Providing coverage of Alaska and northern Canada's oil and gas industry
July 2010

Vol. 15, No. 29 Week of July 18, 2010

Lawmakers intervene on LNG exports

Seven Democrats ask the DOE not to extend the Nikiski export license until companies agree to address looming local shortfalls

Eric Lidji

For Petroleum News

A group of Democratic state lawmakers want the federal government to make liquefied natural gas exports from Alaska dependent on local needs being met first.

The three state senators and four state representatives sent letters to the U.S. Department of Energy and ConocoPhillips Alaska on July 8 saying that near-term natural gas shortfalls in the coming few years must be addressed before shipments are continued.

ConocoPhillips and Marathon Oil have an application pending with DOE to extend the license allowing them to export LNG from a plant in Nikiski. The extension would give the companies two additional years, until March 2013, to make shipments to Asia.

The lawmakers’ complaint about exporting during a time of tight supplies is a familiar one in the context of the LNG facility. By intervening in the case, though, the lawmakers have made the first significant statement of opposition to ConocoPhillips’ and Marathon’s newest bid for an extension.

The plant was built in the late 1960s, when a regional surplus of natural gas supplies led the industry to seek out new markets. Today, though, tight supplies have utilities struggling to meet consumer demand over the next few years, leading to concerns about shipping billions of cubic feet of natural gas overseas.

The complication is that the facility serves two key storage functions in the local natural gas system. First, it levels the extreme seasonal swings of sub-Arctic Alaska, where the cold winters require more natural gas powered heat and electricity than the mild summers. Second, it provides a backstop against system failure on peak demand days, like the occasional stretches when the temperature stays below minus 10 degrees F.

While the lawmakers acknowledge these functions and want the plant to remain in operation, they believe the federal government shouldn’t give the go ahead on more exports while regional shortfalls exist. Enstar Natural Gas, the largest user in the state, still needs to find 900 million cubic feet of gas by 2011, another 1.1 billion cubic feet by 2012, and significantly more by 2013, despite recently inking a supply contract with Marathon.

“The primary factor to be considered when making this determination is whether there is regional need for the gas,” the lawmakers wrote to DOE.

Supplies proved adequate

ConocoPhillips and Marathon believe DOE already considered that factor in 2009, when it extended the current export license, now set to expire in March. At the time, DOE decided the Cook Inlet basin had enough reserves for the companies to ship some 99 Bcf to Asia over two years without putting too much pressure on local supplies.

The companies, though, are on pace to ship only about 60 Bcf by the time the license expires (the result of halving tanker traffic). Rather than asking for permission to ship more gas, the companies are now asking DOE for more time to complete that allotment, which they describe as having “already been determined to be surplus to regional needs on a reserve basis,” therefore “LNG to be exported during the two-year period will not be needed to satisfy regional demand for natural gas.”

That distinction quelled many of the disagreements that arose during the 2009 case, when the Palin Administration demanded more drilling from the companies in return for export and Chugach Electric Association appealed the decision to extend the license, saying that its failed attempts to secure a supply contract proved local needs were not being met. The Parnell Administration and the two large utilities have all supported the new extension.

Enstar and Chugach have expressed support in large part because they recently signed supply contracts, something both utilities were struggling to secure last time around.

Those contracts add complexity, though. While the lawmakers want to make sure the utilities get what they need before shipments leave for Asia, the utilities might not get what they need unless the license is extended. Under the two recently approved supply contracts, Marathon can curtail deliveries to Chugach and Enstar if the export extension is denied, causing the plant to be taken out of operation and area wells to be shut-in.

Combined, ConocoPhillips and Marathon have shipped some 1.9 Bcf to Asia each month this year, except in April, when shipments roughly doubled. The companies shipped some 6 million cubic feet more during the colder months of January and February than in March and May. This winter was relatively milder compared to recent winters.

Contracts and emergencies

The lawmakers are concerned that the plant meets emergency and systemic needs at the expense of near-term natural gas supplies. Those complexities arose this past April, during deliberations over a House Resolution supporting an extension of the license.

The House added an amendment noting the owners had “demonstrated their commitment to meeting local needs by voluntarily diverting gas from contractual export obligation when necessary to meet peak consumer demands in Southcentral Alaska.” But they rejected an amendment withholding support until “local needs for gas for heating and electrical production are met and license applicants commit to sufficient exploration for and development of remaining Cook Inlet reserves to replace the volume exported overseas.”

Rep. Les Gara proposed that second amendment, and also co-signed the letters to ConocoPhillips and the DOE along with Reps. Berta Gardner, Chris Tuck and Pete Petersen, and Sens. Bill Wielechowski, Hollis French and Bettye Davis.

The lawmakers plan to ask the state Attorney General to intervene in the case as well.

The Nikiski plant is the only LNG export facility in the United States.

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