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Vol. 14, No. 5 Week of February 01, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas for Alaska by 2014?

From Palin to lawmakers to industry, in-state gas is a focus for the coming year

Eric Lidji

Petroleum News

The new rallying cry in Alaska is first gas in five years.

Throughout much of last year, high heating oil prices in Fairbanks and dwindling natural gas reserves in Anchorage created public outcry for a new in-state supply of natural gas.

Now, as state lawmakers reconvene in Juneau, the issue is suddenly a high priority item.

In the first three days of the new session, a Senate committee heard testimony from three groups hoping to build smaller gas pipelines, Gov. Sarah Palin pledged to get gas flowing in five years and a Fairbanks task force gave recommendations for meeting that deadline.

Meanwhile, the Alaska Gasline Port Authority told lawmakers that a weak Lower 48 natural gas market means Alaska should keep the liquefied natural gas option alive.

Can ANGDA and Enstar partner?

The Alaska Natural Gas Development Authority, a public corporation, and Enstar Natural Gas, a private utility, continue to pursue separate projects for bringing gas to Alaskans.

“I think the competition on the in-state side is great,” Harold Heinze, chief executive officer of ANGDA, told members of the Senate Resources Committee on Jan. 21.

ANGDA is working on a pipeline between the Beluga power system, west of Anchorage, and Fairbanks. The line would ideally connect to larger pipeline headed to the Lower 48.

The project is in competition with a bullet line promoted by Enstar that would run from the Gubik gas field in the north through Fairbanks and down to the Beluga power plant.

Last summer, Palin announced a partnership between the two groups. Heinze said he thinks a public-private partnership is the best way to advance the project, but admitted that the two sides have failed to work together in the months since the announcement.

Enstar believes the circumstances have changed since summer. In its ongoing search for supplies, the company is finding it harder to get long-term contracts, according to George Schreiber, president and CEO of Continental Energy Systems, Enstar’s parent company.

“Our thinking has changed dramatically. We’re going to have to get gas from the north to bring south because gas in the inlet is just not there,” Schreiber told the committee.

Enstar is pushing forward on a “bullet line” that would connect a northern gas supply, like the Gubik field near Umiat, directly to markets in Fairbanks and around Anchorage.

Enstar believes it has funding for the $4 billion project. But while Enstar isn’t asking the state for financial help, Schreiber said the company needs “a governmental framework that promotes private sector investment” and “predictable and fair market prices for natural gas.” For years, Enstar has battled with state regulators over natural gas prices in Alaska.

Although confident, Enstar still isn’t completely sure that the natural gas reserves at Gubik can support the project. And even if the supply is proven, Enstar would need large industrial anchors to moderate shipping rates and make the gas affordable for customers.

Those anchors include the Agrium fertilizer plant coming back into operation, the Kenai liquefied natural gas facility exporting at capacity and the natural gas grid in Fairbanks being fully expanded, thereby nearly doubling residential gas demand along the Railbelt.

A push for gas by 2014

Thinking along similar lines, Rep. Jay Ramras, a Fairbanks Republican, sponsored four interconnected resolutions designed to get a bullet line sanctioned by November 2010.

The resolutions ask the governor to work toward getting a supply commitment of 180 billion cubic feet per year, reopening the Agrium plant and expanding the LNG facility.

In her annual State of the State address on Jan. 22, Palin said she would introduce legislation in February to facilitate “a smaller, in-state gas line” that could deliver 460 million cubic feet per day of natural gas to markets in Alaska within the next five years.

Palin did not offer further details and several questions remain outstanding, including the source of natural gas for the pipeline, the entities responsible for building and operating the pipeline, how the pipeline will be funded and the route it would take through the state.

Under the terms of the Alaska Gasline Inducement Act, the state cannot give funding or preferential tax and royalty treatment to a pipeline carrying more than 500 million cubic feet per day.

