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March 2008

Vol. 13, No. 10 Week of March 09, 2008

Short circuiting a big gas pipeline

ANGDA chief Heinze responds to challenge from House Speaker John Harris to move in-state natural gas to Alaskans sooner

Kristen Nelson

Petroleum News

John Harris, speaker of the Alaska House, wants a way to get in-state natural gas to Alaskans sooner than the decade-plus a big gas pipeline from the North Slope could take to get sanctioned, built and operating.

At a Feb. 21 House open caucus Harold Heinze, CEO of the Alaska Natural Gas Development Authority, proposed what he called Plan B based on new North Slope gas supply opportunities and a small-diameter, high-pressure gas line.

But this is only a proposal in response to Harris’ challenge, Heinze said.

What ANGDA is working on is a spur line to take natural gas off a big-diameter gas pipeline going to either Canada or Valdez to move gas into Southcentral.

The agency has also been working with local utilities in preparation for an open season, when potential shippers must commit to space on a pipeline, and also on working together. That, Heinze told lawmakers, would produce some real advantages, “lowering transactional cost, getting a volume discount and frankly being able to look at ways to finance and do other things that wouldn’t be available to them individually.”

He noted that with the preference on gas pricing for in-state use, the extension the Legislature provided last year of a 5 percent severance tax on Cook Inlet gas to all Alaska natural gas used in Alaska “you have provided a market mechanism where people want to preferentially supply gas here in Alaska.”

Economics into Southcentral

Southcentral gas supplies “are starting to deplete to the point where we don’t have the supply for a large number of years into the future,” he said, but the immediate problem is the lack of deliverability from existing wells to meet peak winter demand. The Kenai liquefied natural gas plant is providing gas to utilities at peak demand.

“The issue right now is so close that it is fair to say if the Kenai LNG plant had not diverted some of its gas to the residential-commercial market several times already this winter, that we would have had a major failure of the gas system; we’re that close and we’re that much on the ragged edge,” Heinze said.

There is limited gas storage in Cook Inlet, with the LNG plant functioning as storage by reducing its demand in the winter when the gas is needed elsewhere. It would take hundreds of millions of dollars of new investment to provide gas storage to replace the role the LNG plant plays, he said.

ANGDA has looked at the economics of providing in-state gas, Heinze said, and: “Number 1, we’ve learned that the lowest cost to the consumer in Alaska comes from riding as far as you can from the North Slope in a big pipe — big pipes are tariff-efficient, so the farther you can ride, the closer you can get to the point of consumption in that big pipe, the lower the cost to the consumer.”

Industrial or export uses of gas would help pay the bill, lowering the cost to the consumer, he said.

LNG out of Valdez would help lower the bill for North Slope gas in Cook Inlet, as would industrial users in Cook Inlet.

North Slope gas exploration new

In responding to Harris’ challenge to get gas to in-state users sooner, “Plan B,” Heinze said he thinks there are several things that have changed recently on the North Slope, with possible supplies for in-state use from Foothills gas exploration — no discovery announcements — Heinze’s list of possible supplies shows 3-5 trillion cubic feet; 6-8 tcf of gas and liquid from Point Thomson; 1 tcf of Prudhoe Bay natural gas liquids; and 3 tcf of Prudhoe Bay royalty gas.

Anadarko Petroleum and its partners BG Group and Petro-Canada are drilling for natural gas in the Foothills some 75 miles west of the pipeline corridor, just southeast of the Umiat oil field, he said, the first time there has been exploration for gas on the North Slope.

If they make a discovery in the 3 tcf to 5 tcf range, “I think that sets up an interesting dynamic that’s different than anything we’ve had on the North Slope before,” because an explorer “has a lot of reasons to bring that discovery to development and production of gas very rapidly — that’s the nature of the business.”

Because of the 5 percent severance tax for in-state use of gas, “that explorer would have a lot of reasons to try to dedicate that gas to the in-state market,” Heinze said. And because the in-state market “is a finite market … whoever gets there first gets it.”

BG Group testified to the Legislature when AGIA was under discussion that “if they had gas reserves in Alaska, they would be very interested in an LNG project out of Valdez to monetize that gas,” he said.

Point Thomson a possibility

Then there is Point Thomson.

