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Vol. 14, No. 39 Week of September 27, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Natural gas for consumers

ANGDA works for our burner tips, not Chicago’s, Heinze tells chamber

Kristen Nelson

Petroleum News

A lot of people are working on getting North Slope natural gas to Chicago and focused on the revenues the state will receive from commercializing Alaska’s natural gas, Harold Heinze told the Anchorage Chamber of Commerce Sept. 21.

“We’re worried about the consumer and we kind of stick to that knitting,” he said.

Heinze, chief executive officer of the Alaska Natural Gas Development Authority, the public corporation created by voter initiative in 2002, said ANGDA has done more than $10 million of work on right of way, alignment studies, engineering studies, environmental data and other work required at the front end of a pipeline.

That pipeline is a spur line to Southcentral coming off a main line at Delta Junction and down through Glennallen.

ANGDA won’t be building the line to Southcentral, Heinze said, but it will be influencing who builds it, the terms it is built under “and more importantly we will have shaved two or three years off the front end of the process of building a pipeline.”

Based on projected future Southcentral use of natural gas for heat and electricity, 250-300 million cubic feet a day, some of that coming from Cook Inlet production, and a main line moving 4.5 billion cubic feet a day, gas for Southcentral coming off a big line would account for about 5 percent of the total volume.

“Now it’s the most important 5 percent, because it’s 100 percent to us, but it is only 5 percent of the big line,” Heinze said.

“That’s what we’re working on for you as consumers.”

Deliverability a big issue

Right now that includes working with Railbelt electric utilities through a cooperative, the Natural Gas Supply Co., to help utilities find both long-term and short-term supplies of natural gas, including “negotiating with some Cook Inlet producers to see if there are additional quantities of known gas that can be brought forward and to see if we can help in that process.”

ANGDA will be working with the utilities on participation in open season for a line bringing gas off the North Slope, “because we believe in the long term that the best solution for the Alaskan consumer is to ride on that big pipe,” Heinze said.

Getting natural gas to Southcentral is critical because the new Anchorage city administration and the utilities are working to get the area through this winter, because on the coldest days, when gas use peaks, there is “significant concern that the gas system can deliver enough gas to meet the demand,” Heinze said.

Reducing electric consumption with rolling blackouts is the only practical way of quickly changing gas consumption in the area, he said, warning the audience that as homeowners and as business owners they need to be prepared.

Large line best for consumer

In 2010 there will be open seasons for the two proposed main lines from the North Slope to markets in the Lower 48, the TransCanada-ExxonMobil proposal under the Alaska Gasline Inducement Act and Denali, the partnership between BP and ConocoPhillips.

Heinze said the Federal Energy Regulatory Commission rules for the open season on the main line favor the state in the initial open season.

ANGDA is going to negotiate commercial terms for in-state shipment of that 5 percent needed for Southcentral, he said, and also plans to avoid direct competition with the big line “by having an aggressive timeline, getting out in front and doing (the spur line) as a pre-build.”

That avoids competition with construction of the main line, and “it also means that we’ve just trained 500 or 1,000 Alaskans on how to build a pipeline.”

The commitments to finance just that 5 percent to Southcentral will probably be in the range of $5-$10 billion for the gas supply and shipping on both the big pipe and the spur line, Heinze said.

For a utility to get North Slope gas it will have to negotiate to buy the gas before the federal open season; bid on spur line capacity during an intra-state open season; bid on in-Alaska capacity on the 48-inch main line during the federal open season; negotiate a shipping contract on either or both lines before or during the open season; and obtain Regulatory Commission of Alaska approval for gas costs to be passed through to customers.

The route to Southcentral

There are two proposed routes to bring gas to Southcentral — one down the Parks Highway and the other down the Richardson and Glenn highways.

The ANGDA-proposed route, down from Fairbanks to Delta Junction, then down to Glennallen and on to Palmer, has the advantage “that if you ride this extra distance in the big pipe, it actually is a lower tariff to come the long way around,” Heinze said, because the per-unit cost to move gas is lower on the big pipe.

The Fairbanks-Delta Junction-Glennallen-Palmer route also has the advantage of taking the line within 110 miles of Valdez, he said; if you come down the Parks Highway “basically you have drawn an X through the Valdez option.”

Heinze said ANGDA believes it is important to keep the Valdez option open, because exporting through Valdez could help reduce the cost to consumers.

And look at the consumers who would be served by the routes, he said.

Along the Parks Highway there are “a bunch of nice folks along that way and they’d sure like to have some gas, but frankly they already get electricity.”

But going north from Palmer along the Glenn Highway you get past “Sutton, you’re about at the end of the electric wire going east,” he said. Glennallen, at the junction of the Richardson and Glenn highways, has some of the highest electrical rates in the state because their local utility runs on diesel, so “for them a pipeline coming through there is a great boon.”

ANGDA’s numbers indicate that population considerations probably favor going through Glennallen, Heinze said.

“But really, the most important argument from the state’s perspective, we believe, is the military bases,” which line up along the Richardson-Glenn highways, because the military bases play such a significant role in the local economies.

