ConocoPhillips Co. is marketing its pioneering Kenai LNG plant.
“The Kenai LNG Plant has played a key role in our company’s history as well as the history of the Kenai Peninsula. We’re proud of that history, and we are appreciative of the state’s and the Peninsula community’s role in the plant’s success through the years,” the company said in a statement on Nov. 17. “Our efforts to market the plant are consistent with our company’s efforts to regularly review our assets to ensure we are optimizing our portfolio. Our current focus is on our North Slope Operations. We believe the plant is a strategic asset that that offers good opportunities for the right buyer.”
The announcement is the latest saga for the pioneering liquefied natural gas export terminal in Nikiski. The plant was bound for closure in 2011, only to be quickly revived in the wake of increased demand in Asia. The plant operated for six months in 2015, liquefying 20 billion cubic feet of natural gas and delivering six cargoes. Although the facility “remains operational and ready to resume exports,” according to ConocoPhillips, the company did not conduct an export program this year, “due to market conditions.”
When ConocoPhillips and then-partner Marathon Oil Corp. announced plans in 2011 to mothball the plant, the Cook Inlet faced a serious supply challenge. Investment was declining, the major producers in the region were in a holding pattern, and the facility was a crucial storage site allowing utilities to meet demand during the winter cold snaps.
Over the past five years, the Cook Inlet natural gas market has changed drastically, lessening the importance of the facility on the region, albeit only to a slight degree.
Hilcorp Alaska LLC became the dominant producer in the region, increasing investment at legacy fields and securing supply contracts for much of the Southcentral utility natural gas demand through early 2018. At the same time, Enstar Natural Gas Co. LLC completed the Cook Inlet Natural Gas Storage Alaska facility, creating another option for accessing supplies during cold snaps. A collection of smaller independents such as AIX Energy LLC, BlueCrest Energy Inc., Furie Operating Alaska LLC and Glacier Oil & Gas Corp. are currently operating new or revived gas fields, making the market more diverse.
Today, the Kenai LNG plant is perhaps most important as a way to expand the Cook Inlet natural gas market beyond the relatively limited needs of Southcentral and the Interior. In recent years, ConocoPhillips has been using the facility to export third-party shipments.
There have also been changes in the national and international LNG trade in recent years, putting the Kenai LNG facility in a different place than it occupied just five years ago.
While the Kenai LNG plant has been gradually becoming outpaced by larger facilities around the world, it remained the only LNG export facility in North America until Cheniere Energy Inc. brought the Sabine Pass LNG Terminal online in February 2016.
As of mid-October, the Federal Energy Regulatory Commission was considering six applications for LNG export terminals in the U.S. Gulf Coast and another nine in pre-filing (including the proposed Alaska LNG project). The U.S. Maritime Administration and the U.S. Coast Guard are also considering an application for a Gulf Coast export project, and two export projects have been proposed for sites in British Columbia.
Pioneering plant
The Kenai plant was pioneering when Phillips Petroleum and Marathon Oil opened the facility in 1969, just five years after British Gas commissioned the MV Methane Princess, the first purpose-built LNG tanker in the world, and recent discoveries in Algeria launched the global LNG trade. The Kenai LNG facility was a complex operation for its time, including a liquefaction plant in Alaska and a re-gasification plant in Japan, the two largest LNG tankers ever built at the time and the offshore Tyonek platform.
The plant initially ran on long-term contracts with two Japanese utilities, Tokyo Electric Power Co. Inc. and Tokyo Gas Co. Ltd. The first federally approved export license ran from 1969 to 1984 with a five-year extension. The second license ran from 1989 to 2004.
In recent years, export licenses have covered shorter periods of time and smaller volumes of LNG. As investment in the Cook Inlet region declined, local policymakers worried about shipping volumes overseas while utilities struggled to meet demand. In return for endorsing exports, the state required the owners of the plant to agree to several protections such as meeting local needs, increasing drilling and buying third party gas.
Even so, seeing no overseas market and scarce local supplies, ConocoPhillips allowed the license to expire in March 2013. But the state asked the company to apply for a three-year extension to help other producers in the region have a market outside of Alaska.
The company agreed and eventually received approval from U.S. Department of Energy to export as much as 40 billion cubic feet over two years. The license began in March 2014 and ended earlier this year. During that time, the company shipped five cargoes between May and September 2014 and six cargoes between May and mid-October 2015.
An April 2006 report from Stone & Webster Management Consultants Inc. estimated that the plant would reach the end of its useful life within six years “without significant investment to modernize key elements of the plant,” particularly its turbines. At the time, the report estimated it would cost $300 million to prepare the plant for continued operations and $1.5 billion to expand the plant to more than double its present capacity.
The report was commissioned by the Alaska Natural Gas Development Authority and was compiled using publically available information about the plant and its components.
