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Econ 919 — Rethinking gas contracts

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Shaylon Cochran
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KDLL

Along Alaska’s Railbelt, utilities and their customers majorly depend on one important substance: natural gas from Cook Inlet.

Hilcorp is the major supplier of that natural gas — used to generate electricity and heat people’s homes. But according to utilities officials, Hilcorp says it may not meet those high natural gas needs during the next contract cycle.

Homer Electric Association General Manager Brad Janorschke said in his most recent report that while Hilcorp said it has enough gas to fill its existing fuel contracts, it doesn’t have firm gas available beyond that.

That shift could have different implications for different utilities.

Chugach Electric powers Anchorage and parts of the Kenai Peninsula. Natural gas from Hilcorp gas makes up about 50 percent of its current power supply.

“Our contracts with Hilcorp extend through March 2028, which gives us some time to look at other sources,” spokesperson Julie Hasquet said.

Other contracts are up much sooner.

Homer Electric’s gas contract expires at the beginning of 2024. And natural gas from Hilcorp makes up much more of its supply.

“Eighty-six percent. So, it’s a pretty significant number,” said Homer Electric spokesperson Keriann Baker.

She said it's true the utility could have been more proactive.

But she said it’s unlikely that when the contract expires, Hilcorp will pull back right away and leave the co-op without sufficient fuel.

“I think one of the questions that we have received is, are we concerned about running out of gas? And in the short term, we just aren’t,” she said.

Instead, she said the companies will work together on what their new relationship will look like.

It wouldn’t be the first time an oil-and-gas company has sounded the alarm about natural gas supply in the inlet. And about a dozen years ago, the state sent tax credits to oil-and-gas companies on the North Slope and in Cook Inlet to subsidize production among shortages. That’s also when the Cook Inlet Natural Gas Storage Facility was built in Kenai.

Larry Persily was a legislative staffer at that time and has been watching and reporting on Alaska’s oil and gas industry for years. He said Hilcorp’s notice could be an indication it wants to take stock of its investments before embarking on new projects.

“I think this is a notice from Hilcorp that they need to have a conversation with utilities,” Persily said. “‘How much gas do you want? How many years are you willing to sign for? What’s your future demand?’ And then Hilcorp would go out and find that future supply, all the while everyone knowing that future supply is probably going to cost more than the old supply.”

He said companies worldwide are cautious of new investment.

Globally, demand is up for oil and gas while supply is low. That’s why prices remain so high at the moment.

But companies want to make sure they’re investing in the right places before they make investments to increase that supply.

“Oil-and-gas producers are not reluctant, but a little cautious, about putting billions into new projects that may not produce until 2030s because they really don’t know where the world is going with fossil fuels, oil-and-gas demand and climate change,” he said. And they don’t want to be stuck with an investment into something that the world needs, but really not as much as they used to.”

Hilcorp, for its part, said in an email the company plans to drill 17 new wells this year to produce more Alaska natural gas. Spokesperson Luke Miller didn’t address questions about why Hilcorp was reducing its footprint on the Railbelt.

Meanwhile, utilities say they will form a working group to talk about electric reliability in Southcentral.

Hasquet, with Chugach Electric, said the group also was formed in recognition of the "expected decline of aging Cook Inlet assets" and the concurrent rise of interest in renewables.

“There’s just a lot of different things happening at once, and this seemed like a good time to get all these gas purchasers together,” she said.

Whatever the group decides, Baker with Homer Electric said the co-op doesn’t want to be focused on just one source of energy.

But finding suppliers has been hard when they’ve put out requests for proposals.

“We only had one person come back and give us a quote, and that’s Hilcorp,” she said. “And they’re great. We enjoy working with them, they run a great business. This isn’t an anti-gas thing, or an anti-Hilcorp thing.”

But she said the concern is what happens if something goes wrong.

“That is a very vulnerable position for people to place themselves in,” she said.

She said that’s one of the major reasons Homer Electric has been trying to diversify with renewable sources. Homer Electric set a goal to meet 50 percent renewable energy by 2025 and is in the early stages of several renewables projects to get there.

This story has been updated to clarify quotes from Julie Hasquet and Keriann Baker.

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