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Vol. 18, No. 24 Week of June 16, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Looking to simplify

Hilcorp evaluating the possibility of unifying its Cook Inlet gas lines

Alan Bailey

Petroleum News

When Hilcorp Alaska, the company that now dominates oil and gas production in Alaska’s Cook Inlet basin, took over Chevron’s and Marathon’s assets in the basin, the company acquired four key pipelines that deliver natural gas from Cook Inlet fields to Southcentral gas and power utilities. Now, as the dust settles from the Cook Inlet acquisitions, Hilcorp is assessing the potential to consolidate the operation of the pipelines into a single pipeline system, a move that could greatly improve pipeline efficiency, delivering cost savings to the pipeline users, Edmund Jaroch, Hilcorp Alaska’s pipeline manager, told a meeting of the Regulatory Commission of Alaska on May 29.

Individual pipelines

The four pipelines in question — the Cook Inlet Gas Gathering System, the Kenai Nikiski pipeline, the Kenai Kachemak pipeline and the Beluga pipeline — were all constructed at different times by different owners for different purposes. And now, with each pipeline separately managed, with its own tariff and rate structure, the pipelines tend to vie with each other for business despite the fact that they combine to form an integrated Cook Inlet gas transportation network.

In response to requests by businesses shipping gas on the pipelines, Hilcorp is evaluating improvements to its pipeline system, including the practicalities of managing all four pipelines, in effect, as a single line, Jaroch said.

“Today the markets have changed. Some of the customers have changed. The owners have changed … This is probably a good time to do this evaluation,” he commented.

Four-phase process

Hilcorp’s pipeline evaluation is now in the second phase of what could become a four-phase process, Jaroch said.

Phase one, which has already been completed, consisted of Hilcorp’s own internal evaluation, identifying ways in which the management and operation of the pipelines could be improved. Phase two, in progress and planned for completion by around August, involves talking to pipeline shippers and other interested parties, presenting Hilcorp’s ideas and seeking other views of what might be done. If Hilcorp then decides to move ahead with changes to the pipeline system, phase three would involve a roll-out of what the company proposes, with implementation of the proposals taking place in phase four.

Inefficiencies

The evaluation in phase one identified significant inefficiencies in the regulation and operation of the pipelines as separate entities, with each pipeline requiring its own rate case as part of the regulatory process and with each having its own administration, Jaroch said. And the significant differences in shipment rates between the different pipelines tends to drive shippers to move their gas along routes determined by fees rather than by optimum pipeline usage, thus creating congestion at certain points in the pipeline network.

Rate differences also tend to make new pipeline developments more appealing on some sections of pipeline than on others, thus discouraging a system-wide approach to prioritizing development decisions, Jaroch said.

Working gas

Another issue is the small quantity of so-called “working gas” in the pipeline system, Jaroch said. Working gas, the gas that fills the pipelines, maintains the gas pressure in the lines — the more of this working gas that is available, the more flexibility the pipeline system has in responding to changes in the rates of flow of gas into the system from gas fields and out of the system to gas consumers.

Gas shippers have to nominate in advance the amount of gas that they anticipate having to move through a pipeline, with the pipeline operator then having to juggle the needs of different shippers and adjust the pipeline operation to accommodate the actual volumes of gas that flow through the system. If plenty of working gas is available, the operator can maintain pipeline pressure within an acceptable range, as gas throughput changes, by adding or withdrawing working gas. But, if working gas is in short supply, as in Hilcorp’s Cook Inlet lines, the maintenance of the gas pressure can require shippers to frequently alter their gas nominations, to ensure that the delivery of gas into a pipeline is balanced by the rate at which gas is delivered from the line.

In the Cook Inlet region this problem becomes particularly acute during the extreme fluctuations in gas demand during the winter, with shippers often having to submit gas nominations several times a day for all four Hilcorp pipelines, Jaroch said.

“That causes a great deal of discomfort and a lot of work for the accountants,” he said.

Pipeline consolidation

The concept that has thus far emerged from phase two of Hilcorp’s pipeline project is the consolidation of all four pipelines for operation as a single system, regulated and managed as a single entity, accepting shippers’ gas nominations that simultaneously apply to all of the lines, and giving Hilcorp the discretion to decide how to move gas through the system, to make optimum use of pipeline capacity.

And the key to the establishment of an arrangement of this type would be a “postage stamp rate” for shipping gas, Jaroch said. Under a rate design of this type, Hilcorp would charge a constant per volume gas shipping fee, regardless of where in the pipeline system the gas is accepted for shipment and regardless of the shipment delivery point.

In addition to giving Hilcorp the ability to appropriately route gas through the system, a postage stamp rate would place all gas fields on an equal footing for shipping costs, regardless of field location.

“It is the thing that will make the system more homogeneous, make gas more homogeneous, in the Cook Inlet,” Jaroch said.

Gas storage?

Hilcorp is also evaluating three possible ways of making more working gas available for pipeline throughput management. The company could perhaps lease space for working gas in Cook Inlet Natural Gas Storage Inc.’s Kenai gas storage facility; the company may be able to implement its own gas storage facility; or the company could perhaps pay a gas producer for a working gas service, obtaining top ups of working gas from the producer as necessary and subsequently returning the gas when not needed, Jaroch said.

Hilcorp also wants to acquire a modern Internet-based nominations system that will enable shippers to go online both to nominate gas volumes for future shipment and to obtain nomination reports. Currently, shippers have to submit nominations by email, with Hilcorp staff having to transcribe the email contents into the company’s nomination system.

Tricky issues

However, Hilcorp’s ideas for the future are all still in something of an embryonic state, with some fairly tricky issues that would need to be resolved before implementation. For example, the company would need to figure out how to deal with current contracted commitments for use of its pipelines, including some contracts that give some shippers priority in pipeline use, Jaroch said. In additions, gas producers with fields close to customer delivery points, and hence short gas transportation distances, would likely see their transportation costs rise under a postage stamp rate, he said.

Although the overall impact of pipeline consolidation and other improvements would be reduced gas transportation costs, passed on to gas consumers, features such as increased working gas would introduce new cost factors that would need regulatory approval, Jaroch said. Hilcorp would need to be able to recover any new costs from its shipping fees, he said.

It will be necessary for all stakeholders to work collaboratively, to develop and implement solutions with overall benefits for the Cook Inlet gas industry, Jaroch said.



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