Bullet line issue

Heinze said he’s “been accused of being a lightning rod by some people,” but “sometimes the lightning bolt illuminates the tornado that’s about to devour the drilling rig — and you wouldn’t see the tornado if it wasn’t for the lightning bolt.”

He said he was playing the lightning rod role in introducing a table comparing the costs in Fairbanks and Cook Inlet of bringing North Slope gas south on a bullet line, a proposed 24-inch line which would only move gas to consumers in Alaska.

At a low volume, 100 million cubic feet per day, Fairbanks would pay $10 in shipping costs (cost of gas is not included in these numbers) for each million Btu of gas on a bullet line, compared to $1.25 per million Btu on the big line. The costs on the big line don’t vary with increasing volume, but the bullet line costs to Fairbanks drop to $3.50 per million Btu if 250 million cubic feet per day are moved and to $2 per million Btu if 500 million cubic feet per day are moved.

The cost to move gas to Cook inlet on a bullet line starts at $15 per million Btu at the low volume of 100 million cubic feet per day and drops to $5.25 and $3 as the volumes increase to 250 million and then to 500 million cubic feet per day.

Gas to Cook Inlet on the big pipe and then a spur line is based on $1.50 at any volume on the big pipe and then decreasing volumes as the spur line volumes change: $5 per million Btu at 100 million cubic feet; $1.75 at 250 million; and $1 at 500 million cubic feet per day.

The combined big pipe and spur line costs into Cook Inlet are $6.50 compared to $15 on the bullet line for 100 million cubic feet; $3.25 compared to $5.25 on the bullet line for 250 million cubic feet; and $2.50 compared to $3 on the bullet line for 500 million cubic feet.

Heinze said 100 million cubic feet a day would be all the electric utilities or Enstar; 250 million would be all the utilities; and 500 million “represents having a very large industrial customer” in the mix “to carry the vast majority of the load.” He said if such a customer were found the bullet line should be named after them, because “that and a hug is about all they’re going to get from us while we get the benefit of them paying the majority of the bill.”

For Fairbanks, the big pipe is the best option, and would probably provide the lowest energy cost in the country, Heinze said.

Even with the bullet line Fairbanks would still pay less at the lowest volume because they are paying two to three times Anchorage prices now.

In Cook Inlet picture is different.

Heinze said that for Southcentral it would mean “we run the risk of being locked into, for long term, extremely high cost of service to deliver gas through the bullet line approach.” And that risk, he said, is on the consumer’s back, “basically you and me. And it could double or triple our energy prices.”

He urged caution.

What now?

Heinze said he hears it said a lot that the big pipeline won’t work, that AGIA’s not going to work, and that we need to move immediately on a bullet line.

“We can’t afford to not wait six months, nine months, a year, to see how the cards play,” he said. “We’ve been at this for a long time; we are close to the point of knowing whether we’ve got a winning hand or not.”

Heinze said he’s an optimist and he wouldn’t give 50-50 odds, “so I think you’ve got to be prepared mentally for the fact that it isn’t going to work out as easily and more importantly as quickly as some people want.”

In Cook Inlet, there could be more reserves found that would bridge the gap to North Slope gas; liquefied natural gas could be imported; and storage could be developed.

He said all those ideas are worth looking at.

All of them are costly, Heinze said, and “if you’re going to pay the money, the one thing I know works is drilling wells,” and it may be worth doing that if there is a lack of confidence in North Slope natural gas.

“I don’t think we ought to let the timeline of the next year drive us towards a bad decision — and frankly that’s what we’re most concerned about is rushing to a bad decision.”

Open season

So what are the results that could come out of an open season?

“I think from an Alaskan perspective that there’s a lot more chance of success out of this open season than most people describe,” Heinze said.

Most people visualize a big line going to market through Canada and if that doesn’t happen it means failure.

First, he said, TransCanada and ExxonMobil have committed to accepting bids to ship gas to Valdez as well as to Canada, and if there are bids to ship 3 bcf a day to Valdez for LNG with a Cook Inlet spur line at Glennallen, “I consider that a great success for Alaska,” because if there is that much interest in shipping LNG out of Valdez “I’ll assure you that’s the absolute lowest cost to us consumers here.”

Even if there’s only a little bit of interest in shipping LNG out of Valdez, “that sets up a scenario under a spur line that Ys at Glennallen and goes both ways and frankly, again from an Alaskan consumer point of view, that’s a big success,” Heinze said, because it would give spur line gas to Southcentral the advantage of a major shipper sharing the cost part of the way.

Rest of the state?

And what about consumers in the rest of the state, how do they benefit from Alaska gas?

That’s where propane comes in, Heinze said, describing a plan ANGDA is working on for propane extraction at the North Slope with shipment by tankers, barges and ISO containers for distribution throughout the state.

The best opportunities for coming off the big line as it goes south will be in Fairbanks and at other spots where there is enough power generation need to bring gas off and use it for power generation.

“Those places, frankly, are few and far between,” Heinze said.

Having propane available all up and down the line is the second best thing.

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