In oil-rich Alaska, an energy crunch

A shortage of natural gas besets the state's most populous area. In rural outposts, energy costs spike.

On the shore of Cook Inlet, site of Alaska's oldest oil- and gas-producing basin, the Agrium Inc. fertilizer plant for four decades produced a steady supply of urea and ammonia for international agricultural and industrial clients. Agrium's exports supported a prosperous petrochemical business, employing hundreds and bolstering local tax rolls.

But operations ceased in December. The reason? Lack of natural gas, the feedstock for Agrium's products. Despite its perch atop a petroleum basin, Agrium couldn't secure enough natural gas to stay in business.

Agrium's woes symbolize a larger energy dilemma: Raw resources are in the ground, but lack of infrastructure and poor economies of scale hinder access to them, putting Alaska in an energy crunch.

Natural gas at the North Slope – America's largest known but untapped conventional natural-gas supply – is 700 miles away and unavailable. There's no pipeline to convey North Slope natural gas to consumers, in or out of Alaska.

So Alaska's most populous region relies on local energy – Cook Inlet natural gas – for heat and power. But natural gas known to be in Cook Inlet is expected to last eight more years, and local utility costs have risen as markets tighten.

"It's the goofiest thing in the world, to be sitting on top of some of the biggest energy reserves in the world and have these challenges," says Bill Popp, president of the Anchorage Economic Development Corp.

Reviving exploration in Cook Inlet

Except for the mile of road that holds the Agrium plant, a liquefied natural-gas (LNG) facility, a Tesoro refinery, and a BP facility, few obvious signs remain that Kenai was the "Oil Capital of Alaska," as an old Chamber of Commerce slogan boasted.

The first major Cook Inlet natural-gas discovery – and still the biggest – came in 1959. Since then, most of the known natural gas was found while explorers were seeking oil, and almost all was discovered before 1970.

Until recently, having enough gas to supply local needs was not a worry. The worry was, rather, that local needs were too minuscule. This part of Alaska may hold most state residents, including the far-north metropolis nicknamed "Los Anchorage," but as a natural-gas market, it is a lightweight. Dramatic seasonal swings in demand make it a tricky market to serve.

Consequently, industrial users are deemed essential to anchor production in this so-called "stranded" market. But industrial users are now down to one: North America's sole LNG export facility, next door to Agrium. The plant, owned by ConocoPhillips and Marathon, has shipped LNG to Japan since 1969, soaking up Cook Inlet natural gas that had no other market.

Cook Inlet's proven reserves are down to 1.7 trillion cubic feet. But the basin holds potential for another 13 trillion to 17 trillion cubic feet of undiscovered reserves, according to the US Department of Energy.

Interest is finally perking up, with companies in recent years drilling specifically for natural gas. A new agreement among ConocoPhillips, Marathon, and the state should stimulate more exploration, officials say. The pact trades state backing of a renewed federal LNG export license for increased natural-gas searches and promises to give residential utilities first dibs on gas in times of shortages. "Hopefully the new development will ensure that there's no further decline in the reserve base," Marty Rutherford, Alaska's deputy natural resources commissioner, said at a recent news conference.

In rural outposts, 'energy refugees'

While Anchorage residents fret about future energy supplies, rural Alaskans face a dire situation right now. Skyrocketing prices for diesel and other fuels, compounded by costly air and barge transport, have created "energy refugees."

"[Energy] is so expensive in the villages that people are being forced to leave, especially people with young families, because they cannot afford to make ends meet," says Meera Kohler, president of the Alaska Village Electric Cooperative, which provides electricity to 53 remote villages where electrical costs can be four times those in Anchorage.

Costs of electricity, heating, and transportation fuel can account for up to 40 percent of family expenses in rural Alaska, Ms. Kohler says.

Some pioneers are seeking long-term solutions in alternative energy.

Geothermal, wind, hydro, and tidal power may hold the most promise in a state dotted with volcanoes, scoured by stiff breezes, and surrounded by water. Alaska's Division of Oil and Gas is soliciting bids for leases to develop geothermal energy beneath Mount Spurr, a volcano on the Anchorage skyline. Fairbanks's Chena Hot Springs Resort is renown for putting the underground heat that warms its pools to a variety of other uses.

A handful of native villages have erected wind turbines, and Anchorage's electricity cooperative has wind-power plans. Solar energy – seemingly a long shot because of daylight-deprived winters – is getting a look, with panels installed in some communities. Even fish oil has fueled generators at Denali National Park.

Such small-scale projects face economic hurdles, however.

"Alternative energy is very expensive capital-wise," says Kohler, whose cooperative includes wind-powered villages. Federal grants have funded villages' alternative-energy projects, but prospects are dim for future aid, she says.

Another energy option is coal. Alaska is overflowing with it – from the Arctic, where the Inupiat Eskimo village of Atqasuk is named for "the place to dig the rock that burns," to the Kenai Peninsula's Kachemak Bay, where dark seams are exposed on coastal bluffs. Some officials tout coal gasification as an option to restart Agrium's operations.

Others consider coal a misstep. "Coal is the dirtiest fossil fuel out there," says Bob Shavelson of Cook Inlet Keeper, an environmental group. "We can go backward to coal and climate change ... and habitat destruction, or we can go forward to renewable energy and long-term jobs."