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Vol. 18, No. 2 Week of January 13, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Southcentral utilities leaning toward the use of diesel fuel

The Southcentral Alaska utilities are considering the use of diesel fuel for some power generation, in the event of a predicted utility natural gas supply shortage around 2014-15, Robert Gibb, associate director of Navigant Consulting, told the Mayor’s Energy Task Force in Anchorage on Jan. 9. Gibb is helping the utilities and the planned Donlin Creek gold mine evaluate the options for dealing with the pending Southcentral gas supply crisis.

The utilities have been investigating the potential import of liquefied natural gas or compressed natural gas into Southcentral to cover the gas shortfall. But with some significant uncertainties associated with these options, the utilities now tend to favor the diesel fuel option as a safe means of dealing with the problem in the short term, despite the fuel’s high cost. The utilities will also seek a cost-effective long-term solution, Gibb said.

Short- and long-term

“What we’ve done on this project very recently is we’ve broken it into two pieces and we’ve said there’s a short-term … and then there’s a long-term shortage, and we’ve recognized that they don’t need to both have the same solution,” Gibb said.

A reliable and certain solution is necessary for the short term, even although that solution may not be the cheapest option.

The use of diesel fuel for power generation would seem a low-risk means of ensuring that the lights stay on and buildings stay heated, as gas supplies from the Cook Inlet basin decline below demand levels.

“From a technology standpoint it’s not very challenging. From a sourcing standpoint it’s pretty realistic. And from a cost standpoint it’s fairly well known,” Gibb said in commenting that diesel is becoming the leading short-term contender.

And, although on an energy equivalent basis diesel may cost five times as much as gas, diesel power generation would, at least initially, represent a relatively small proportion of total generation, the diesel cost being diluted by the lower cost of power generated from gas.

Work to do

However, quite a bit of work remains to be done to clarify all the issues involved in diesel usage.

Lee Thibert, senior vice president of Chugach Electric Association, told Petroleum News that neither the Beluga power station on the west side of Cook Inlet nor the new gas-fired power station being completed in south Anchorage can currently run on liquid fuel. If the utilities move ahead with the diesel fuel option, one of the power plants in the new south Anchorage facility would probably be converted for liquid fuel use. Municipal Light & Power can already use diesel in its Anchorage power station. Golden Valley Electric Association in Fairbanks also has diesel generation capacity, with the possibility of shipping electrical power south on an electricity intertie that connects with Anchorage.

All options open

Looking into the longer term, which Gibb characterized as 15 years into the future, the utilities are still considering all possible options, including the import of LNG or CNG by ship from out of state. The longer-term arrangements would take over from the short-term solution, once those longer-term arrangements are in place. And in evaluating the long-term solutions, the utilities are assuming that the gas shortage will level out after 2020 as new Cook Inlet gas fields come on line following the resurgence of interest in Cook Inlet exploration.

Asked whether the implementation of a short-term solution to the gas shortage could provide a couple of years of breathing space, to see whether new gas fields in the Cook Inlet basin would bring on line sufficient gas to avert a long-term gas supply shortage, Gibb said that unfortunately an early decision will be needed for an option to import gas.

Any import option will require a commitment to the building of the necessary ships, with a two-year window involved in the ship construction, he said. And, with production decline rates from the basin at about 20 percent per year, drilling out of the supply shortage would be tough.

“The (gas production) declines that we’re seeing here … there’s a serious question … as to whether you can run fast enough,” Gibb said. “If you don’t find that mother-lode field that is all of a sudden just an heroic solution, it’s very, very difficult to look at a means whereby you can drill your way out of this problem.”

North Slope gas

The possibility of trucking LNG from the North Slope is on the table, but this option would require hundreds of LNG trucks to travel down the Haul Road from the Slope every day, with gas supplies coming to a halt if for some reason the road had to be closed, and with the possibility of weather causing delays in truck movements.

“Logistically, it may be very, very challenging,” Gibb said.

Gibb also addressed the question of an in-state gas line from the North Slope as a long-term gas supply solution for Southcentral, saying that at the moment the pipeline option is uncertain. If the pipeline is built, it would be necessary to look at the comparative economics of obtaining gas by this means, with the possibility of incurring the cost of backing out of the gas import arrangements, or extending the costly short-term power generation solution until the pipeline is completed.

Western Canada

And, whether in the form of LNG or CNG, imported gas would likely come from western Canada, with a purchase price linked to North American gas markets rather than to the price of LNG in, say, Japan. At present there is no practical source for the LNG or CNG from the West Coast of the United States, and shipping the product from a U.S. port would involve complications around the Jones Act, the statute that requires the use of U.S. ships for freighting between U.S. ports.

The utilities had been veering towards the import of CNG as an apparently simpler and more cost effective solution than LNG, although both of these long-term import solutions require dedicated ships. In fact, the utilities are close to determining the best shipping arrangement for the CNG option, Gibb said.

LNG

But the utilities have realized that they need to take a closer look at LNG — one LNG provider has what appears to be almost a custom fit to what is needed, he said. In fact there is an LNG option that presents the possibility of a short-term solution, he said. And there are technical challenges with CNG, including the construction of some necessary equipment.

“We do have a CNG answer, but there’s not a reason to move forward with it yet,” Gibb. “LNG is beginning to look more and more like, at least, a competitive solution.”

The facilities for importing the CNG or LNG would probably be located at the port of Nikiski on the Kenai Peninsula, to take advantage of the existing dock infrastructure there. But, unlike the use of diesel fuel for power generation, there would be a significant permitting requirement. And either import option, because it would involve the movement of gas across the U.S. border, would require a presidential permit, a source of some project uncertainty, Gibb said.

—Alan Bailey



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