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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2009

Vol. 14, No. 7 Week of February 15, 2009

Alaska trying to swallow the elephant

Deliberations, debates and discussions continue on plans, ideas and schemes for meeting growing in-state demand for natural gas

Eric Lidji

Petroleum News

Rep. Jay Ramras has been repeating an old joke lately.

Q: How do you eat an elephant? A: One bite at a time.

The elephant in this case is the on-going attempt to supply natural gas to the more urban parts of Alaska as soon as possible. And there are a lot of hungry people at the table.

Ramras quartered the elephant.

The Fairbanks Republican sponsored four resolutions, each tackling a different obstacle facing an in-state gas pipeline, known as the bullet line. The resolutions address the need for adequate supplies, additional industrial demand and a stable regulatory framework.

The House passed those resolutions on Feb. 9, but not without familiar points of debate that have complicated other attempts to move ahead on building an in-state gas pipeline.

Rep. Les Gara, a Democrat from Anchorage, noted that while the resolutions might have good intentions, they don’t have the same weight as a state statute, and are non-binding.

“We’re not going to move the gas line forward by passing this resolution,” Gara said.

Gara wanted the resolutions to do more to prioritize natural gas for in-state markets. One of the resolutions pushes for the liquefied natural gas facility on the Kenai Peninsula to be able to export more gas. Gara and others have been critical of those exports.

Gara also expressed concern that a bullet line might lock consumers in to higher priced natural gas because even at capacity it would carry lower volumes than a big pipeline.

Rep. Mark Neuman, a Republican from Big Lake, said the resolutions signaled intent.

“We talk about these resolutions as if they don’t have a lot of authority, but in my mind they do. It sends somewhat of a message to industry that Alaska is concerned about our gas and our people,” he said, adding that having more gas pipelines in the state would diversify economic opportunities and allow for the creation of value-added industries.

The four resolutions passed by varying degrees ranging from unanimous to 28-6.

Taking a similar bite of the elephant, Gov. Sarah Palin on Feb. 11 reiterated plans to unveil legislation this month to supply the Railbelt with natural gas within five years.

Her staff is currently reviewing the Right of Way Act and the Pipeline Act to make sure the bill won’t clash with natural gas operations in the Cook Inlet or on the North Slope.

To help with the bill, Palin said she is bringing on Harry Noah, the executive director of the Trust Land Office and former commissioner of the Department of Natural Resources.

“He’s got a lot of great experience in putting together big projects,” Palin said.

Enstar addresses “disconnect”

Although not specifically mentioned in the resolutions, the company doing the most in pursuing a bullet line in Alaska is Southcentral utility Enstar Natural Gas Co.

For Enstar, the biggest bite of the elephant is a gap between when the utility needs new natural gas supplies and when natural gas producers might be able to meet those needs.

The company would like to build a pipeline from the Gubik fields in the Brooks Range foothills to meet shortfalls expected by 2014, but Anadarko, the company exploring those fields, recently told lawmakers it mostly likely couldn’t start producing gas before 2016.

Mark Hanley, public affairs manager for Anadarko, called it “a little bit of a disconnect.”

The disconnect is an issue of timing, not communication, according to Colleen Starring, regional vice president for Enstar, who spoke to the Anchorage Chamber of Commerce on Feb. 9. She said Enstar always knew its timetable might not align with Anadarko’s.

“If we got into another drilling season and we did not get favorable results or discussions then we would look to another supplier or another source for the gas,” Starring said.

Enstar expects to get an update from Anadarko in April or May, Starring said.

But Enstar needs new supplies soon. The company is facing a shortfall as soon as 2011.

Another problem is deliverability, or the amount of natural gas Enstar can call on at any given time. A January cold snap proved the system can’t deliver as much as it once did.

One solution is storage, which would allow Enstar to use excess supplies in summer to meet excess demand in winter. Enstar is even looking at pumping natural gas into old reservoirs, but the effort is moving slowly and the company might need to bridge a gap.

“And so we’ve also considered, as early as 2011, we could be importing a tank or two of (liquefied natural gas) to meet the deliverability needs,” Starring said.

A bullet line would solve those supply problems, but there are still big bites to swallow.

One is route. Enstar prefers a route down the Parks Highway, which would be shorter, and therefore cheaper, than a route along the Richardson Highway, but would also pass through several state and national parks, including Denali National Park and Preserve.

“We’re going to try to do this. We’re going to try to go through the park,” Starring said.

Starring said the management of the park is interested in converting its buses to gas.

The proposed route would also bypass Fairbanks and connect back to the city with a 33-mile pipeline. The move would save $200 million, but worries some in Fairbanks, who wonder if the extra pipeline might carry additional tariffs, driving up the cost of gas.

Enstar plans to privately finance the roughly $4 billion pipeline with a 75-25 debt to equity ratio, and recently announced a $1 billion commitment from its owner, but said it needs the “right governmental framework” and a “fair, predictable market price” for gas.

FNG wants bonds for LNG

Anchorage and Fairbanks stare at different ends of the elephant.

While Anchorage is trying to sidestep declining Cook Inlet production, Fairbanks wants to get off diesel fuel both to avoid the next price spike and to meet air quality standards.

Fairbanks Natural Gas, the lone natural gas provider in Fairbanks, wants the state to issue $250 million in bonds to help fund a liquefied natural gas facility on the North Slope.

“It’s not a grant. It’s not anything that would come out of the general fund,” said Dan Britton, president of Fairbanks Natural Gas.

The bonds would cover a North Slope liquefaction plant, a fleet of tanker trucks to bring shipments down the Dalton Highway and a facility in Fairbanks to turn the LNG into gas.

“The gas could be delivered to customers in 2011,” Britton said.

Fairbanks Natural Gas has a 10-year contract with Exxon for North Slope gas. The utility currently buys natural gas at a premium from Cook Inlet and trucks it north to Fairbanks.

Britton said the delivered cost of gas produced at the plant could range between $11 and $17 per thousand cubic feet depending on the terms of the bond and the price of oil. That’s compared to the $23.35 per thousand cubic feet customers currently pay.

At current oil prices, Britton said the average household in Fairbanks would save about $877 a year, while at peak prices from summer the savings would jump to around $3,000.

“The savings to consumers is significant,” Britton said.

Fairbanks Natural Gas is currently partially regulated. While the company can change its rates at will, it must notify state regulators, as well as provide frequent supply updates.

But Britton said the Regulatory Commission of Alaska would set rates at the plant.

The LNG plant would give Fairbanks Natural Gas an opportunity to build out the distribution grid in Fairbanks, a major undertaking that needs to be completed before the community can take advantage of a large diameter pipeline at some point in the future.

Because the plant wouldn’t supply Southcentral, it could have trouble gaining traction among state lawmakers. Britton said that while the plant would only supply Fairbanks and North Pole, it has statewide benefit because it would help the Flint Hill Refinery.

The plant could also produce propane for rural communities currently burning diesel fuel.

Britton said he presented the plan to members of the Interior delegation, and is currently working to craft language for a bill and find a sponsor. Britton said he would prefer for the Fairbanks Natural Gas project to be separate from a bill that would allow several public corporations to issue multimillion-dollar bonds to invest in energy projects within the state.






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