Heinze said two years ago he would have said it was in “legal limbo” and he couldn’t have predicted when it would come out of legal limbo. “And as we sit here today I’m very comfortable to look you in the eye and say within a matter of a year or two years I believe Point Thomson will be under very active development.” Heinze said he couldn’t say how that would come about, but believes “there’s a good chance that that field will be under active development in the near future.”

He said he thinks all the proposed plans of development for Point Thomson should be taken off the table and the reservoir should be depleted “using a single high-pressure gas line running over to a small line coming off the North Slope.”

Heinze told Petroleum News in early March that his depletion plan for the field is not based on separating oil and gas from the high-pressure condensate Thomson reservoir but on using one high-pressure line carrying initially condensate from cycling and some gas.

He said what he’s proposing would be at the boundary between blow down and pure cycling and would probably start off fairly close to what cycling would look like, but rather than lowering the pressure and separating liquids, then reinjecting gas to keep pressure up in the reservoir, he’s proposing keeping the pressure up on the surface and feeding condensate from the reservoir into a 2,500 pound-per-square-inch high-pressure line.

Between possible gas discoveries and Point Thomson, “I think you start to have a basis for gas, gas liquids and a lot of production off the North Slope,” he told legislators.

And with 8 billion cubic feet a day of gas reinjected at Prudhoe Bay, including ethane, propane and butane, “it seems it would be good conservation to take some of those ethane, propane, butane molecules that are produced every day and run them down that high-pressure pipeline.”

“As a matter of fact,” he told legislators, “I would think a case could be made that if that was not done, that that might actually constitute waste under the Alaska statutes.”

Alaska royalty gas, under statute, cannot leave the state without satisfying needs in Alaska. “I am the first one to point out that I would prefer not to buy my gas from the state, but having that gas available as a backstop is probably a very helpful thing.”

No Prudhoe gas needed

To meet immediate needs in the state, no Prudhoe Bay gas is required, Heinze said, but “if there was a high-pressure gas line” from the sources he mentioned, “I would think that at least one if not more of the Prudhoe Bay producers might think about” sending their gas to in-state destinations.

In response to the challenge of meeting in-state needs sooner, rather than later, Heinze said he’s “tried to define a north end (of a gas pipeline) that seems to me to reflect those things that are different now.”

By building on a Foothills discovery, Point Thomson, NGLs from Prudhoe Bay and royalty gas from Prudhoe Bay, “I think there’s a very high probability of a sufficient reserve base for an in-state gas system” in the range of 1 billion to 1.25 billion cubic feet a day, a system which would provide gas for “a large number of opportunities within Alaska” as well as opening the North Slope basin for gas production.

That gas would go “down through the spine of Alaska, through Fairbanks, the second-largest community in Alaska.” The gas could also be used for export and “to meet the power generation needs and heating needs in the broad Railbelt area for at least a generation, maybe more.”

Project would be 24-inch line

The in-state gas project would be a 24-inch diameter pipeline, which Heinze said ANGDA has estimated would take a workforce of about 2,000. “We think that’s very Alaska-sized; much beyond that number we probably don’t have enough people here in Alaska, but at the level of 2,000 people we do,” he said.

Heinze said he didn’t think the project could be done in six years, but said “we probably can do it a lot faster than I think a lot of people realize.”

One reason for that is funding from the Legislature has allowed ANGDA “to advance a lot of the concepts that we’re talking about here. They’re in the context of the spur line, but they are concepts that can be applied much more broadly as appropriate.”

Who would build the line?

Heinze said he visits with companies capable of building multi-billion dollar pipelines and he thinks there would be interest in building the 24-inch line. ANGDA, a public corporation of the state, “at some point feels its exit strategy is to find that sponsor that is capable of doing the work … in a way that results in a low cost of service to the Alaskan consumer.” At that point, he said, ANGDA would exit and move on to doing other things.

Financing for utilities is on the basis of the cash flow from customers paying for the service and Heinze said another role ANGDA could play would be to “find a way to bridge between that monthly cash flow of the utilities to a very long-term bond commitment and in essence be able to achieve a long-term, very reasonable price, fixed price, for gas and resulting electricity,” something that would benefit Alaskan consumers.

State shouldn’t lose control of NGLs

Rep. Mark Neuman, R-Wasilla, asked Heinze about gas to liquids and shipping them through the high-pressure line and about petrochemicals.

