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Vol. 13, No. 1 Week of January 06, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska cuts deal on LNG

Governor, Kenai plant owners reach agreement on state support for export license

Petroleum News

Alaska Gov. Sarah Palin said Jan. 3 that her administration and the owners of the liquefied natural gas plant on the Kenai Peninsula have reached an agreement that would give state support for a two-year extension of the LNG plant’s federal export license. Plant co-owners Marathon Oil and ConocoPhillips filed for the extension in January 2007. The present export license expires in 2009.

Palin said the agreement ensures that there will be adequate supplies of gas for local utilities, requiring, among other things, that Marathon and ConocoPhillips develop additional natural gas reserves in Cook Inlet. Specifically, ConocoPhillips agreed to approve at least two wells for 2008 drilling, and Marathon agreed to approve five wells for its 2008 program.

Under the agreement with the state both companies are required to continue negotiations with Enstar Natural Gas Co. and Chugach Electric Association on gas supply agreements to satisfy local gas supply needs; and if certain local gas supply milestones are not met, the companies agreed to reduce exports below the LNG export quantities requested in the application.

Additionally, ConocoPhillips and Marathon agreed to allow third parties the opportunity to monetize their gas production through the LNG plant, meaning they will purchase natural gas from other producers “when practical for the production of LNG at the Kenai LNG facility,” the governor’s press release said.

The companies have also committed to sell Cook Inlet seismic and well data to other potential oil and gas explorers in the Cook Inlet region on a commercially reasonable basis to encourage exploration and development.

The agreement includes “a framework for cooperation” between the state and the LNG plant owners for “future applications to the DOE (U.S. Department of Energy) for additional LNG export authorizations, with the common goal of making a minimum of 30 million standard cubic feet per day of plant inlet capacity available for natural gas purchased from other producers,” the governor’s office said.

State will support future extensions

If additional LNG export license extension applications are filed by ConocoPhillips, the governor’s office has agreed to support them “provided, among other things, that the natural gas to be exported is excess to the requirements of the regional utilities for the period covered by the application,” the governor’s office said, noting that it recognizes the local market alone is not large enough or flexible enough to sustain exploration and development activities in the Cook Inlet basin.

“It is our hope that, by reaching this agreement, the U.S. Department of Energy will have the assurances necessary to approve their request,” said Palin. “We understand that the export approval is just one step in the process of securing a future for the LNG operation and look forward to working with all stakeholders in achieving the goal of improved gas supply security for Southcentral.”

The Kenai LNG facility, located in Nikiski, is the only LNG export plant in North America. The facility began operations in 1969 and today employs 58 people, the governor’s office said, noting that the plant also supports 128 other jobs in the Kenai Peninsula community.

The LNG plant contributes approximately $50 million in royalties and taxes to the state and local economies, the governor’s office said.

“This agreement improves the prospects for future drilling in the Cook Inlet and supports continued operation of the Kenai plant,” said Jim Bowles, president of ConocoPhillips Alaska. “This new level of cooperation is a very positive outcome and is essential for a solution to the natural gas development issues facing Southcentral and the state as a whole.”

“Extending the life of the Kenai LNG facility will help manage gas deliveries during peak winter demand and encourage new development,” said Steven Hinchman, Marathon’s senior vice president of worldwide production. “This agreement is clearly a win-win for the State of Alaska, the economy of the Kenai region and the local utility needs.”

“It is important that the producers and the state can work together,” said Gene Dubay, senior vice president of operations for Semco, which the governor’s office identified as Enstar’s parent. “In this case the state intervention was the catalyst to reaching agreement on our near-term supply needs.”

The agreement, a summary and maps can be found at:

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