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State, LNG owners look long term After January agreement state backs 2-year LNG export license extension; state, plant owners looking at further extensions Kristen Nelson Petroleum News
The issue used to be what to do with surplus natural gas in Cook Inlet. In recent years the issue has been whether there will be enough gas to meet local needs. That concern prompted the State of Alaska to ask that specific conditions be met before the U.S. Department of Energy approved a two-year extension of the export license for the Nikiski liquefied natural gas plant.
As reported in the Jan. 6 issue of Petroleum News, the Jan. 2 agreement between the state and the LNG plant owners — which resulted in the state giving unconditional support to the two-year extension application — actually looks at keeping the plant, a mainstay of the Kenai Peninsula economy, open indefinitely.
The agreement, which is contingent on DOE approving the export license extension, acknowledges that the state and the LNG plant owners “have a common interest in the continued operation” of the LNG facility and provides that within two months ConocoPhillips and Marathon Oil, the owners of the LNG facility, will issue a request for proposals to determine “available and prospective natural gas supplies” from April 1, 2009, through March 31, 2016.
Within six months the companies will confer with the state on filing for “blanket authority to export additional LNG volumes during the time period covered” by the April 1, 2009, through March 31, 2011, application, “with the intention that the natural gas used to manufacture these additional LNG volumes would be purchased from other natural gas producers.” These volumes would be in addition to the volumes in the two-year extension now being considered by DOE.
Within 12 months the companies will meet with the state to confer on filing a five-year extension application for the period following the end of the two-year extension now being considered by DOE. The natural gas for that period would be a combination of natural gas from ConocoPhillips and Marathon and natural gas purchased from other natural gas producers.
Industrial facilities built to deal with surplus natural gas The natural gas volumes discovered in Southcentral Alaska during the search for oil in the 1950s and 1960s were too large for home heating and local utility use, so in the late 1960s a fertilizer plant and a liquefied natural gas plant were built on the Kenai Peninsula, providing a way for the gas to be monetized.
Initially there was no gas exploration: Gas had been found as a byproduct of oil exploration and utilities and industrial users had gas supplies well into the future so there was no incentive for gas exploration.
Over the years known reserves of natural gas began to dwindle and concern grew about supply. Gas exploration began, along with development of gas discovered earlier during oil exploration.
Discoveries weren’t large enough to supply the fertilizer plant; after operating at partial capacity it closed its doors last year.
The owners of the fertilizer plant had no gas of their own.
Owners of the LNG plant have their own gas — the plant converts it to LNG and the owners ship it to Japan. That export is subject to a license from the Department of Energy and that license expires in 2009.
Last January the plant owners, ConocoPhillips Alaska and Marathon Oil, applied to DOE for a two-year license extension.
Such licenses are subject to local needs being met and in April Alaska Gov. Sarah Palin said the state would only support an application for a two-year extension of the export license if certain state conditions were met — conditions aimed at protecting Southcentral Alaska utility gas consumers.
The conditions set by the governor were binding contracts with local utilities to guarantee adequate supplies of natural gas for domestic utilities; continued exploration by the LNG plant owners for new gas to replace depleted reserves; and access for third-party gas producers to the LNG plant to encourage competition and new exploration.
A State has been negotiating t a Jan. 3 press conference, the governor said a state negotiating team had reached an agreement “with the owners of the LNG plant on key objectives that will ensure state energy supplies and … energy security for Southcentral.”
“The state now unconditionally supports the continued operation of the LNG plant,” Palin said.
The governor said the LNG plant is “a key driver in Southcentral’s economy as well as a driver for continued Cook Inlet natural gas exploration.”
The agreement includes commitments to develop additional natural gas reserves, opportunities for third parties to sell natural gas to the LNG plant and third-party access to certain seismic and well data.
The governor said a key part of the agreement is “reduction in gas exports if local gas utility requirements aren’t met.”
Palin said the agreement “represents progress and a new level of cooperation” and she hopes the agreement will provide DOE with the assurances it needs to approve the export extension.
New drilling at Beluga Jim Bowles, president of ConocoPhillips Alaska, thanked the governor and Deputy Commissioner of Natural Resources Marty Rutherford, who led the state’s negotiating team.
He said ConocoPhillips will be “bringing a new rig to our Beluga field for some drilling activity this year,” the first new drilling at Beluga in 10 years.
The company is also evaluating drilling activity on the Tyonek platform in the North Cook Inlet field. It would be the first new drilling at Tyonek in five years, he said.
The company could move a rig to the Tyonek platform and could “potentially” drill two to three wells there, Bowles said.
ConocoPhillips is the operator at Beluga where it owns one-third of the working interest; Chevron and the Municipality of Anchorage each own one-third of the working interest. The agreement the state struck with the plant owners requires ConocoPhillips to approve and submit authorizations for expenditures to the Beluga River unit working interest owners for two wells to be drilled in 2008.
On possible drilling from the Tyonek platform the agreement says: “If ConocoPhillips determines that market conditions warrant, ConocoPhillips will drill additional wells in the North Cook Inlet Unit.”
ConocoPhillips has no partners at North Cook Inlet where it holds 100 percent of the working interest.
