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Vol. 15, No. 16 Week of April 18, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

More time for exports

Kenai LNG owners to ask for another two-year extension to export license

Eric Lidji

For Petroleum News

If you had to pick one facility that symbolized all the complexities of the Cook Inlet basin, you couldn’t do much better than the liquefied natural gas export plant in Nikiski.

It keeps the lights on by tempering seasonal swings, but also sends huge amounts of gas overseas at a time of declining reserves. It’s unique locally as an anchor for industrial demand, and unique nationally for being the only LNG export facility in the country.

The importance of the Kenai LNG plant is up for discussion again because its owners, ConocoPhillips and Marathon Oil, recently said they plan to ask the federal government for an extension to the license that allows them to ship gas overseas. The current license expires on March 31, 2011. The companies want to extend that for another two years, and plan to submit an application to the U.S. Department of Energy before the end of May.

The DOE last extended the license in 2008, but this request is different. ConocoPhillips and Marathon don’t want to ship more gas to Asian markets. They just want more time to export the gas they’ve already been cleared to ship. The extension through 2011 let the plant export 99 trillion British thermal units, roughly 99 billion cubic feet, to the Pacific Rim, but in the first year it only shipped 27.9 bcf, about a quarter of the allowed volume.

That distinction, and a scary winter in 2009, when an extended January cold snap led natural gas users to pull harder on the system than ever before, seems to have changed opinions of some stakeholders who questioned the prudency of the previous extension.

Systemic case for plant

Dan Clark, ConocoPhillips’ manager of Cook Inlet assets, announced the plan at a Senate Resources Committee meeting on April 8 and made the economic case for the plant: $130 million per year in benefits to the state and local economies, $60 million per year in royalties and taxes to the State of Alaska and the Kenai Peninsula Borough, and more than 100 direct and indirect jobs that bring in around $17 million in personal income annually.

The bigger argument for the plant, though, is systemic. In winter, the plant diverts supplies to local markets when the system can’t deliver all the gas demanded of it. In summer, it keeps wells producing at an even keel despite huge seasonal swings. With Cook Inlet deliverability declining and storage in short supply, the plant guards against a system-wide failure on the coldest days and reservoir damage during the rest of the year.

The argument against extending the license has mostly been about local supplies. Why, the question goes, would Alaska ship any natural gas overseas when existing reserves are declining in the Cook Inlet and exploration efforts to replace are slow going at best?

As recently as January, the owners wouldn’t publically commit to seek an extension to the license, leading lawmakers to ponder short-term imports. With the owners on board, the challenge now is convincing the federal government to keep allowing domestic supplies to go overseas, and convincing Asian markets to continue to buy from Alaska.

Broader support this time

While the arguments for and against exports haven’t changed in the past year, this round appears to have more initial support from Southcentral stakeholders than the 2008 attempt.

The two largest natural gas customers in Alaska, Chugach Electric Association and Enstar Natural Gas, as well as the Parnell administration have offered some support for continuing exports, citing the plant’s ability to temper swings and improve deliverability.

Some lawmakers are on board, too, while others, including some of the Senate Democrats who have questioned exports in the recent past, are offering conditional support.

“As long as we can meet in-state needs and get affordable gas to the consumers of Cook Inlet, I’m in full support of this, but I just want to make sure that we’re meeting the needs of our consumers first,” Senate Resources Committee Co-chair Sen. Bill Wielechowski, D-Anchorage, said.

The situation on the ground today is not radically different than it was in 2008.

Deliverability improved slightly this winter, but mostly because of a milder season this year compared with the extended cold snaps of early 2009. As in 2008, the two largest natural gas customers in Alaska, Chugach Electric Association and Enstar Natural Gas, have recently filed new gas supply contracts with the Regulatory Commission of Alaska.

The various stakeholders now seem to agree on the importance of the plant.

In March 2010, when it still remained unclear whether the owners would try to get another extension, a cooperative of utilities even offered to buy the plant.

Still, some old claims about the plant have already re-emerged. At Senate Resources, Sen. Hollis French, D-Anchorage, asked if Japan pays less for Alaska gas than Alaskans.

“There’s maybe been a handful of months in the history of exporting that that’s maybe been true,” Clark said, adding that the average price Enstar charges for Alaska gas in Southcentral is currently around 63 percent of what Japanese customers pay for it.

A “bridge” solution for area

Phillips Petroleum and Marathon built the plant in the late 1960s to market surplus gas from Cook Inlet, where massive deposits had been found in the search for oil. Today, the plant serves an opposite role, anchoring gas production in the region. (Local demand is generally thought to be too small to justify development, although exact production costs remain proprietary, to the consternation of regulators and some lawmakers.)

Testifying before Senate Resources, Clark presented the plant as a “bridge” between now and the day when Cook Inlet has more storage options or some group figures out how to bring the massive North Slope natural gas supplies down to the Anchorage area.

Enstar, which in recent years has looked into building a pipeline from the North Slope to Southcentral, is touting this second option, saying the export facility could theoretically anchor North Slope production, just as it currently anchors Cook Inlet production.

Asked by Co-chair Sen. Lesil McGuire, R-Anchorage, about the prerequisites for such a switch, Clark said the 40-year-old plant needed work, particularly to its compressors, to last for another 40 years. “It would require some investment. It would be less than having to build a new plant, but it would require a good bit of work to do that,” he said.

Clark said the facility would only export gas beyond what is needed locally, but “there are certainly adequate reserves for the next several years. I think the questions and concerns that continue to come up are around deliverability on those coldest days.”

While the supply crunch of early 2009 moderated some in the past year, mostly due to a milder winter this year, Clark noted that the system is still at risk on the coldest days.

“All of the systems will have to run well to be able to meet those demands,” Clark said.

While ConocoPhillips has backup options behind the main compressor at the Beluga River field, there is a several minute lag between one failing and the other kicking on.

No additional wells planned

The general support for the export license means less leverage, in one sense.

To get support for the 2009 extension from the Palin administration, ConocoPhillips and Marathon agreed to several terms, including drilling wells and negotiating with utilities.

ConocoPhillips has drilled six Cook Inlet wells since early 2008. “The results weren’t gangbusters, but we are seeing good delivery and volumes out of those wells,” Clark said.

ConocoPhillips doesn’t see the need to tie this extension to further drilling because it doesn’t want to ship additional volumes of gas. Ultimately, future drilling in Cook Inlet may have more to do with how much gas Asian markets can handle, Clark suggested.

“When a deal is signed with a particular utility or a deal is signed with a buyer in Japan, the particular terms of that contract is what works best to drive drilling activity,” he said.

The owners signed the existing contracts with Tokyo Electric Power Co. and Tokyo Gas Corp. in 2009. Those expire with the license in March 2011 and need to be revised.

“That’s a major piece of work that’s ahead of us to make this happen,” Clark said.

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