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Vol. 13, No. 28 Week of July 13, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas headed north

State of Alaska, ANGDA Enstar to build pipeline from Cook Inlet to Fairbanks

Eric Lidji

Petroleum News

Worried minds contemplating the dwindling natural gas supply in the Cook Inlet have long looked north for a solution, but the answer they expected to find always involved supply. Could the answer up north actually be demand?

After years spent pursuing separate pipelines with the similar goal of increasing natural gas supplies to Alaska communities, the Alaska Natural Gas Development Authority and Enstar Natural Gas Co. announced July 7 they have formed a public-private partnership with the state to build a pipeline connecting Fairbanks to Cook Inlet by 2013.

The new project touches the most troublesome energy issues facing the road system communities: the impending shortage of natural gas supplies in Southcentral, the rising cost of fuel in the Interior and the stranded natural gas reserves in the Cook Inlet.

For the past several years, ANGDA and Enstar have independently worked and reworked pipelines, spur lines and bullet lines designed to offset expected shortages in Anchorage by shipping gas from fields north of the Brooks Range.

Those plans were mutually exclusive, often at odds and occasionally contentious, but always involved a basic assumption: northern gas would come to the rescue.

The new pipeline partnership seems to flip all that.

Now, ANGDA and Enstar have suddenly agreed to work together.

And instead of bringing northern gas south they plan to take southern gas north, saying the proposed pipeline will spur natural gas development in the Cook Inlet, and that new supply of Cook Inlet gas can help fuel Fairbanks for a generation or more.

Phase one

Or not.

The pipeline as proposed by ANGDA and Enstar is very agile. It’s designed to change directions — quite literally, it turns out — as circumstances in Alaska change.

Ideally, the partnership would spend the next two and a half years collecting field data and permitting a 450-mile pipeline running from Palmer to Glennallen, then up the Richardson Highway to Delta Junction and west to Fairbanks.

The partnership would also use that time to convince producers that demand along that route, which includes around 100,000 people and several energy intensive military installations, warrants a new wave of exploration to unlock long-stranded gas reserves in the Cook Inlet.

Construction on this “phase one” would begin in 2011, with the pipeline gearing up to ship around 460 million cubic feet of gas each day as early as 2013.

Phase two

Geologists, producers and policy makers generally agree that Cook Inlet still holds enough gas in its reservoirs to supply Alaskans for decades to come, possibly as much as 25 trillion cubic feet of recoverable reserves, according to a U.S. Department of Energy report from 2004.

But oil and gas exploration is always an uncertain business. Even with advances in seismic technology, dry holes are both common and costly. That DOE report also suggested the North Slope might be a cheaper solution than developing Cook Inlet.

If the proposed pipeline didn’t spur Cook Inlet exploration, or if those efforts were ultimately neither fruitful nor timely, the partnership would start on “phase two.”

Phase two means continuing the pipeline north from Fairbanks to gas fields in the foothills of the Brooks Range. Once there, sometime around 2014 and now nearly 800 miles from Anchorage, the flow of the pipeline would be reversed to send northern gas to Fairbanks and communities in Southcentral.

Anadarko is currently exploring for gas in the foothills of the Brooks Range, but has released only broad figures about the quantity of gas that might be sitting underground.

If the foothills ultimately turn out to be an unfeasible source, the partnership would keep building north until it hit the North Slope, around 900 miles of pipe from Anchorage, or twice as long as the original line from Cook Inlet to Fairbanks.

If the project does spur a successful round of Cook Inlet exploration and phase two isn’t needed, the pipeline could eventually connect to either a TransCanada or Denali pipeline running from the North Slope to markets in the Lower 48 around 2020.

That would create a comprehensive pipeline network in Alaska, where any prospective gas sources along the road system — either in the Cook Inlet, the Copper River or Nenana basins, the Yukon Flats, the foothills of the Brooks Range or the North Slope — could all feed into one of the hungriest energy markets in the world: North America.

Proposal came together fast

As of late June, ANGDA and Enstar appeared to be at odds on the issue of in-state gas, both spending large amounts of money this summer on different pipeline projects.

