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Gas rush: with shortages looming, Alaska firms seek new deposits

TYONEK -- Andy Clifford retreats to the "designated smoking area" maybe 100 yards back from the drilling rig and lights up a cigar. He's wearing a Hooters T-shirt and a very cool set of Ray-Bans. His face shows no apparent sign of anxiety.

"We're living our dream," he says. "But when you see the bills we're paying -- $5,000 here and $50,000 there -- you go, wow, we've got to find a lot of gas."

Clifford, 49, is an oil man, one in a growing stable of risk takers hunting new supplies of natural gas around Cook Inlet. They're drawn by a big surge in gas prices, plus forecasts of a looming shortage for gas-addicted Southcentral Alaska.

The rig juts up from a dusty square of bulldozed ground in the middle of bear-infested woods on the west side of the Inlet, about 13 miles outside the Athabascan village of Tyonek.

Normally Clifford, a geologist from Houston, Texas, wouldn't be around for the dirty work of actual drilling.

But this is a special day.

Rig workers are preparing for a routine but dangerous test that involves blasting knotholes into the well casing some 3,400 feet down, giving the gas a way to rush into the well and up to the surface.

With luck, Clifford and his partners in Aurora Gas -- a tiny company built on life savings, loans, frequent-flier miles and $25 million from a low-profile Oklahoma billionaire -- will hear gas roar out of the Long Lake No. 1 well like jet exhaust.

Government and industry leaders hope Aurora hears the roar too.

Cook Inlet gas is nearly gone, experts warn, jeopardizing the energy security for the state's most populous region.

For more than 40 years, Southcentral has relied on cheap and abundant Inlet natural gas. It heats most every home and business against the January cold that once again has us pushing up the thermostat.

Gas also is the fuel for generating most of our electricity. And one of the state's only major industrial complexes, the Agrium fertilizer plant on the Kenai Peninsula, will fizz out of business entirely without natural gas.

When drillers struck rich reserves of Cook Inlet gas beginning in the late 1950s, they were crestfallen they hadn't found more valuable black oil instead. They weren't even sure they could find any use for it. But by the summer of 1961 the pilot light was lit for the first natural gas customer, a Mountain View laundromat, and a clean-burning revolution blew away Anchorage's wood stoves, fuel-oil tanks and polluting coal-fired boilers.

Now comes a new reality: Inlet gas fields are expected to tap out early in the next decade without major new discoveries, government analysts say. And in any event, prices are going to rise. In fact, if you're paying attention to your gas and electric bills, you already know the uptick is under way.

But shortages and higher prices are adrenaline for oil and gas companies, and the Cook Inlet basin is in the midst of a modest drilling boom. Aurora and larger players such as Unocal already have made some decent finds and are piping new gas to market.

A recent U.S. Department of Energy study says Cook Inlet probably contains a great deal of undiscovered gas. But it notes that explorers will have to spend billions of dollars to find it -- spending that's already begun.

On a sweaty afternoon in early August, Clifford and his partners are concerned only with the mere $1 million or so they've got riding on Long Lake No. 1. They're pretty confident of a positive test. Fairly sure of that roar.

"There's so much gas here in Cook Inlet. That DOE report? I believe that wholeheartedly," Clifford says. Still, he notes: "It's not a slam dunk."

'THE BIG GAMBLE'

When oil companies began poking lots of holes around Cook Inlet in the 1950s, before Alaska became a state, they wanted oil, not gas. But they found lots of gas anyway.

After the 1959 discovery of the Kenai gas field, the most prolific of Cook Inlet's roughly 25 commercial gas fields, Union Oil Co. of California ran image ads in Newsweek magazine and Sports Illustrated touting, if not an oil gusher, at least "a source of wealth for the common good." Unocal added: "The big gamble in Alaska has started to pay off -- and the story is not yet over."

A few years later the oil companies would stampede to the North Slope tundra, where they succeeded in finding those oil gushers at Prudhoe Bay.

Around overshadowed Cook Inlet, developers built pipelines to gasify Anchorage. And they built two Kenai industrial complexes to export much of the Inlet's gas surplus -- a fertilizer factory run today by Calgary-based Agrium Inc. and a Conoco Phillips Co. plant that supercools natural gas into liquid form for shipment to Japanese utilities.

