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Vol. 13, No. 25 Week of June 22, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Two lines to Southcentral

Enstar, ANGDA argue the merits of small pipelines projects for in state gas

Eric Lidji

Petroleum News

On the natural gas fight card this year, the main event is clearly the big pipeline: Denali, created by BP and ConocoPhillips, squaring off against TransCanada, backed by the state and looking for legislative approval.

That’s undoubtedly the heavyweight match, but there is a highly competitive undercard as well: two smaller proposals for bringing northern gas to markets in Southcentral Alaska.

The Alaska Natural Gas Development Authority, or ANGDA, wants to build a spur line connecting the mainline to Anchorage, while Enstar Natural Gas Co. wants to build a “bullet line” connecting gas fields in the foothills of the Brooks Range to Anchorage.

The two projects hope to solve the same problem: declining production in Cook Inlet threatens to cause a shortage of natural gas supplies in Southcentral Alaska. According one forecast, that shortage could start to be felt as soon as 2014.

But the two projects differ in philosophy. By definition, a spur line requires a mainline and a bullet line doesn’t. That distinction could determine how fast gas gets to Anchorage, and how much it would cost once it got there.

The debate came up during legislative hearings in Fairbanks on June 12, as part of a day devoted to plans for bringing Alaska natural gas to Alaskans.

This summer, ANGDA is spending between $1.2 million and $2 million, by far the largest single expense in the five-year history of the public corporation, to study a 370-mile spur line corridor from Delta Junction to Beluga through Glennallen.

At the same time, Enstar is planning to spend at least $6 million this year on engineering work along the 690-mile route for a pipeline from the Gubik gas field near the village of Umiat to the utility’s existing grid in Anchorage along the Parks Highway.

These projects have been under way in various forms for years. Until earlier this year, Enstar had been considering the Parks Highway for a spur line. In the past, ANGDA has mentioned a bullet line might be the last resort if progress stalled on a big pipeline.

“If they don’t hurry up, we’ll figure out a way to get all the way north,” Harold Heinze, chief executive officer of ANGDA, told the Palmer Chamber of Commerce in late 2004, as reported by the Anchorage Daily News.

Both ANGDA and Enstar believe in that call to “hurry up,” but as each company looks into the near future, it sees a different outcome on the horizon — one less optimistic than the other.

Enstar: Time is up

Enstar believes it can no longer afford to wait on a big pipeline. The company is expecting major shortages within six years. And whereas Enstar once enjoyed supply contracts lasting 15 years or longer, the most recent contract before state regulators would last only five years.

“We have a precipitous fall off over a period of time,” said Andrew White, of Enstar, talking to lawmakers about natural gas supplies from Cook Inlet. “And in terms of where Enstar is right now, that’s led us to not only thinking of gas contracts with ConocoPhillips and Marathon through 2013, but also looking elsewhere ... for a natural gas pipeline from the foothills to Southcentral Alaska with a spur into Fairbanks.”

With a 20-inch bullet line, Enstar believes it can get gas to Southcentral five or six years sooner than it would by waiting for the mainline and building a spur.

The $3.3 billion bullet line could have gas flowing to Anchorage as soon as 2014, said Gene Dubay, senior vice president and chief operating officer of SEMCO, the Michigan utility that owns Enstar.

But two huge obstacles stand in the way: one with supply and another with demand.

The Enstar line only became possible because of recent exploration efforts at Gubik by Anadarko Petroleum. Taking gas from Gubik rather than the North Slope would shave more than 100 miles in the length of the pipeline.

But Anadarko doesn’t know how much gas is at Gubik. The most recent reserve figures come from 1951, when a U.S. Geological Survey expedition estimated the field held 600 billion cubic feet of natural gas. Enstar needs 3.5 trillion cubic feet for its bullet line.

Enstar doesn’t know how much more the bullet line would cost if it had to run all the way to Prudhoe Bay, White said. Nor has the company talked with North Slope producers about buying gas from Prudhoe Bay.

