LNG plant key to stable Cook Inlet market

Supporters say renewing Nikiski facility’s federal export license for two years would be good for economy, industry and state

Rose Ragsdale

For Petroleum News

With what many believe is a natural gas shortage unfolding in Cook Inlet, renewing a license for a plant in Nikiski to ship liquefied natural gas to Asia seems at first glance a frivolous, if not foolhardy, proposition.

But ensuring that the 40-employee processing facility, tiny by world standards, continues to operate much as it has for the past 38 years is actually vital to the continued health of the natural gas market in Southcentral Alaska, according to Bill Popp, former oil and gas liaison for the Kenai Peninsula Borough.

“It’s counter-intuitive, so many people have trouble understanding how important the LNG plant is to the natural gas market in Cook Inlet,” Popp told Petroleum News in an interview Sept. 10. “It would be a step backwards if we lose the LNG plant.”

Popp, who now serves as executive director of the Anchorage Economic Development Corp., spent years stumping for oil and gas development in and around the Cook Inlet basin.

But moving a few miles north to Anchorage hasn’t stopped Popp from weighing the consequences of a failure by the U.S. Department of Energy to renew the plant’s export license.

Owners ConocoPhillips Alaska Inc. and Marathon Oil Co. applied earlier this year to DOE for a two-year renewal for 2009-2011 of their license to export LNG.

Popp said renewing the plant’s export license is important for numerous reasons. Not only is the LNG plant an important contributor to the Kenai Peninsula economy and tax base, but it is also part of a delicate balancing act that enables consumers in Southcentral Alaska, including Anchorage, to enjoy a reliable supply and relatively low prices for natural gas.

Plant provides supply cushion

Popp said the region got a taste of what can happen when there is no cushioning “interruptible” supply of gas available last winter when Aurora Gas cancelled its contracts with commercial and industrial customers.

Popp said a “domino effect” ensued in which Tesoro Alaska’s refinery was unable to obtain needed gas supplies for power generation and had to resort to using part of the oil it normally refines into products such as diesel and propane to generate its own power to run the refinery. The diverted supplies, especially propane, resulted in price hikes that hit the Alaska consumer pretty hard, he added.

Conditions likely would have deteriorated further if the 272 million-cubic-foot-per-day LNG plant had not voluntarily cut its gas consumption by 50 million cubic feet per day during the peak demand period, according to Harold Heinze, executive director of the Alaska Natural Gas Development Authority.

“Until something else comes along to take its place to accommodate the variation in gas demand in the market, we need the LNG plant,” Heinze said Sept. 11. “Having it in the system is more help than problem.”

Without the LNG plant, gas producers in Cook Inlet likely would have to shut in wells during part of the year because they wouldn’t have a market for their gas, Popp said. This would lead to less production and potentially lost reserves because shutting in gas wells can damage the underground formations where the gas deposits are located, he said. It also would lead to cost increases and thus, higher gas prices.

Popp and Heinze are among scores of knowledgeable Alaskans who support the LNG plant’s continued operation. They say the facility’s presence in the market encourages independents and others to explore for more natural gas reserves in Cook Inlet, and taking the LNG plant out of the mix would result in excess gas supplies and remove the incentive for additional exploration.

Cook Inlet currently has nearly 1.7 trillion cubic feet of natural gas reserves. The basin could hold additional trillions of cubic feet of gas, according to state and industry estimates.

Another supporter of the LNG plant’s continued operation is Tony Izzo, former CEO of Enstar Natural Gas Co., the largest gas utility in Alaska and the major gas distributor in Southcentral Alaska.

“The Kenai LNG plant provides gas supply stability for Southcentral Alaska by backing up gas supplies for local utilities during periods of peak demand on cold days or when failures occur in the gas supply system,” said Izzo, now an industry consultant, in a letter to DOE. “If the plant ceases operation in 2009, local utilities would be forced to invest or pay others to invest in costly peaking facilities. This cost ultimately would be passed on to consumers.”

Describing the Cook Inlet gas market as being in transition, Izzo also cited the other reasons that Popp and Heinze offered for the plant’s continued operation.

Looking to the future, the LNG plant and other larger gas users such as Agrium Inc.’s fertilizer plant and Tesoro’s refinery, also could play an important role in bringing North Slope gas to Cook Inlet via a spur line.

Heinze, who is currently working to develop a spur line to Southcentral Alaska for North Slope gas, said the LNG plant’s gas consumption is part of the economics that will make the spur line cost effective.

Popp agreed. “We need enough demand to get the North Slope gas pipeline project together, and the LNG plant is part of that demand.”

Governor less enthusiastic

This reserved approach, which mirrors sentiments expressed by some of the utilities and is intended to protect local gas consumers, has officials of the Kenai Peninsula Borough worried.

“We believe the conditions that Gov. (Sarah) Palin wants to put on the license renewal are probably fatal to the application,” said Bruce Richards, special assistant to the mayor of the Kenai Peninsula Borough. “We wrote the governor in July and asked her to reconsider the state’s position on the license. We’ve gotten no official response yet, but we’ve had some conversations with members of the Palin administration.”

Richards said the borough’s main fear is the governor’s position will trump all the positive expressions of support DOE has received for the LNG plant’s continued operation.

“We wonder why the state would put all that on the license. Our position is to take it off the license and negotiate the conditions with the companies,” he said. “Without the license, none of it would be happening anyway.”

Richards said another worry is that the plant’s original permit was issued in 1969. “If the plant closes, we don’t know if it would ever be permitted again.”

One sign the administration may be listening is the governor’s call for a trial-like hearing on the renewal application.

U.S. Sen. Lisa Murkowski added her voice to this appeal in a letter to DOE in June. She said DOE will need to resolve substantial issues of fact regarding the supply of and demand for natural gas in the Cook Inlet region in order to rule on the application.

“Scheduling a trial-type hearing, as requested by the State, will ensure that all of the relevant facts are thoroughly evaluated and an appropriate decision is reached,” Murkowski added.