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No decisions yet on LNG The future of the Nikiski LNG plant hinges on the supply situation for Cook Inlet natural gas Alan Bailey Petroleum News
The owners of the LNG plant at Nikiski on Alaska’s Kenai Peninsula are still evaluating whether to apply for renewal of the federal LNG export license that expires in March 2011, Dan Clark, manager of Cook Inlet assets for ConocoPhillips, told Petroleum News Sept. 4. Marathon Oil Co. and ConocoPhillips own the plant, with ConocoPhillips as operator.
Originally built in the heyday of Cook Inlet oil and gas development to provide a market for excess natural gas discovered during oil exploration, the plant went into operation in 1969, since when it has continuously exported LNG to Japan.
The original U.S. Department of Energy export license for the plant expired in 2009, and the plant owners’ application for renewal of the license beyond that year met a barrage of questions regarding whether there was enough gas remaining in the Cook Inlet basin to support both the plant and the needs of local gas and power utilities. In the event, DOE extended the license through to 2011 while, under the terms of an agreement with the State of Alaska, the plant owners committed to drill some new Cook Inlet gas wells and to make some seismic and well data available to potential Cook Inlet oil and gas explorers.
But, with gas supplies from the Cook Inlet basin continuing to decline, what are the chances of LNG exports from Nikiski continuing beyond 2011?
No conclusion yet “We haven’t come to any conclusion yet as to whether to pursue more exports beyond March 2011,” Clark said. “We think we still have time to get that (evaluation) done. So we still think it’s very possible that it could happen.”
The critical factor in any decision about whether to try to continue LNG production will be the question of how much gas will be flowing from the Cook Inlet gas wells, and whether that gas production will exceed the critical mass required to support the cost of renewing the export license and continuing to operate the plant, he said.
“It’s not just dependent on ConocoPhillips and Marathon and what we’re doing,” Clark said. “It’s dependent on other things that are happening in the basin.”
Other ramifications However, the ramifications of closing the Nikiski plant go well beyond the simple question of whether to continue the export of LNG from Alaska: As the only significant industrial consumer of natural gas in Southcentral Alaska, the plant performs a central role in the economics of the Southcentral gas industry. And, by on occasion diverting gas supplies earmarked for the plant, the plant owners can help bolster Southcentral utility gas deliverability, the rate of supply of gas to consumers, during peak demand during the most extreme cold of the winter — without this diversion of gas supplies, the Southcentral utilities would have run short of gas during a cold snap in January 2009, for example.
In addition, Enstar Natural Gas Co., the main Southcentral Alaska gas utility, has been discussing with the LNG plant owners the possibility of installing regasification equipment at the plant, to further increase gas deliverability during peak demand by converting LNG in the Nikiski storage tanks back to gas, as well as diverting the plant’s gas supplies. A proposal to use the plant in this way, in effect as a gas storage facility to support “needle peaking” supplies, was included in a gas supply contract between ConocoPhillips and Enstar that the Regulatory Commission of Alaska rejected in 2008, Clark pointed out.
Deliverability risk But, given the extreme swings in Southcentral Alaska utility gas demand between summer and winter, there’s also a more fundamental problem associated with gas deliverability, were the LNG plant to close, Clark said.
The cessation of LNG exports after March 2011, a time of year at which the utility gas demand is starting to drop as the weather starts to warm, would likely result in the shut-in of gas wells, many of them quite old, that would otherwise have produced gas destined for the LNG plant, he said.
“That creates a lot of risk,” Clark said. “You shut wells in and … you have risk of water encroachment. When that water comes into the well you potentially lose the well altogether.”
Then, as gas demand soars during the following winter, the extra gas from those shut-in wells would not be immediately available or perhaps not available at all. At a minimum, time and money would have to be expended in restoring the gas production, and it is quite likely that production rates could not be fully restored to their previous values.
Incentive for development In addition, the gas demand from the LNG plant provides economic incentives to drill new wells, to find and bring new gas reserves on line both for LNG exports and for local utility gas supplies. The local utility gas market, by itself, is very small in relation to the cost of exploring for and developing Cook Inlet gas.
And that market situation adds to the challenges for Cook Inlet gas explorers.
“Just from my perspective it’s already challenged because of the great amount of resistance that’s encountered in terms of getting export (license) approval,” Clark said. “We’re only getting short-term extensions, like this last one which is two years. To justify spending the type of money that it takes to get wells on production here in the Cook Inlet, gas producers need some assurance that they’re going to be able to flow their gas over a reasonable period of time. … It’s pretty difficult to justify spending a lot of capital to develop wells that might deliver gas (for only) one or two months a year.”
LNG imports? One solution that people are considering to tackle a pending shortfall in Southcentral utility gas is the possibility of converting the Nikiski LNG plant to an LNG import terminal, to bring LNG from overseas into Southcentral Alaska. Essentially, the flow of LNG at the plant would be reversed, to transfer LNG into the plant storage tanks from incoming LNG carriers. Regasification equipment would need to be installed, to convert the LNG into gas for supply into the Southcentral gas pipeline network.
Converting the plant in this way would require some investment but should be quite straightforward, Clark said.
“We’ve got a facility that’s there,” Clark said. “It’s got a marine dock, tanks, equipment and piping, all in good condition.”
Modifications would likely include alterations to the dock, to accommodate a variety of sizes of LNG carrier, he said.
North Slope gas The other source being considered for future Southcentral utility gas is the North Slope, with gas delivered either through a “bullet line” direct from the Slope, or from a spur line off a main North Slope gas export line. Both of these North Slope gas options would require industrial gas demand in Southcentral Alaska, to drive sufficient pipeline throughput to achieve pipeline tariff levels that would result in feasible prices for utility gas. Could the Nikiski LNG plant become a prime driver in that future industrial demand?
“The LNG plant is an obvious candidate that could do that,” Clark said.
If the plant were to cease its exports operations prior to North Slope gas being delivered into the Cook Inlet region, the plant could be mothballed or used for alternative purposes such as the importing of LNG. In part because of the low temperatures involved in LNG processing, but also because the plant has been well maintained, the plant is in excellent condition, with no corrosion, despite the plant’s age, Clark said.
However, a long-term supply of gas from the North Slope would warrant investment in some upgrading of the plant, in particular the upgrading of the plant’s 1960s era gas compressor technology.
“Probably the primary area where that (upgrade) would happen is in the gas compression turbines,” Clark said.
However, this and all other decisions regarding the future of the plant remain in something of a state of limbo, waiting while the plant owners monitor the evolving Cook Inlet gas industry before the end-date for the current LNG export license starts to approach.
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