Heinze said one of ANGDA’s biggest concerns “is that the state, in the course of whatever decisions it reached, would lose control of the natural gas liquids.” All the work ANGDA has done, he said, shows “an inherent strong value associated with what I call the natural gas liquids — the ethane, propane, butane, the heavier hydrocarbon molecules that are gas, but they’re heavier than the methane.”

NGLs are the basis of the petrochemical industry, and the amount coming to the surface at Prudhoe Bay in 8 bcf of gas a day are “hundreds of thousands of barrels of ethane, propane, butane.” Heinze said that volume “would support two world-scale petrochemical complexes.”

Ethane is turned into pellets which are used by the petrochemical industry worldwide, he said. The required investment would be huge, he said, but such an industry would create hundreds of jobs and provide for more entrepreneurial opportunities in such things as specialty foam insulation that could be made in Alaska. As for shipping the pellets, Port MacKenzie ships wood chips, the pellets are basically inert: “If you can ship wood chips you can ship pellets,” he said.

A gas-to-liquids conversion could be done on the North Slope and shipped through that small-diameter high-pressure gas line. GTL is compatible with gas and condensates and are easily separated at the end of the line, Heinze said.

Is permitting possible?

Could the gas pipeline, or a petrochemical plant, be permitted in Alaska, asked Rep. Bill Stoltze, R-Chugiak/Mat-Su.

Heinze said ANGDA has a conditional right of way for a spur line from Glennallen into Palmer and then to Beluga and went through a public hearing process for that right of way. He said there were concerns expressed, but those were addressed. A gas pipeline is low impact “because it happens; it’s over with; and it disappears.”

Except for the tax benefits, Heinze said: The spur line would be the largest taxpayer in the Mat-Su Borough.

On the issue of permitting a petrochemical plant, he said: “A modern petrochemical plant is a very low emissions facility and then of course one of the advantages in the Mat-Su Borough is you’ve got a couple hundred square miles of air shed sitting by the Port MacKenzie area.” Between the level of emissions and the size of the air shed, Heinze said he didn’t think it would be a problem.

Gas-related plants, “whatever you think of them, they are all fairly clean; these are good technologies that don’t involve impurities,” he said. And against the concerns, he said, set the environmental advantages of getting gas into the area.

What would it cost?

Rep. Mike Doogan, D-Anchorage, asked what the economics would be of a line sized to meet the state’s internal needs.

For heating and electricity the in-state need is about 250 million cubic feet a day, Heinze said. If you add modest LNG export out of Valdez and some industrial or LNG use in Cook Inlet, “you very quickly add up to a billion cubic feet a day,” which would be compatible with a 24-inch line from the North Slope to both Valdez and Cook Inlet.

At an estimated cost of $5 billion, the tariff could be about $2 per thousand cubic feet.

It’s not a proposed project, Heinze said, but rather a response to Harris’ challenge to provide in-state gas, but could it work?

In discussions with people in the LNG business ANGDA has been told “if you could put gas in Valdez say for a $2 transportation charge from the North Slope, we’d be happy to build a plant, call with our ships, deliver it to our markets and everything else.”

But, he was quick to tell Doogan, that’s meaningless until those people stand up at an open season and make the multi-billion-dollar commitments required.

Not bucking AGIA

Heinze told lawmakers that ANGDA is not working against the Alaska Gasline Inducement Act process.

The south end of a system that comes off a mainline at Delta Junction could add up to 1.25 bcf a day. “And we believe that may be a very effective in-state system to tack on to something else.” This, he said, is just “a very different vision of what it takes on the north end” to meet in-state needs.

The work ANGDA did on its AGIA application “is a very strong statement of what I’m calling the south end of this state system,” Heinze said.

The small-diameter high-pressure 24-inch line is based on “a little different concept of the north end,” a north end not anchored at Prudhoe Bay, but at a spot called Toolik where the trans-Alaska oil pipeline starts up into the Foothills.

“… Think of this as the Toolik hub for gas on the north end,” Heinze said.

Pipes would feed into the Toolik hub from the Foothills, from Point Thomson, maybe from Prudhoe Bay, he said. “There will be other exploration discoveries … and they go to that hub.”

A pipeline runs from the hub to Glennallen, a 24-inch high-pressure line carrying 1 bcf to 1.25 bcf a day.

A line like that, maybe $5 billion, is still a lot of money, “but on the other hand that’s very Alaska-sized and it’s within reach,” he said.






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