Marathon looks to raise rates on KNPL

Built more than 40 years ago, small pipeline once supplied Agrium, now dedicated mostly to LNG; rates could jump again next year

Eric Lidji

Petroleum News

The Marathon Oil Co. is asking state regulators to increase the shipping rates on a small Cook Inlet pipeline used to supply gas to several Nikiski-area facilities.

The 20-inch Kenai Nikiski Pipeline, or KNPL, runs 17.5 miles from the gas fields around Kenai to the pipeline hub north of Nikiski and can hold around 167 million cubic feet of natural gas at maximum capacity.

Marathon requested the increase because of declining throughput on the line.

When KNPL became a regulated line back in 2003, state regulators and the pipeline owners created a rate structure based on throughput. The original rates had been based on an average annual throughput of 42,303,500 thousand cubic feet of natural gas. In 2007, the actual throughput on the KNPL was 37,270,806 mcf.

Should regulators approve the increase, the firm transportation rate — or reserved space on the KNPL — would jump 24.6 cents, or 62 percent, to $2.071 per thousand cubic feet of daily capacity per month, while a cheaper interruptible transportation rates would rise by less than a penny, or 13.5 percent, to $0.0681 per mcf. The KNPL does not currently have any firm shippers.

The new rates would go into effect on April 1, 2008.

The Regulatory Commission of Alaska is taking comment on the issue through March 20.

KNPL built in 1965

Between April 2005 and April 2006, the LNG plant accounted for 70 percent of the deliveries along the KNPL, while the Agrium plant accounted for 17 percent, according to testimony given by Marathon in December 2006.

The remaining deliveries went to a variety of other users, including the Tesoro Refinery, the BP gas-to-liquids plant, the Chugach Bernice Lake power plant, Aurora Power Resources Inc. and small deliveries to the city of Kenai through the Enstar Natural Gas Co.

KNPL depends on LNG and Agrium

Marathon and the Union Oil Co. of California built the KNPL in 1965 to supply those two plants, both under construction at the time, with gas from the Kenai gas field and later from the Cannery Loop field, both situated just south of the city of Kenai.

While the KNPL is designed to bring gas northbound, the northernmost section from Nikiski to the Kenai Pipeline Junction can actually run in both directions.

In 1994, Marathon acquired most of Unocal’s interest in the Kenai gas field and KNPL. Today, Marathon is the sole owner of KNPL.

When Marathon and Unocal built the Kenai Kachemak Pipeline, or KKPL, in 2003, the KNPL took on an additional role, connecting south gas fields including Ninilchik, Happy Valley and Kasilof to gas-consuming facilities to the north.

That interconnection led to the KNPL becoming a regulated pipeline.

Assessing the future of the KNPL at the time, Marathon took a conservative approach, looking only as far as 2018, because, “Due to the uncertainties surrounding both the LNG plant and the Agrium plant, there is no basis for predicting an economic life for KNPL that will extend beyond 2018,” Kent Hampton, a long time manager with Marathon, said in testimony before the Regulatory Commission of Alaska in May 2006.

The state’s decision to support an extension of the export license for the LNG plant provides some security for the larger customer on the line, but the closure of the Agrium plant in December could mean continuing declines in throughput for the KNPL during the coming year.

Marathon wouldn’t say how much of the gas going through the line last year went to the Agrium plant, citing “shipper-privileged information,” but a spokeswoman said the Southcentral gas market “is very tight, meaning that supply and demand are fairly well balanced. All available production attached to KNPL finds a market; so, KNPL pipeline throughput is mainly production driven.”