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Vol. 12, No. 15 Week of April 15, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

LNG extension if…

Palin supports Nikiski LNG license extension if others have plant access

Alan Bailey

Petroleum News

Gov. Sarah Palin has told the U.S. Department of Energy that she supports a two-year extension of the federal export license for the LNG plant on Alaska’s Kenai Peninsula, provided that certain conditions protecting utility gas consumers can be met. Part of the reason for her decision might be an expectation of a major gas discovery in the area.

The acting director of the state’s Division of Oil and Gas, Kevin Banks, thinks a sizable gas field might be discovered in the Cook Inlet basin in the near future, and that the LNG plant at Nikiski could provide a way for gas from such a field to get to market.

The current export license is due to expire in 2009 — ConocoPhillips and Marathon, the plant owners, have applied to DOE for the two-year license extension.

“While I support an extension of LNG export, I have concerns that the interests of Alaskans may be jeopardized in granting the blanket authorization unless several criteria are met,” Palin told DOE’s Office of Fossil Energy.

Utility supplies

The state’s core concern is the need to ensure that the gas demands of the LNG plant do not jeopardize the gas supplies for Southcentral gas and electricity utilities, in particular Enstar Natural Gas Co. and Chugach Electric.

“The state has a compelling interest in ensuring that these public utilities have adequate supplies of natural gas under contract to meet these local needs,” the state said in its motion to intervene in the application for the export license extension. “… Enstar has substantial unmet natural gas requirements beginning in 2009. Chugach has substantial unmet requirements for natural gas beginning in 2010.”

The state wants to see firm contracts with the utilities, at least covering the period up to 2011, when the proposed export license extension would expire. And those contracts need to be approved by the Regulatory Commission of Alaska.

“Unless the producers present contractual opportunities to these utilities for gas supplies to meet their outstanding requirements, and do so under terms the RCA will approve, there can be no conclusion locals needs are met,” the state said.

Moreover, the contracts must grant priority rights to the utilities for gas supplies to meet peak gas demand during the winter, the state said.

Maintain reserves

And, recognizing the tight demand and supply situation for Cook Inlet gas, the state wants to see the gas producers invest in exploration and development work that will maintain current levels of gas reserves.

“The need to require replacement of reserves as a condition is built on the notion that the basin’s existing stock of proved reserves should at minimum, be kept whole as a condition of extended LNG export,” the state said. “… Maintenance of this balance in production and reserves replacement should act to keep the Cook Inlet industrial users in business for the long haul, as well as serve the long term requirements of public utilities and their consumers.”

Access to plant for other producers

The state also wants to see the LNG plant become open for the purchase of gas from third-party gas producers, rather than just the plant owners.

Banks told Petroleum News April 10, that there’s a good possibility of a company discovering a major gas field (with say 200 billion to 300 billion cubic feet of gas) in the Cook Inlet basin and the state wants a way for that producer to be able to market its gas.

Banks bases his expectation on a gap in the statistical distribution of Cook Inlet field sizes, an expectation that DOE has shared in past reports on Cook Inlet.

Gas supplies to the local utilities tend to be tied into medium or long-term contracts, so that an industrial consumer would likely be a requirement for marketing large quantities of gas.

“If somebody finds a gas field that big they’re not going to have a market to sell into easily, unless LNG is an option. It’s that kind of customer that we want to make sure is served,” Banks said.

He said that part of the state’s concern is that the proposed export license extension only seems to take into account the export of ConocoPhillips’ and Marathon’s own gas.

“They’re talking about reducing the amount of gas they’re delivering to the plant and exporting from the plant over this two-year period,” Banks said. “… That’s tailored to what they want to deliver to the plant, so there is capacity for more gas.”

The state recognizes the importance of the LNG plant to the economy of the Kenai Peninsula, as well as to the economics of the Cook Inlet gas industry.

An industrial gas consumer such as the LNG plant would also likely be necessary to underpin the economics of a gas spur line to bring North Slope gas into Southcentral Alaska.

“We recognize that the LNG role in the Cook Inlet gas market is important for new exploration and new development,” Banks said. However, the desire to keep the plant running should not result in the imposition of unacceptably high gas prices on Alaska gas consumers, he said.

“But if the price is right and that plant can be run and gas can be found within some reasonable price for consumers, by all means we should keep it running,” Banks said. “… We have to make sure we’re at the table as the discussion about how this will work goes forward.”



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