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Vol. 11, No. 36 Week of September 03, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Homer gas line proposed

Enstar would carry gas from Chevron unit; infrastructure could encourage exploration

Alan Bailey

Petroleum News

It seems that the question of supplying the city of Homer on Alaska’s Kenai Peninsula with natural gas has been an on-again/off-again debate for several years. Government facilities, businesses and residents could all benefit from energy cost savings that gas could bring. But, although there are gas fields on the Kenai Peninsula, swinging the economics of developing a gas infrastructure to support the relatively small Homer population has proved elusive.

In what it describes as “thinking out of the box,” Enstar Natural Gas Co. has proposed leveraging a known gas pool that Unocal (now part of Chevron) discovered in 2004 in the Nikolaevsk unit, approximately 14 miles southeast of Ninilchik on the Peninsula. The Unocal discovery came from drilling two wells from the Red pad in the Nikolaevsk unit.

Enstar would build a high-pressure gas transmission line north from the Red pad to the southern end of the Kenai Kachemak pipeline, and due south from the Red pad to Homer, to bring gas from the Red well to Homer and connect the Southcentral Alaska natural gas grid to the southern Kenai Peninsula.

Curtis Thayer and Charley Hernandez presented Enstar’s idea to Homer’s city council on Aug. 14. And Thayer has explained the company’s concept to Petroleum News.

“It’s very preliminary, very early on, but it appears it could be a win-win situation,” Thayer said.

A previous proposal for a gas supply for Homer had involved a 2003 contract between Enstar and NorthStar Energy Group. That proposal involved the supply of gas from NorthStar’s North Fork unit through pipelines to be built between North Fork and Anchor Point and between Anchor Point and Homer (see sidebar). But in July NorthStar informed Enstar that NorthStar can no longer fulfill the contract.

Secure gas supply

Enstar still wants to supply gas into the Homer market but the company requires a secure supply of gas for that market, Thayer said. He said Enstar has held informal talks with Chevron Corp. about the potential to use the Red well gas.

“They indicated that they had a (gas) discovery at Red well,” Thayer said. “They hadn’t really proved it up or tested it because they didn’t have infrastructure there to get the gas the market. … It clearly was a way to solve Homer’s problem with getting natural gas and at the same time developing a new area in the Cook Inlet to supply gas into the Southcentral grid if commercial quantities of gas are found.”

Preliminary estimates indicate that the transmission line north and south from the Red pad would take about four years to complete, at a cost of $16 million.

“The two longest parts of that (development plan) are the regulatory and permitting processes,” Thayer said.

The development costs for the transmission line would be recovered from the tariffs for shipping gas through the lines. But, by connecting the line into the Southcentral gas grid, Enstar expects to be able to spread those costs across its whole customer base, rather than just across the new Homer customers — the new line would benefit all Southcentral gas users by opening up new sources of gas, Thayer said.

In parallel with building the gas transmission line, Enstar would build out a gas distribution network from Homer at an estimated cost of $14 million, to eventually serve an estimated 3,000 customers in the Homer area.

“There’s a build out in Homer that would probably take four years to six years.” Thayer said. “You want your transmission line and your core center to hook up at about the same time.”

Build outwards

Construction of the Homer gas distribution network would start in the town center and progressively move outwards from that center, Thayer explained. Laying the network in the central part of Homer would be relatively expensive.

“One of the difficulties with Homer is that it is a mature market … driveways are in, sidewalks are there, roads are paved,” Thayer said.

In general, gas consumers have to pay for those parts of the gas distribution network that they need. However, government grants are possible to assist with the costs. And the build-out plan would probably target government buildings and other large public buildings first, Thayer explained. The use of natural gas could achieve especially large energy cost savings for these buildings and might attract some level of government funding from, for example, the state’s Railbelt Energy Fund.

Once the basic natural gas infrastructure is in place for public buildings, homeowners and private businesses could connect into the system, Thayer said.

$10 million per year savings

Enstar has estimated a total current cost per year of about $15 million for heating Homer homes and businesses using fuel oil, propane and electricity, at today’s prices for those fuels. By calculating the volume of natural gas required to provide the same amount of heat, the company has calculated a cost of $5 million for the use of gas at today’s gas prices.

“They’re going to see almost a $10 million a year savings if they switch to natural gas vs. what they’re paying today,” Thayer said.

Enstar did not include the use of wood as a heating fuel in its calculations. The company views wood as, essentially, a free fuel source, the use of which would remain unaltered were people to start using natural gas.

Expanding the pipeline infrastructure

In addition to reducing heating costs in Homer, Enstar thinks that extending the Cook Inlet natural gas pipeline infrastructure to the southern Kenai Peninsula would encourage new gas exploration in that area — convenient access to a gas pipeline connected to gas markets significantly improves the economics of gas exploration.

“If we build it they will come,” Thayer said.

Thayer said that Enstar is talking to both Chevron and Marathon about exploration possibilities, were the pipeline to be built. But Thayer also emphasized the preliminary nature of Enstar’s proposals: the concept hinges on proving enough gas at the Red pad to at least supply Homer.

“If the Red well didn’t exist we probably wouldn’t be talking Homer, but here is an idea that we can supply Homer and our existing customers with a new discovery,” Thayer said.

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NorthStar says can't provide gas

An earlier idea for supplying natural gas to Homer was focused on the North Fork unit, east of Anchor Point, where Standard Oil of California’s North Fork 41-35 well struck gas in 1965 during a search for oil. Gas-Pro Alaska LLC acquired the North Fork unit from Unocal in 1996 and NorthStar Energy Group bought Gas-Pro in 2000.

In 2001 NorthStar tested the 41-35 well and reported a flow of 4 million cubic feet per day of natural gas from one interval at 8,500 feet.

In 2003 NorthStar and Enstar Natural Gas Co. signed a contract for the supply of natural gas to Homer from North Fork. The deal involved Alliance Energy, sister company to NorthStar, building a pipeline from North Fork to Anchor Point and Enstar building a pipeline from Anchor Point to Homer. However, both Enstar and the Regulatory Commission of Alaska required that pipeline construction be contingent on drilling a second North Fork well to raise proved reserves in the field from 12 billion cubic feet to 14.5 bcf, thus ensuring a 20-year gas supply for Homer.

In August 2004 Alliance announced that it would fully fund development of the North Fork unit, including “fast tracking” a pipeline north to connect the North Fork gas field with the Kenai Kachemak pipeline. Under a farmout agreement between Alliance and NorthStar, development 1of the North Fork field would include drilling a second well “as soon as January 2005,” Barry Foote, vice president of Alliance Energy, told Petroleum News in 2004.

But that second well has never been drilled.

North Fork is a joint federal and State of Alaska unit. On March 8, 2006, the Bureau of Land Management, the federal agency that administers the unit, sent a letter to Gas-Pro stating that, if the second well on the unit is not drilled by Oct. 1, 2006, the unit would be terminated as from Oct. 1, 2005. The unit was originally due to expire in 2005, but BLM granted an extension contingent on a well workover being done and the second well being drilled. The Alaska Department of Natural Resources wrote to Gas-Pro March 9, saying that failure to drill the second well by Oct. 1, 2006, would result in termination of the unit on that date.

BLM has told Petroleum News that the federal leases associated with the unit can continue in existence for a period of up to two years from the date of termination of the unit. DNR says that the state leases terminate on the date of termination of the unit.

In July NorthStar wrote to Enstar, saying that it could not fulfill the gas supply contract for Homer, Enstar has said.

—Alan Bailey

Editor’s note: Petroleum News has asked for a comment from Alliance and Northstar, so more information is possible in subsequent editions of PN.