Senate majority to regulators: reconsider the rejected gas storage project, and make BlueCrest produce

With Cook Inlet gas production declining and state regulators having rejected Enstar Natural Gas Company's proposed Kenai storage project, Alaska Senate majority members said Monday they are sending a letter asking the Regulatory Commission of Alaska to reconsider that denial. They also called on Gov. Mike Dunleavy to press the Department of Natural Resources to bring an undeveloped Cook Inlet lease into production, tying the delay to concerns about this winter's gas supply.

The commission denied Enstar's petition on July 8, calling advance determination "an extraordinary remedy" and finding the utility had not met the burden of proof to justify it. It also cited unresolved technical and timing questions, including whether the reservoir could serve as storage and whether Enstar needed the added capacity now. Enstar, which says the Kenai project is the only viable commercial storage option left in Cook Inlet, has asked the commission to reconsider.

The availability centered mainly on the governor's still-unseen gas pipeline bill. Senate President Gary Stevens said Dunleavy has told him he will present a bill Aug. 20, five days before the special session ends — a timeline Stevens called difficult, since lawmakers still don't know what the bill contains. The Senate has already passed two versions carrying roughly $1 billion a year in tax breaks along with timeline, liability and labor protections, both of which the governor declined to support. Senators said the project's estimated cost has climbed from about $45 billion to as much as $70 billion, changing the economics and the projected price of gas.

The sharper exchange was over which Cook Inlet operators should be pressed to produce. Senate majority members said BlueCrest Energy's Cosmopolitan lease is believed to hold as much as 300 billion cubic feet of gas — more than four years of Railbelt demand — and that outside companies have offered to help develop it and been turned down. "If DNR and the governor's office are allowing BlueCrest to sit on what we believe to be 300 billion cubic feet of gas, that is only hurting our situation this winter," Sen. Bill Wielechowski said. He said the department has let BlueCrest hold the leases for a decade without enforcement, calling the administration's handling of Cook Inlet leasing "colossal mismanagement."

Journalist Jeff Landfield of the Alaska Landmine questioned the focus on smaller operators. He said Hex Energy has received 75% royalty reductions worth about $5 million a year, that neither Hex nor BlueCrest owns a rig, and that Hilcorp has spent $1.5 billion in the inlet without seeking royalty relief. "Why is Hilcorp not being asked to help us with this problem when they're the ones who have demonstrated they can solve this problem?" Landfield said.

A Senate majority member responded that Hilcorp has gone without paying the state corporate income tax that other major producers pay, and that only one drill rig operates in Cook Inlet, shared between Hilcorp and Hex. Wielechowski said Hilcorp controls 90% of the leases and is capable, but that the state has mismanaged them. The available material includes no response from the governor's office, DNR, BlueCrest, Hex or Hilcorp.

Cook Inlet's daily gas production has fallen from about 450 million cubic feet in 2010 to around 200 million, against a winter peak demand near 320 million. The House and Senate Resources committees are scheduled to hold a joint meeting on gas supply Aug. 20.