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Vol. 12, No. 48 Week of December 02, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Scenario ‘alarming … downright scary’

Kenai Peninsula Borough mayor tells RDC conference attendees Alaska needs energy plan; closing LNG plant not the solution

Kristen Nelson

Petroleum News

John Williams, mayor of the Kenai Peninsula Borough, says shutting down the liquefied natural gas facility in Nikiski is only a short-term solution to the natural gas supply situation in Southcentral Alaska.

Some reports indicate there won’t be enough natural gas to meet demands after 2015, he said Nov. 14 at the Resource Development Council’s annual conference in Anchorage.

“That scenario is alarming — it’s downright scary to many of the residents of Southcentral Alaska,” he said, noting that the lights and heat in the hotel hosting the conference come from natural gas.

But is shutting down industrial export facilities in Nikiski the solution? Only in the short run, Williams said, “but this will only delay the problem and severely impact the economy of the Kenai Peninsula as well as the rest of the State of Alaska.”

Shutting down industrial users “is short sighted and reactionary,” he said. “Besides, these large industrial facilities help to pay the freight on all of our gas.” Williams said he’s no tariff expert, “but it seems to me that if big ratepayers go away, I think our gas bills will actually increase. …”

Agrium announced closure of its nitrogen fertilizer plant at Nikiski in October. “While many knew this day would come, it didn’t make the announcement any easier,” he said. In December Agrium will be terminating more than 100 employees — in addition to those it let go when production was downsized.

The blow is “devastating … for families of those who worked there,” and in addition to jobs at Agrium “there will be many more indirect jobs lost as well,” Williams said. The closure will have a major impact on the Kenai Peninsula’s economy, he said.

“Is there a light at the end of the tunnel?” Williams asked. “I think so — hopefully it isn’t a train.”

Agrium is continuing to evaluate the economics of switching to coal gasification, and if they make that decision it would require enormous capital investment and would produce “a construction boom unequaled in Kenai Peninsula history.”

But that will only happen if the project “pencils out” for Agrium and its partners, Williams said.

LNG export license up

The ConocoPhillips-Marathon liquefied natural gas plant has applied for a two-year export license extension, from 2009 to 2011.

If the extension isn’t granted, the Kenai Peninsula will have lost two of its four major industrial facilities, leaving only the Tesoro refinery and BP’s gas-to-liquids facility.

“What is the nexus of the Agrium announcement and the upcoming LNG announcement? Natural gas,” Williams said.

In 2007 the Alaska Division of Oil and Gas report showed natural gas reserves in the Cook Inlet basin of 1.68 trillion cubic feet, probably an eight to nine year supply at current demand, excluding Agrium; a 14-year supply backing out LNG.

“I believe that number is high because some of the supply wells for the LNG plant would be shut in and may not deliver” when an attempt is made to bring them back online. Sometimes it’s hard to get gas wells started again, he said: “Sometimes they never start again.”

“So the problem is screaming for a solution.” Williams said closing the LNG plant solves nothing, “it only delays the inevitable” and “more than likely it will drive up our energy costs.”

More drilling needed

Until Southcentral can get gas from the North Slope, “we need to start punching exploratory wells in the Cook Inlet throughout the entire basin.” Williams said he’d love nothing more than to see a jack-up rig brought to Cook Inlet. The U.S. Department of Energy estimated in a 2004 report that between 13 trillion and 17 trillion cubic feet of natural gas are undiscovered in the Cook Inlet basin.

To develop that undiscovered gas, DOE said it would take $5 billion, and those were 2004 dollars, Williams said.

What will it take to move gas from undiscovered to reserves?

We need an energy policy, Williams said. The State of Alaska does not have an energy policy and “we can’t wait for them to develop one,” he said.

Cook Inlet is not getting the attention it deserves “to encourage its natural gas exploration,” he said: What is needed is more drilling in the Cook Inlet basin, incentives for deep drilling and incentives to update platforms.

Why drill without buyer?

Cook Inlet has already lost one major natural gas user and another one is on the block at the Department of Energy, he said.

The State of Alaska is opposed to extending the export license, Williams said. It calls its position “conditional support,” but he said he believes the conditions the state is requiring are fatal to the whole application and has been working to get the state’s position changed, but has been unsuccessful.

Williams said he’s been working that issue for the past six months with the governor, the commissioners and high-level administrators, “all to no avail.” The latest word, he said, is “they’re working on it.”

He said he hopes the governor has a plan in place if the LNG plant shuts down because that plant fills the peak need on cold winter days “so that we didn’t go into rolling brownouts right here in this community.”

Who’s going to drill exploratory wells now that Agrium is closed and the LNG plant is about to close, he asked.

“Why should anybody drill those exploratory wells without a major market for new gas?”

Tri-borough commission

What is the way forward?

In November of 2005 the mayors of the Kenai Peninsula Borough, the Matanuska-Susitna Borough and the Municipality of Anchorage formed the tri-borough commission. The three mayors have worked together on many issues that affect more than 60 percent of Alaska’s population, Williams said, and the current focus is on the energy issue, working on a Southcentral energy policy.

Such a policy could theoretically be applied statewide and needs to include conservation, efficiency and renewable energy development. Williams also called for the establishment of a school of energy at the University of Alaska “to focus on development of Alaska energy as well as energy research.”

This is not an original idea he said, it comes from the University of Wyoming.

“I think this is long overdue for our state,” he said. Industry could help fund the school as was done in Wyoming. Williams called it a new idea for Alaska and said it hasn’t been fleshed out yet, but that he’s asked members of the energy task force set up by the tri-borough commission to look at it further.

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