Earlier this month, Marathon Petroleum Corporation (Marathon), the owner of the Kenai oil refinery and various related assets, announced the proposed sale of its inactive liquefied natural gas (LNG) plant, which it acquired from ConocoPhillips in 2018, to Harvest Alaska (Harvest), the pipeline and midstream affiliate of Hilcorp Alaska. Harvest, in turn, announced that it intended to use the plant to import and prepare regasified LNG (regas) for sale to Marathon, Chugach Electric Association (CEA), and other buyers in the Cook Inlet.
While the plant was previously used to liquefy and export gas during ConocoPhillips’ ownership, following its acquisition in late 2020, Marathon received authorization from the Federal Energy Regulatory Commission (FERC) to convert the plant into an import facility. Subsequently, Marathon announced in the fall of 2023 that it was “evaluating strategic options for the facility [including a] second phase, which could help address forecast natural gas needs in the Cook Inlet region.”
Although Marathon has yet to make the necessary changes to adapt the facility to its new purpose, it has continued to obtain extensions of the required FERC authorizations, which can be transferred with the sale of the underlying corporation. Currently, the authorizations allow the facilities to import and regasify gas only for Marathon’s own purposes at the refinery. Before the facility can sell regas to third parties, the authorizations will need to be expanded to include sales to others.
Followers of our weekly podcast with Michael Dukes will know that we have long advocated using Marathon’s Kenai LNG plant to help meet the Southcentral region’s increasingly urgent gas needs. We also view this option as much preferable to Enstar Natural Gas’ (Enstar) recent proposal to build a new LNG import facility with Glenfarne Energy Transition (Glenfarne) on the same site intended for the Alaska LNG export facility.
We favor the use of the Kenai LNG plant because it involves an existing and largely permitted facility. That advanced status presents a significant advantage in the current time-sensitive environment over the unpermitted and, as far as publicly known, not yet even conceptually engineered alternative pursued by Enstar and Glenfarne.
While neither proposal has presented cost or other commercial data, the existing Kenai LNG plant would also likely be more economical for users than the new build suggested by Glenfarne and Enstar. Finally, we are concerned that Enstar’s proposal to build its facility in conjunction with Glenfarne—the same company proposing the construction of the much larger Alaska LNG export facility—on the same lands as designated for the export facility could create significant complications, potentially leading to delays and costs that the standalone Kenai LNG facility would avoid.
However, Kenai LNG is not without its own significant complexities because of its proposed acquisition and operation by a Hilcorp affiliate.
The reason is Hilcorp’s current commercially dominant position in the Cook Inlet gas market.
As explained by the Antitrust Division of the U.S. Department of Justice (DOJ), the Herfindahl–Hirschman Index (HHI) is a commonly accepted measure of market concentration. “The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The measure approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.”
The agencies charged with federal antitrust enforcement—the Antitrust Division of the DOJ and the Federal Trade Commission (FTC)—generally consider markets with an HHI between 1,000 and 1,800 points to be moderately concentrated and markets with an HHI in excess of 1,800 points to be highly concentrated.
Compared to those standards, based on 2024 production data, the Cook Inlet gas sales market currently has an HHI of more than 6,200 points, well above the level that raises significant concern. To say the Cook Inlet gas market is highly concentrated is an understatement. As noted on the following chart, Hilcorp alone has a market share of over 75%. The top 2 producers alone have a combined market share of over 90%.
Measuring the market based only on those volumes that are actually sold into the market, rather than being for the producer’s own use, as are CEA’s, results in an even higher HHI of more than 8,100.
The proposed sale of the Kenai LNG plant to Harvest will, at the very least, reinforce Hilcorp’s dominant position. Even if all that the sale does is allow Hilcorp to replace sales through the Kenai LNG facility as its own Cook Inlet production decreases, it still will result in maintaining Hilcorp’s current, excessively dominant position. The sale could potentially even increase Hilcorp’s dominance if it enables it to expand its market share, for example, in sales made to CEA as production volumes from CEA’s self-owned source decline.
The typical reaction to such a proposed acquisition by an entity already in a market-dominant position is for the reviewing agency to either deny the transaction or to condition it on the divestiture of sufficient capacity to others to create enough competition to overcome the concern.
Such steps would be more than justified in this case. Apart from whatever pricing power it may be exercising, Hilcorp has already demonstrated that it has no hesitation in using (abusing) its market dominance even in remotely adjacent markets when it serves its purpose.
Last year, the Alaska Senate added during committee consideration of a related bill a provision that would have subjected Hilcorp, one of the largest oil producers in the state, to the same petroleum corporate income tax applicable to the state’s other major oil producers. Hilcorp responded, not on the merits of the bill, but by threatening to reduce further investments in the Cook Inlet area, exposing Cook Inlet buyers to even earlier supply risks than they already are facing. The threat was effective; the following committee considering the bill stripped the proposed measure.
The only reason that Hilcorp was positioned to have that much influence over the legislation was its dominance of the Cook Inlet gas market.
While that should disqualify Hilcorp from expanding its market dominance even further by acquiring a new entrant into the Cook Inlet supply market, there may be an alternative to the usual path of either denying the proposed acquisition or requiring an offsetting divestiture.
In Alaska, public utilities are subject to regulation by the Regulatory Commission of Alaska (RCA) of their rates and terms and conditions of service, including any reductions in or abandonment of service. Last year, the Legislature added the service of “liquefied natural gas storage” to the list of public utilities.
Either modifying last year’s provision or adding another to similarly regulate the services of selling regas from an LNG import facility or “tolling” (regasifying third-party LNG in the facility for a fee) would do much to ameliorate the potential for extending Hilcorp’s existing market power to include the operation of the Kenai LNG facility.
As the FERC explained when it authorized the use of the Kenai LNG facility to import gas, federal law establishes – and in doing so, precludes state – jurisdiction over certain aspects of such facilities. But federal jurisdiction does not extend to the sale of regas from such facilities nor to the terms and conditions of any tolling services the facility may provide. Indeed, section 3(e)(3)(b) of the Natural Gas Act, 15 USC 717b(e)(3)(b), explicitly precludes the Commission from exercising such jurisdiction.
Moreover, section 1(b) of the Natural Gas Act, 15 USC 717(b), has long made clear that the Act, and any federal preclusion it may create, does not apply to the intrastate (activities occurring within a single state) sale or transportation of natural gas. To avoid a regulatory gap over what are otherwise monopoly or near monopoly activities, those have long since been subject to state regulation.
We believe that any extension of Hilcorp’s currently overwhelming market power due to its acquisition could be adequately held in check if the Kenal LNG facility were regulated as to its rates and terms and conditions of service in the same manner as the state’s other public utilities.
But the Legislature may not decide to expand the RCA’s powers in the area.
If not, we anticipate that some will strongly urge the DOJ or the Federal Trade Commission to examine the proposed transaction’s anticompetitive effects and, in accordance with their usual practices, take steps to prevent it by either halting the acquisition or requiring Hilcorp to simultaneously divest sufficient assets to restore active competition in the Cook Inlet gas market. Even if the transaction has already closed by then, they may mandate Hilcorp to divest the plant.
Otherwise, the acquisition will only exacerbate Cook Inlet’s existing market dominance issue and heighten the risk of Hilcorp’s ongoing abuse of that position in both the Cook Inlet and adjacent markets.
Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.