Also, the state's largest electric plant was installed on the west side of Cook Inlet, next to the big Beluga River gas field, with power lines to Anchorage.

For decades, gas was a cozy constant for Southcentral -- plenty to go around and dirt cheap. If you look at a chart of total Cook Inlet gas production, you'll see it has held steady at about 200 billion cubic feet per year since the late 1970s.

But what has civic leaders and utility operators worried is what the chart shows in coming years: a nosedive.

According to the DOE study released last summer, Inlet gas reserves will last less than nine years, and that's only with some economically painful cutbacks in industrial use, which historically has consumed more than 60 percent of Inlet production.The cuts would include a shutdown as soon as late this year of the Agrium plant, which provides more than 200 of the best-paid jobs on the Kenai. And liquefied gas exports would have to halt in early 2009.

"The mayor of Anchorage ought to be concerned if he's going to have enough energy for his city," says Joe Griffith, an ex-Air Force commander now running the state's largest power utility, Chugach Electric Association. At an Anchorage Chamber of Commerce forum last summer, Griffith and other utility executives called for a task force to devise an energy strategy.

Does the region really have an energy crisis? It's debatable.

The DOE study notes that nearly all the gas we're burning today was discovered by oil drillers before 1970, and only in the last five years have companies including Aurora, Unocal and a handful of others begun to look specifically for gas. The companies now have more accurate tools for finding it, including three-dimensional seismic surveys.

Using geological and economic modeling, the authors of the DOE study conclude that drillers likely could find 13 trillion to 17 trillion cubic feet of new gas around Cook Inlet, well beyond the 8.5 trillion cubic feet already found. Some of the new gas would come simply from massaging and expanding existing fields.

Failing new finds of conventional Inlet gas, other options include controversial coal bed methane extraction or a pipeline from the gas-rich North Slope -- a long-frustrated megaproject that boosters might never live to see.

HAPPY VALLEY

All these options come at a cost, however, and consumers already are paying the price of finding more Cook Inlet gas.

The DOE study estimates it will take an investment of up to $6 billion to find and develop half of that 13 trillion to 17 trillion cubic feet -- assuming the gas is even there.

To encourage drillers to get moving, major wholesale gas buyers such as Enstar Natural Gas Co., the utility serving Southcentral, are signing contracts to pay higher prices for gas and are passing the increase along to consumers.

A recent contract between Enstar and Unocal contained a landmark provision linking Cook Inlet gas prices to those set in the Lower 48 at a major gas pipeline crossroads in Louisiana called Henry Hub. The contract is significant because the Alaska gas market had always been an island with a large and disconnected supply, low local demand and thus low wholesale prices compared to Outside.

Critics including Kate Giard, a dissenting member of the state regulatory commission that approved the contract, see no reason to link Alaska gas prices to the volatile Lower 48 market.

Indeed, early last year Enstar raised customer rates 13 percent -- $8.38 a month more for the average home -- with much of the increase attributable to the Unocal deal.

Enstar said rates are rising again this month by about 17 percent, or $12.50 a month for the average home.

Though it hasn't signed new gas contracts, Chugach Electric also is warning that its rates will rise this year by 4 percent for homeowners and 6 percent for large commercial customers. This largely reflects the rising cost of natural gas priced in connection with crude oil markets, which hit record levels in 2004.

Enstar and other utility managers, as well as oil company executives, say supply contracts linked to the Lower 48 gas markets are probably the only way to set drill bits turning at Cook Inlet.

Oil companies can spend their money anywhere in the world, the executives say, so why invest in an isolated market where prices are low?

"It's now easier to make investments in Alaska," says Kent Hampton, North American natural gas marketing manager for Houston-based Marathon Oil Co., one of Cook Inlet's top gas producers and most aggressive drillers. Marathon competed for the Enstar contract that Unocal won, but now the price incentive for all players is improved, Hampton says.

The escalating prices, the relatively low level of drilling in Cook Inlet, and the impending gas shortage make the Inlet "a unique opportunity you rarely see anywhere else in the world," says Aurora's Clifford.

Inspired by the chance for richer sales, drillers are notching some successes.

In November, Unocal began shipping gas through a new 15-mile, $15 million pipeline it laid last summer from its Happy Valley gas discovery, amid spruce meadows about seven miles southeast of Ninilchik.