Enstar is meeting with Anadarko in mid-July to discuss the results of the exploration program at Gubik this past winter, Dubay said.

A lack of gas at Gubik would make the bullet line physically impossible, but failing to attract major industrial customers would make the bullet line economically impossible. If the cost of the project fell entirely on the shoulders of residential and small commercial customers along the Railbelt, the rates would probably be prohibitively high.

Enstar won’t build the project without commitments from large industrial users, like an expansion of the Kenai liquefied natural gas plant or a revived Agrium fertilizer plant, Dubay said. He said Enstar is drafting a letter to Agrium, hoping to get a commitment about the future of the plant should the bullet line move forward.

Either way, Dubay remains hopeful.

“We’re approaching this project with quite a bit of certainty that when it comes time for the industrial users to sign up for a capacity in this line that we’re going to get commitments from the industrial users that are going to take capacity in the line,” he said.

Enstar plans to decide whether to sanction the bullet line by June 2009.

ANGDA: approve TransCanada and let the market work

While Enstar no longer wants to wait for a pipeline, Heinze says it’s not too late.

He believes the Alaska Gasline Inducement Act, or AGIA, prompted the producers to create Denali-The Alaska Gas Pipeline LLC and quickly prefile with the Federal Energy Regulatory Commission, an early first step toward permitting the 48-inch main pipeline.

Believing the entire timeline is now moving fast, Heinze wants lawmakers to approve the TransCanada application and let the company battle it out with Denali in the marketplace.

“Frankly, the only reason I can’t start building tomorrow is that people don’t know and aren’t sure if a big project is going to be built,” Heinze told lawmakers.

Even with pre-building, where work on a 20-inch spur line begins as soon as the main line gets final approval, the project could take longer to bring online than a bullet line.

Still, ANGDA sees its $1.25 billion project as the cheapest source of gas for Alaska, because local prices would be tied to an outside market, rather than competing with oil.

Heinze points to Fairbanks Natural Gas as the alternative. The natural gas utility of Fairbanks charges residential customers $23.35 per thousand cubic feet of gas, most likely the highest natural gas rate in the country.

But whether the price is high depends on the context. Compared by energy content, natural gas is still cheaper than fuel oil in Fairbanks, but it’s also more than two and a half times more than what natural gas customers pay in Anchorage.

“You pay the competitive alternative price and you’re locked into it,” Heinz told lawmakers. “And that’s one of the things you’re trying to break by bringing a big pipeline down through the spine of the state.”

Enstar disagrees.

“I don’t think the size of the pipe is going to have an impact on the cost of the gas. I think it’s going to be an index-based price whether it’s a 48-inch pipe or a 20-inch pipe,” Dubay said.

Enstar uses indexes now to price its natural gas supply from the Cook Inlet. In the new contracts before state regulators, Enstar pulls the middle price from a selection of indexes as a way to avoid unexpected cost swings in the market like those felt after Hurricane Katrina.

With these indexes, Anchorage would probably pay a little more to get natural gas from the bullet line than it currently does from Cook Inlet, while Fairbanks would probably pay a lot less than it does now to get that same Cook Inlet gas trucked north.

“We are paying market prices and we will continue to pay market prices,” Enstar spokesman Curtis Thayer told Petroleum News.

ANGDA also believes the spur line is the best way to create a petrochemical industry in Alaska, using by-products from the gas stream on the North Slope.

Compatible vs. competitive

As the debate continues on the large pipeline, both Enstar and ANGDA want to avoid a provision within AGIA that keeps the state from supporting a competing project after awarding a license.

In fact, speaking to lawmakers, both companies said they planned to work with either TransCanada or Denali and both companies used almost identical language to defend their respective plans for bringing gas to Southcentral.

“We’re not a competitive project. We’re a compatible project,” Heinze said.

“This is not a competing project and it’s a complementary project,” Dubay said.

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