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Vol. 11, No. 40 Week of October 01, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Cook Inlet gas crunch

Crisis or deliverability issue: Southcentral Alaska players debate gas future

Kristen Nelson

Petroleum News

There may or may not be a crisis in the Cook Inlet natural gas market, but there are uncertainties, especially with so much of Southcentral’s energy needs met by natural gas, the Southcentral Alaska Energy Forum heard in wrap-up comments in Anchorage Sept. 21.

The forum, organized by the Alaska Oil and Gas Conservation Commission and co-sponsored by the State of Alaska, the Municipality of Anchorage, the Kenai Peninsula Borough and the Matanuska-Susitna Borough, was chaired by commission Chairman John Norman.

Bill Popp, special assistant to the mayor of the Kenai Peninsula Borough, said he thinks the answer to whether there is an energy problem is “maybe,” with Cook Inlet in transition from a system driven by abundant natural gas. Southcentral “developed a very significant, expensive infrastructure to produce, deliver, consume natural gas in the basin and it can’t be discarded out of hand.”

Popp said he does not agree with suggestions to just shut down the liquefied natural gas plant and the fertilizer plant and said “policy makers need to educate the public on the issues.”

He agreed that the energy mix needs to be diversified, and called for dialogue between industry, utilities and producers, “instead of scrabbling for the scraps, which I think some are prone to do.”

“We’re going to have to maintain our existing industries to the greatest degree possible and not just arbitrarily, out of hand, discard them,” while at the same time encouraging new industries “and potentially new resources, such as the North Slope gas pipeline.” And he called for getting rid “of the one-liners” and starting to have “meaningful discussions about the true economics that underlie these various projects. … If we can’t do that, then we do have an energy problem,” Popp said.

Carolyn Dunmire of Dunmire Consulting, a firm which did an alternative energy study for the Alaska Natural Gas Development Authority, said she thinks there is an energy problem in Southcentral. Natural gas production volumes are down, she said, and “a very big portion of the infrastructure for Cook Inlet energy is reliant on natural gas.” Having all of an area’s energy come from natural gas isn’t good, she said: “there should be some diversity in supply.”

She said that there are some unique resources Southcentral might be able to use, tidal and geothermal power, and said if Alaska is interested in looking at those resources it should pursue research and demonstration projects, because probably that research won’t happen elsewhere.

The utility nightmare

Tony Izzo, until recently the head of Enstar Natural Gas, Southcentral’s local distribution company, said he believes the area does face a crisis, one of “continuity of flow in terms of maintaining pressure in the pipe.”

What if there wasn’t enough gas to maintain pressure in the pipe, he asked. “If demand greatly exceeded the supply then you’d lose that entire system,” Izzo said. And if you had to take the entire system down, you’d shut off “half the state’s population.”

You’d have to go house to house, he said, shutting off the meters. You’d have to test the line, some of it hydrostatically — with water — and once the testing was complete you’d have to re-introduce gas.

“It would take months to re-introduce gas, to vent … the air out of the system.” Then you’d have to go house to house again, getting individual homes back online.

That nightmare scenario, he said, is why you get some “heightened anxiety, heightened uncertainty” from the state’s utilities. “Because the minute there isn’t enough flow, you’re talking about a winter without heat — and that would be a disaster.”

Prices have gone up over the last few years, he said, because providing natural gas is capital intensive.

As to the future, is it a spur line or is it LNG? “You can’t throw all your eggs in one basket and then find out later on that you missed it because the options for alternatives don’t exist.”

Unocal: deliverability crunch

John Zager, Chevron’s Alaska general manager, said he doesn’t think there is a crisis, but “I think we definitely have a deliverability crunch here.”

The exploration and production business faces two risks, one of which, geologic, the companies are used to dealing with. But there’s another risk in Alaska that the industry doesn’t really face in the Lower 48, and that’s market risk. Zager said he thinks market risk “is the real uncertainty for players.”

And while established companies have large fields and markets and are exploring, Zager thinks there is a lot of uncertainty for new players. Agrium, one of the big purchasers of gas, may not be here past next year. If you drill wells and look to bring on production in five years, you can’t count on Agrium; and you can’t count on the LNG plant past 2009, when its present exploration license expires, he said.

Enstar and the utilities “are pretty well supplied, especially if either of those plants shuts down,” he said.

The spur line introduces another uncertainty: “If that comes in it would certainly be competition for the market, essentially displacing the market and putting another whole risk into your exploration program.”

When you plan an exploration program, he said, you have to know you can sell what you find. It’s fine to talk about getting more exploration in Cook Inlet, but there are market risks companies don’t face in the Lower 48. “In the Lower 48, if you have a discovery, you hook it to a pipe and basically you’re connected to the infinite market.”

Zager said he thinks conventional exploration and production is the direction that’s needed for the next 10 years. What happens next depends on how successful that exploration effort is: with a big gas discovery there would be a significant delay before any non-conventional solution would be needed. He said he hadn’t given the LNG alternative much thought, but said it seemed like something that “could be brought on in relatively short order at relatively competitive prices.”