Marathon: role of plant in winter “By working in cooperation, the State of Alaska, ConocoPhillips (and) Marathon, have been successful in addressing a lot of the issues and have come together as a partnership,” said Steve Hinchman, senior vice president of worldwide production for Marathon Oil.
“The Kenai plant really plays a critical and significant role in energy security and energy supply and has been a vital part of the economics of the Kenai Peninsula since 1969,” he said.
And “extending the life of the LNG facility will help to manage gas deliverability” during peak winter demand as well as helping to encourage “investment in the development of new resources.”
“Many people don’t realize what an important role that LNG facility plays in meeting that peak winter demand,” Hinchman said. From summer to winter, natural gas demand in Southcentral “can fluctuate by maybe two to three times.” The LNG plant can divert gas to utility use on those colder days.
Bowles noted that in the past there was surplus gas that would accommodate the seasonal swings. With surplus gas diminishing, “we can’t accommodate these swings as handily.” The gas is available, he said: “It ends up being more of a swing problem than it is a gas availability problem. The LNG facility is “a very good facility to handle swing and accommodate that type of market,” Bowles said.
Five wells a minimum for Marathon The relatively small size of the utility market in Southcentral is also an issue, Hinchman said. Industrial uses for gas, such as the LNG plant, help to encourage exploration and development of more resources.
Kevin Banks, acting director of the Division of Oil and Gas, said the reserve-to-production ratio has dropped and is now at about 8 years.
No one will explore for gas without a market, Banks said. “And what the LNG export license will provide is a marketplace for explorers, new development into the market,” providing incentives for new development.
The agreement specifies that Marathon will drill five wells: at Ninilchik, where Marathon holds 60 percent of the working interest and is the operator (Chevron holds the other 40 percent), the company will approve and submit AFEs to the Ninilchik working interest owners for two wells to be drilled in 2008.
At the Kenai gas field, where Marathon owns 100 percent of the working interest, it will drill three wells in 2008.
Hinchman said that with Marathon’s purpose-built rig the company has the capability “to drill somewhere between eight and 12 wells in a year and so five a year is probably the minimum.”
Gene Dubay, senior vice president of operations for Semco, the parent company of Enstar Natural Gas, said Enstar supports the state’s decision. “We agree that it’s very important to our supply needs in the interim and the long term to have the LNG plant in operation.”
Dubay said the ability of the LNG plant to provide gas on the coldest days of winters when the utilities are running short is “not just a theoretical issue.”
“The producers have diverted gas from the LNG plant for the utility’s needs on peak days: So it’s not what might happen; it has happened and that’s been very valuable to us.”
Hinchman also noted that keeping the LNG plant in operation provides an option: the plant could be turned around and used to receive LNG.
Ensuring supply The agreement says the export proposal, up to 99 trillion British thermal units from April 1, 2009, through March 31, 2011, would require a total of some 116 billion cubic feet for liquefaction and shipping.
The state’s concern is that the local utilities, Enstar Natural Gas and Chugach Electric Association, have supply agreements to meet their needs with the plant owners or other natural gas suppliers.
ConocoPhillips and Marathon have agreed to continue negotiations with Enstar and Chugach on gas supply agreements to satisfy local gas supply needs and to reduce exports if certain local gas supply milestones are not met. The companies have agreed with Enstar “on a non-binding term sheet that includes price, volume, and term,” for sale of natural gas by the plant owners to Enstar during the export period; the gas supply agreements need to be executed and submitted to the Regulatory Commission of Alaska.
The companies also agreed to negotiate a gas supply agreement with Chugach for unmet gas requirements.
For as long as Chugach has unmet gas requirements, the plant owners “will voluntarily reduce the LNG export quantities authorized by DOE.” According to the agreement, Chugach has 5.2 bcf of unmet gas requirements for the entire year 2010 and 4 bcf of unmet gas requirements for Jan. 1-March 31 of 2011.
The unmet gas requirements will be reduced “by volumes no longer required by Chugach due to merger or acquisition, loss of customers, efficiency improvements, conservation measures, or any other reason.” The unmet gas requirements in the agreement “cannot be increased and once reduced, a reduction is not reversible.”
Data for sale ConocoPhillips and Marathon will catalogue the well log data and seismic data in the Cook Inlet lease sale area that could be sold to other parties. “Data will be made available on an ‘as is’ basis,” the agreement states.
Each company provided a map of excluded areas for which they will not make data available for sale. The maps, along with the agreement, are available online at the Division of Oil and Gas Web site at www.dog.dnr.state.ak.us/oil/. The catalogue of available data will be ready by Dec. 1, 2008.
Terms for sale of data, including price and confidentiality, are to be “commercially reasonable.” Where other companies have an interest in the data, ConocoPhillips and Marathon “will work, in good faith, with the co-owners” to make data available for sale.
Under certain conditions, ConocoPhillips and Marathon will buy natural gas from third parties for use at the LNG plant.
The conditions include: “excess liquefaction capacity that can be utilized in an efficient manner”; excess capacity on LNG tankers at the same time that there is excess liquefaction capacity at the plant; a contract for the sale of this third-party LNG; and “a DOE export authorization in an amount that allows for the export of such LNG without violating the export cap imposed in the export authorization” after taking into account ConocoPhillips’ and Marathon’s cumulative gas.
Bowles said the agreement to make the LNG plant available to third parties “is also critical for development of new gas here in the inlet.”
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