Although the announcement on July 7 is the first public indication of any kind about the project, the state began considering a partnership during negotiations to extend the export license of the liquefied natural gas plant on the Kenai Peninsula, according to Deputy Resources Commissioner Marty Rutherford.

The move only “meshed” within the last month, she said. ANGDA and Enstar came together to talk about the idea with the state only within the last two weeks, according to Scott Heyworth, chairman of the ANGDA board.

Gov. Sarah Palin said the state saw the potential for synergy among the three parties: Enstar brought decades of experience as a pipeline operator and builder in Alaska, ANGDA can marshal its status as a public corporation to secure financing for the multi-billion dollar project and the state could help to ensure low tariffs and transportation costs.

The state might even be willing to pick up part of the tab if need be, Palin said.

“I believe that the sense of the populous is if it takes a contribution from the state through ANGDA to get more affordable sources of energy to our businesses, to our homes, I think the sense is that that is a positive thing, that is not a hardship for the state, especially in this time of surplus,” Palin said.

All three parties acknowledged the plan is still short on details, but said the partnership is still only days old and the next few months would be devoted to answering the big questions: who will own the line, who will operate it and who will pay for it.

The goal is to answer those questions by the end of the year, and present any legislation and appropriation requests to state lawmakers during the next regular session.

Announcing the unformed plan now was preferable to the alternative, Palin said.

“And that would be just having the exclusive discussions without the public knowing that there is light at the end of the tunnel here,” Palin said. “We have not lost sight of the need for an in-state gas line.”

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Enstar and ANGDA: Partners after years apart

Anyone following ANGDA and Enstar even over just the past few months might have been surprised to see the companies sitting at the same table to announce a partnership.

For nearly five years, Enstar has been looking at building either a spur line or a bullet line along the Parks Highway, while ANGDA has been exploring a similar project along the Glenn and Richardson Highways.

The two projects have progressed independently, and when they did cross paths, it was often due to some point of dispute.

Federal money for Parks route

After Enstar received a $2 million federal grant in 2005 to study the Parks Highway route, Alaska’s Congressional delegation sent a letter to state transportation officials clarifying that the money should only go toward studying the Parks Highway.

“The Glennallen-Delta route isn’t competing with the Parks Highway route,” the letter read. “ANGDA is fully cooperating with Enstar, and the goal is to have feasibility and conceptual engineering work done on two options for spur pipelines to South Central.”

Sen. Ted Stevens was one of the signatures on that letter, and some questioned the appropriation because Stevens’ son Ben, the former state senator, sat on the board of directors for Semco Energy, the company that owned Enstar at the time.

In early 2007, the Alaska Public Offices Commission fined Ben Stevens $630 for failing to disclose compensation he received as a member of the Semco board.

The state put the Parks Highway project out to bid late last year.

DOE compares two routes

Between 2006 and 2007, the U.S. Department of Energy compared the two routes: a 320-mile spur line running from Wasilla to Fairbanks up the Parks Highway and a 280-mile spur line running from Palmer to Delta Junction through Glennallen.

A draft report released in September 2006 found “essentially no difference in the price of gas delivered to Cook Inlet via either the Fairbanks or Delta Spur options.”

Enstar said it preferred the Parks Highway because it could piggyback on the busiest infrastructure corridor in the state. But ANGDA pointed to the legislative permission needed to pass through the state and federal parks along the highway.

ANGDA preferred the Glennallen route up to Delta Junction because it provided easy access for a future liquefied natural gas plant out of Valdez.

Transitions for both companies

As work progressed on the two routes, both companies went through major transitions.

Semco asked state regulators in early 2007 to approve a sale of Enstar to the Texas utility holding company Cap Rock Holding Corp., and got that approval by the end of the year.

The sale turned Enstar from a public company into a private one, although state regulators still maintained oversight of the utilities operations and activities in Alaska.

Meanwhile, ANGDA struggled through the whims of two different administrations, each with a different philosophy on how best to get a large natural gas pipeline built. With the tremendous focus on that pipeline over the past two years, ANGDA found itself forced to re-examine its role in the state or face becoming irrelevant.

