplies going.
The idea of importing natural gas will feel like a personal affront to Alaskans, who know there is a vast basin of gas on the North Slope. But North Slope gas can't reach Southcentral without a pipeline, estimated to cost between $40 billion and $60 billion (or, if a “high-speed line” were built solely to serve the people of Alaska, $10 billion ). It should be clear to anyone paying attention that the private sector is not vocally willing to take this risk, and that the political costs (and economic risk) of making such fiscal commitments with public funds seem too high to make it a realistic possibility be.
And even if a decision on a gas pipeline were somehow made tomorrow, it would take several years for the gas to reach communities in Alaska. Homer Electric Association's gas contract was set to expire in six weeks today before Enstar negotiated a one-year extension on its behalf. Other utilities' contracts expire in the next few years, with Enstar's contract expiring in 2033. If these contracts expire without sufficient supply to replace them, and before imported gas comes online, this will result in an increase in heat and energy supply costs and the cost of electricity will result in the 50-60 percent increase from imported gas being like one looks idiotic. Southcentral's current gas supply costs about $8 per thousand cubic feet of gas; The kind of cobbled together solutions that will be possible if Cook Inlet gas falls short in the coming years could cost nearly four times as much. Of course, this does not mean that the total electricity costs will quadruple, as the shortfall is only a fraction of the total amount of gas. But it will be an amount that will make life difficult for Alaskans across the state.
Because the fact is that the cost of electricity affects all other costs in the state. If there is less low-cost gas available for purchased electricity in Fairbanks, Golden Valley Electric Association customers will see rate increases as the cooperative resorts to more expensive fuel. If electricity costs rise along the Railbelt, rural communities across the state will receive less assistance from the Electric Cost Adjustment Fund because the difference between their energy costs and the costs of urban customers will be smaller. And everything from rent to retail goods to groceries is becoming more expensive as the higher costs of heat and electricity cause businesses and property owners to charge more to cover those costs. If you want to stimulate an already fragile economy, there is no easier way than to increase energy costs.
So what should be done? Gov. Mike Dunleavy has introduced a bill to reduce royalty obligations for Cook Inlet gas producers in an effort to encourage producers to engage in new exploration and production activities. That alone is unlikely to help, as a recent royalty-free lease sale in the Inlet generated little interest. Smaller producers Bluecrest and HEX outlined additional incentives at a legislative hearing that they said would help them commit to more production. Legislators must weigh up whether they consider such state investments to be sensible. Utilities are moving toward renewable energy sources with greater urgency than in recent years, but not only will these energy sources not come online for many years, but they cannot replace more than a fraction of gas supplies without massive investment; It would take a project on the scale of the decommissioned Susitna-Watana Dam to fully replace gas with electricity. It is a shame that our leaders lacked the will and strength to pursue Susitna-Watana a decade ago when it should have been built. Today we are paying for their inaction.
The bottom line, according to Enstar President John Sims, is that if lawmakers don't take action this year to develop more Cook Inlet gas in the “bridge years” to 2030, our options for avoiding a gas shortage will be more expensive and worse – and all Alaskans will feel the impact. As much as we don't like it, this means that government money must be used to support production. This could take the form of subsidies, loan guarantees or a refund of exploration tax credits. And where does the state get the money for such a program? It must come from existing budget sources or new taxes. No matter how you slice it, whether through new taxes, reduced government spending in other areas, or expensive imported natural gas, living in Alaska will become even more expensive. To do our part, we can and should save gas individually – by setting thermostats lower, paying attention to electricity usage, etc. – but that alone won't solve the problem, so we should also let legislators know that it's not optional is to deal with it this year.
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