ConocoPhillips: Strategic decisions the challenge

Scott Jepsen, Cook Inlet manager for ConocoPhillips Alaska, said he believes the challenge is one of “strategic decisions.”

One of the biggest decisions to be made “is do we destroy demand?” Should we encourage the fertilizer plant to stay in business? Should there be support for an export license extension for the LNG plant?

The industrial natural gas users, Jepsen said, create “spinning space (capacity) for the utilities.”

“What happens on a very cold day is gas goes from industrial users to the utilities. It’s hard to say what would happen if you didn’t have that kind of spinning spare capacity.” The utilities can call up the industrials and ask for gas, he said. “It’s an unwritten sort of agreement that we have, but it’s one that makes the whole system work, it’s kind of a license-to-operate sort of deal.”

While it seems contradictory to say keeping large industrial consumers of gas in business increases the supply to the utilities, “this is a very shallow market: this is not the market like we have in the Lower 48,” he said.

“If you’re a newcomer coming into Cook Inlet to look for gas and you find gas, it would be a travesty if you couldn’t sell it,” but the utilities “by and large are pretty taken care of” for the next nine or 10 years, Jepsen said.

And while importing LNG to Alaska is “almost unthinkable” to people, it could be a transition for exploration or for the spur line, and provides an option. “Those of us in the energy business, we have to deal with uncertainty all the time. … You always have to have options.”

Curtailment equals crisis

Harold Heinze, CEO of the Alaska Natural Gas Development Authority, said he became convinced there was an energy crisis in Cook Inlet a couple of years ago because of the decisions he saw people making.

He said discussion of curtailing the fertilizer plant is “really significant” and wouldn’t have been discussed five or 10 years ago.

And one of the major electric co-ops wants to replace one of its old generators “and it doesn’t have enough gas reserves for our bankers to loan the money.”

Tony Izzo “scared the devil out of me” a couple of years ago, Heinze said, “when he said if we don’t get some more gas under contract pretty quick then in a matter of a couple of years I’m going to stop hooking up new subdivisions.”

Heinze said the utilities have had wake-up calls and both Agrium and the LNG plant have come to terms with the fact “there’s a decision out in front of them.” State and federal agencies have also put resources into trying to understand the problem.

He said he thought there were good ideas on the table and didn’t want to see any of them crossed off the list, but said he thought anything that got serious consideration was going to have to get to the project stage so people who make commercial and regulatory decisions can weigh in, “because what you have to do is put something real in front of them that they can make some judgment on — not an idea.”



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Gas for Fairbanks utility could short Agrium

The issue of a gas shortage in Cook Inlet is already before the Regulatory Commission of Alaska.

Enstar Natural Gas Co. has applied to the commission for an expedited approval to supply natural gas to Fairbanks Natural Gas, per an agreement the companies reached Sept. 26.

Aurora, which has supplied gas to Fairbanks Natural Gas, told FNG May 1 that it would stop deliveries Oct. 1 because it is “not economic” to continue production.

FNG supplies gas to some 800 customers in Fairbanks, Cook Inlet gas which the company liquefies at a Point MacKenzie plant and trucks north to Fairbanks. Enstar has provided transportation service for the gas to the liquefaction plant since 1999.

Enstar said FNG has purchased gas from Aurora Power Resources or Aurora Gas LLC, but that sales agreement ends Oct. 1. “As a consequence, FNG has an immediate need for approximately 0.8 (billion cubic feet) per year of natural gas to supply its liquefaction plant and to serve its Fairbanks customers,” Enstar told RCA in a Sept. 26 letter.

Enstar had only a transportation agreement with FNG, and said it is not obligated to stand by with a gas supply for FNG. FNG argued that Enstar was obligated, since the FNG liquefaction plant is within Enstar’s service area.

FNG told Enstar it needs Cook Inlet gas only until Alaska North Slope gas is available.

The agreement the companies reached covers only Oct. 1, 2006, through June 30, 2008, and Enstar said it is not agreeing to any commitment beyond the term of the contract, “and is not agreeing that it has any legal obligation to serve FNG.”

The large-volume, short-term need would be met by a special contract, Enstar said.

Bradford Keithley of Jones Day, attorney for Chevron, told the commission in a Sept. 22 letter that Chevron engaged in negotiations to sell gas to Fairbanks Natural Gas “at an earlier time, before entering into its most recent sales contract with Agrium” and made an offer to sell gas, an offer which FNG rejected.

Chevron subsequently sold the gas to Agrium, Keithley said. “By the time that FNG attempted to reopen those discussions following Aurora’s notification this year that it would no longer provide gas, Chevron had already reached its sales agreement with Agrium.”

Keithley noted that Enstar, in a Sept. 21 filing with the commission, suggested that one potential way for Enstar to provide gas to FNG would be “for Enstar to acquire additional gas from Chevron under its existing contracts.”

If that occurred, Keithley told the commission, Chevron would have to examine the facts and its contracts to determine what its obligation would be.

If Chevron is obligated to provide additional gas to Enstar for FNG, “the consequence will be that Chevron will need to reduce its deliveries over the coming year to Agrium below the levels previously contemplated.”

—Kristen Nelson