Unocal announced the Happy Valley field a year ago, calling it the company's largest Alaska gas find in 20 years with up to 100 billion cubic feet -- enough to supply all of Enstar's market for three or four years.

"Welcome to Happy Valley," safety director Donald Echternacht greets visitors to the site. Part of his job in summer is to walk the perimeter every couple of hours, looking for bear tracks. In March a brown bear mauled a big-game guide hired to protect a seismic crew working for Unocal elsewhere on the Kenai Peninsula.

A tall rig with an American flag on top runs round the clock to sink as many as 10 producer wells planned for the field.

Happy Valley ended an awful losing streak for Unocal, which drilled three expensive dry holes in search of gas before the company's luck turned.

"You could tell by the way people walked in the hallways," says Happy Valley project manager Ed Turner.

AURORA DREAMS

But the rising prices and the prospect of a seller's market have failed to ignite a true gas gold rush around the Inlet.

In May, federal officials canceled an offshore lease sale in the lower Cook Inlet for lack of any bidders.

Major companies including Conoco Phillips, BP and Exxon Mobil are more interested in bigger gas plays elsewhere around the globe, although Conoco remains the biggest of the Inlet's gas producers with its Tyonek offshore platform, which drains the big North Cook Inlet field. Marathon and Unocal round out the Inlet's Big Three producers.

Working at their ankles is a swarm of micros, including Aurora Gas; California-based Pelican Hill Oil and Gas, which also is drilling on the west side; NorthStar Energy Group of Tulsa, Okla., which hopes to introduce gas to Homer from a field near Anchor Point; and Pioneer Oil Co., an Illinois outfit that was the big star of a state lease sale last spring, bidding nearly $794,000 for acreage around the upper Cook Inlet.

Some of the companies, including Aurora, look to pick some meat from the bones left behind by the oil giants.

Aurora, formed in early 2000, already has scored some successes in refurbishing old, exploratory oil wells as gas wells. The company's thrift-shop approach is to identify good gas prospects by poring over old drilling logs, seismic data and other information often on file and open to the public in state offices.

In 2003 Aurora put its Moquawkie gas field near Tyonek into production. It consists of one well originally drilled by oil giant Mobil in 1965. In the little metal control houses next to the well, you can hear gas bound for customer Enstar whistling through, and the air is thick with the smell of new paint and warm circuitry.

So far, Aurora accounts for only about 1 percent of total Cook Inlet production, but the owners aim to be more than niche players.

They would also like to make a profit, something Clifford, Aurora's vice president of exploration, says hasn't happened yet.

Aurora began after president Scott Pfoff, an ex-Marathon man in Alaska, hooked up with Ed Jones, an engineer who attended the same church in Sugar Land, a Houston suburb. England native Clifford joined them as a third founder. He and Jones had worked for years with Australian mining and oil giant BHP.

The trio all longed to run their own show -- no more corporate coffee-and-muffin meetings, Clifford says -- and they staked their money on Cook Inlet. They embarked on a "road show," using a New York investment banker to find a major backer in Kaiser-Francis Oil Co. of Tulsa. It's headed by George Kaiser, ranked No. 43 last year on the Forbes magazine list of the richest Americans.

Aurora has an office on Benson Boulevard in Anchorage, and a company condo. Pfoff, through a side company that predates Aurora Gas, markets gas directly to local commercial customers.

Aurora's search for gas on the wild west side of Cook Inlet is difficult and expensive. No roads connect to the outside, so every pipe, motor and meal must come in by small plane or aboard a landing craft that plays the tides to reach the beach near Tyonek. To access its drill sites, Aurora hires villagers to clear alder-choked roads originally cut by a Japanese logging company.

The Long Lake No. 1 well is a typical Aurora play. Texaco drilled it in 1973, and though it was never tested for gas, the Aurora men judged it a good bet to auger into again.

But the roar they'd hoped to hear never came. The gas test failed, and Aurora plugged the well with cement.

"The most major setback we've had," said Jones, Aurora's vice president for engineering and operations.

Yet there's no despair in his voice. The search for Cook Inlet goes on, and Aurora was busy boring another hole last month.

Editorial Notes: Originally published Jan 2. -BA

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