TransCanada and Denali, the sponsors of competing proposals to build a gas pipeline from Prudhoe into Alberta, both told lawmakers recently they plan to complete separate studies of the natural gas needs of Alaska, a required document for any major pipeline.

Worries persist in Fairbanks

An in-state gas pipeline would solve different problems in different parts of the state.

In Anchorage, a pipeline would offset declining Cook Inlet fields, but in Fairbanks it would offer an alternative to diesel fuel, which strained household budgets this summer when oil prices spiked, and would also help the city meet federal air quality standards.

A task force in Fairbanks came together last year to assess the options on the table.

In a draft of its findings released on Jan. 23, the group calls the ANGDA spur “fatally flawed,” saying there isn’t enough gas in Cook Inlet to ship north and Fairbanks can’t wait for a pipeline from the North Slope to join up with the spur sometime around 2018.

The task force also expressed concern about the Enstar line. In addition to questions about sufficient supply and adequate demand, the report worries about the route.

First, any pipeline running along the Parks Highway, as preferred by Enstar, would need permission to pass through several parks, including Denali National Park and Preserve.

Second, the task force worries about Enstar’s plan to run its pipeline 40 miles west of Fairbanks and connect to the city with a lateral line, which could increase the cost of gas.

Return of the All-Alaska line

A recurring theme over the first week of the session has been the growing concern over weakening natural gas markets in the Lower 48, as a recession crimps demand for fuel after a year of increasing production and the future promising more unconventional gas.

On the back of that emerging dynamic, the Alaska Gasline Port Authority testified before a Senate committee about liquefying North Slope natural gas and shipping it overseas.

As gas prices topped $13 per thousand cubic feet last summer, companies took interest in unconventional gas plays, like the Marcellus Shale running from West Virginia to New York, said Bill Walker, general counsel and project manager for the Port Authority.

“We’re glad that Alaska has multiple options,” Walker told members of the Senate Resources Committee on Jan 21. “We think that LNG makes an abundance of sense.”

The Port Authority wants an All-Alaska line running from Prudhoe Bay to Valdez, where gas would be liquefied and shipped overseas, or possibly domestic markets in the future.

The LNG facility on the Kenai Peninsula is the only export facility in North America.

Sen. Hollis French, D-Anchorage, said the “hang-up” facing the LNG option in the past has been getting permission from the federal government to ship American gas overseas.

“But now I’m sitting here wondering whether the recent discoveries of large volumes of natural gas in the Lower 48, while they seem to be an impediment to our big line to the Midwest, may not provide an opportunity for us to revisit the political difficulty of shipping our gas overseas,” French said.

Walker said the concern behind exporting is whether American need is being met by its supply. If the shale estimates turn out to be accurate, that would no longer be a problem.

Plus, Walker said, LNG contracts can be designed to be “interruptible,” meaning a tanker setting out for Asia could be diverted back to America in the case of an emergency.

LNG obstacles

But LNG still faces many obstacles.

First, the high prices that drove companies to explore shale last summer have fallen.

“The question is: How will that effect the shale gas?” Walker said.

Another problem is competition. A planned LNG import facility in Kitimat, British Columbia, is now planning to export instead to serve markets along the Pacific Rim.

During a special session last summer, the liquefied natural gas option seemed dead, as legislative economists said it wouldn’t yield returns as high as those on a highway route.

But before summer ended, the Port Authority got several breaks.

First, lawmakers mentioned the LNG option in legislative intent passed alongside AGIA. Then, Palin issued an order promoting the LNG option. Finally, TransCanada said it would pursue an LNG project if enough shippers preferred it to a highway route.

Those measures allowed the Port Authority to progress partnerships with Mitsubishi Corp., a major supplier to Asia, and Sempra, which owns an import terminal.

Since the summer, the Port Authority has been in talks with the Office of Hawaiian Affairs, a Native group, about possible shipments to Hawaii, and continues to work on cost estimates of its All-Alaska pipeline in preparation for possible open seasons in 2010.



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