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Vol. 12, No. 2 Week of January 14, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska LNG rumor denied

News report indicates biggest customer may be edging away from Nikiski supply

Allen Baker

For Petroleum News

The biggest customer for liquefied natural gas coming from Nikiski’s LNG plant may be looking for other sources of supply after March 2009. That’s when the aging plant will need a new export license from the U.S. Department of Energy to keep sending its product to Japan.

A Jan. 9 report in Japan’s top financial newspaper, Nihon Keizai Shimbun, said Tokyo Electric Power Co. had decided not to renew its contract with the ConocoPhillips-Marathon joint venture, or another smaller contract with Indonesia. The report said Tepco believed reserves for the two LNG producers were close to being exhausted.

But a company spokesman was quoted by Dow Jones later that day as saying no decision had been made on the supply issue.

“We are not in any kind of talks on these projects with the sellers, and haven’t made any decision,” a Tepco spokesman was quoted by Dow Jones. Tepco buys 920,000 metric tons of LNG annually from Alaska, as well as 130,000 metric tons from Indonesia.

Tepco and Tokyo Gas Co. Ltd. have bought essentially all of the LNG from the Nikiski facility since it started production back in 1969.

Two ships that each carry 40,000 metric tons of LNG continually shuttle from Nikiski to Japan, taking the plant’s annual production of 1.7 million metric tons of LNG, produced from the 220 million cubic feet of natural gas that flows in daily.

No shutdown plans

The owners of the Nikiski LNG plant say they aren’t ready to give up on the facility, even though it’s essentially outmoded and small by current standards.

“We have a contract through 2009. Nothing definitive has been determined after 2009. ConocoPhillips remains interested in extending exports if circumstances permit,” said Dawn Patience of ConocoPhillips, which owns 70 percent of the plant and operates it. Its 70 percent share of the production comes from the North Cook Inlet field.

The other plant owner, Marathon Oil Co., may have a more compelling reason to want the facility to soldier on past 2009. While ConocoPhillips isn’t active in Southcentral Alaska exploration, Marathon has drilled more than 50 wells in the area since 1998, and has had some notable successes.

“We’ve invested many millions in development and drilling activities,” says Paul Weeditz, the company’s director of external communications. “The Cook Inlet region, we believe, holds substantial resource potential — but it will require significant investment to realize that potential.”

And that investment may be contingent on a ready market for natural gas, which the LNG plant provides by consuming more than a third of the gas produced in the region, day after day, year after year.

“It’s an incredibly important part of the economy there. Beyond simple exports of LNG, it plays an important part of the industrial base of natural gas,” Weeditz said. “We’ve been asked quite a bit about the future of the facility in 2009. What we’ve said is we’re working with our partners to examine the facility, what our options are.”

Permit problematic

But even renewal of the export license may not be easy. When the two companies went to the Department of Energy in 1999 to get an extension of the license from 2004 to 2009, objections came from utility Enstar Natural Gas Co., as well as from Aurora Gas Inc., Unocal and Fairbanks Natural Gas LLC. The export license depends on a determination that there is surplus gas beyond what is needed for domestic use, and the objecting companies disputed that.

The next round could be challenging because projections by the Alaska Department of Natural Resources indicate a steep decline in production from existing Cook Inlet fields after this year. Most of the huge fields discovered in the 1960s are starting to play out.

On top of that, there are concerns that the plant itself is reaching the end of its useful life. A report last summer commissioned by the Alaska Natural Gas Development Authority noted that the big combustion gas turbines driving the compressors have been in service for 37 years, and are likely to need replacing in the next five years. Does it make economic sense to patch the current system, build a new state-of-the-art plant, or dismantle it?

For the 58 workers at the Nikiski plant, future employment could depend on major new discoveries of gas in the Cook Inlet region, or a spur line carrying natural gas from the North Slope to Southcentral Alaska. Even a North Slope spur could be tough on the plant’s economics, given the netbacks the producers would want for their gas, plus transportation to Nikiski and then to the eventual markets.

Closer suppliers

The Japanese utilities that signed the long supply contracts back in the 1960s that resulted in construction of the Nikiski plant are now diversifying their supplies, and are finding sources much closer to home. They still like dependability, however, and typically ink agreements for a fifth of a century or more.

The LNG from Nikiski accounts for just 6 percent of the 16 million metric tons of LNG consumed each year by Tokyo Electric Power. Tepco signed a 22-year contract in 2004 to buy at least 1.5 million tonnes of LNG annually, starting in 2008, from the Sakhalin 2 venture, now led by Russia’s Gazprom.

It has long-term contracts with other sources, including Australia’s North West Shelf project, Malaysia, Qatar, Brunei and Abu Dhabi, along with the Alaska and Indonesian suppliers. Tepco expects to need the same 16 million tonnes of LNG in 2009 that it is using this year. The utility says it already has contracts in place for the 2009 supplies.

Japan imports a total of 58 million tonnes of LNG annually, and is expected to consume 80 million tonnes by 2020. Korea is the world’s second-largest LNG buyer, with current consumption of more than 22 million tonnes a year and a growth rate of about 5 percent annually.

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