The original voter initiative that created ANGDA in 2002 revolved around an “All Alaska project” or a gas pipeline running from the North Slope to an LNG facility in Valdez, but that effort lost some momentum during the Murkowski administration.

Following a meeting with Palin after her inauguration in late 2006, then ANGDA board Chairman Andy Warwick told Petroleum News that the Murkowski administration was “very cool” toward an all-Alaska gas pipeline project.

In the final days of the Murkowski administration, ANGDA made a new business plan to help refocus its efforts. In addition to its spur line, ANGDA began taking on projects related to propane and other value-added industries that could be created from a large stream of natural gas moving across the state. It also looked at aggregating the demand from utilities and preparing local companies for an in-state open season.

There has also been shifting personnel. In the fall of 2006, Tony Izzo resigned as president of Enstar after five and half years in charge of the company. Izzo recently signed a one-year consulting deal with ANGDA.

Accelerated efforts in 2008

Even with all the work ANGDA and Enstar put into their projects in the past, both companies seemed to be accelerating their efforts this year.

With the call for applications under the Alaska Gasline Inducement Act in late 2007, ANGDA unveiled two possible spur lines designed to fit with any pipeline project.

Around that same time, Enstar said a $700 million to $800 million spur line connecting Cook Inlet to Fairbanks and the Nenana Basin was still a viable option, even without an industrial anchor, and could be built in as little as four to five years.

During the regular legislative session in March, Enstar announced an expanded version of that project: a $3.3 billion bullet line running from Cook Inlet to the Gubik gas fields in the foothills of the Brooks Range. That project would need an industrial anchor and a large supply of natural gas.

ANGDA and Enstar both testified twice during the just-finished special session, updating lawmakers on the fieldwork going on this summer and the plans on the horizon.

Enstar planned to spend $6 million this year on engineering for the Parks Highway bullet line to Gubik, while ANGDA planned to spend as much as $2 million on a wetlands study of the route up the Glenn and Richardson Highways.

Enstar said it had the fastest plan for getting gas to Anchorage. And with a large industrial customer anchoring the end of the line, Enstar believed it could even make that gas affordable for residential customers.

ANGDA argued that the lowest price depended on connecting in-state gas to out-of-state markets, which is only possible through a spur line. ANGDA also said it could shave some construction time by pre-building its spur line.

As recently as late June, the companies seemed fairly at odds: ANGDA began looking for a contractor to study routes between the Gubik gas fields and Dalton Highway, covering the same potential corridor Enstar is currently examining.

State picks Richardson route

At least in regard to the route, the new partnership favors ANGDA. The state wants the pipeline to run up the Richardson Highway, rather than the shorter Parks Highway route, in order to hit state leases in the Copper River basin.

“We have a public interest in reaching the populations and the communities and the military and the industrial facilities along the Richardson Highway,” Gov. Sarah Palin said on July 7. “In addition, as a resource owner in the Copper River Valley, the state has a significant interest in promoting the exploration and development of energy in that basin.”

But while Enstar agreed to look at the Richardson, it said it would return to the Parks Highway if that ultimately proved to be the best route.

“We’re going to do the right thing for the community. We’re sitting here right now finalizing that decision before digging a trench,” said Gene Dubay, chief operating officer for Continental Energy Systems, Enstar’s parent company.

Depending on how the partnership shakes out, the pipeline could also mean a lot for Enstar. In addition to possibly solving the supply problem that motivated the company to look at spur lines and bullet lines in the first place, owning a piece of the pipeline would mean a larger asset base for a company with a fixed rate of return.

Enstar said it was prepared to build the line without help from the state.

“With the state’s help, we believe that it’s a slam dunk to get this line done,” Dubay said.

ANGDA sees the partnership as the culmination of that voter initiative passed in 2002.

“This is the single biggest, boldest, most-positive thing that’s ever been done to help the in-state gas,” said Harold Heinze, chief executive officer of ANGDA.

—Eric Lidji