Keithley: Importing LNG would stimulate inlet gas production
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Kristen Nelson Petroleum News
Why isn't more Cook Inlet natural gas being found and produced?
Because the economics don't support it at present prices, Brad Keithley told the House Resources Committee March 15.
He said if the market is allowed to set the price, more natural gas will be brought to market while current prices only support production from existing fields, not the investment required to find and bring new volumes online.
Bringing in liquefied natural gas would increase the price enough to make more Cook Inlet gas exploration and development economic.
Committee Chair Tom McKay has expressed the concern that importing liquefied natural gas would drive out the oil and gas industry in Cook Inlet, but Keithley said LNG imports wouldn't drive out Cook Inlet natural gas but would reset the price, providing producers the economics they need to go after more natural gas. And if limited LNG is targeted for import, those imports would be scalable, he said, so if a large discovery was made in the inlet, LNG supplies could be scaled back or eliminated.
Utilities' study Keithley said the study produced by the utilities, "Alaska Utilities Working Group Phase I Assessment: Cook Inlet Gas Supply Project," provides the best assessment of the economics of Cook Inlet natural gas. One of the options presented there, based on the reuse of existing Kenai LNG facilities, would provide the lowest cost LNG over time -- $12 to $13.60 per mcf, thousand cubic feet -- compared to a potential long-term cost of $9.30 to $25.50 per mcf for Cook Inlet gas, with a timeline of 3-4 years.
With Cook Inlet gas currently at some $9 per mcf, a price in the $12-range would be an increase, but the Kenai LNG option compares favorably to larger LNG projects and to the long-term price of Cook Inlet natural gas. And while the price of gas would be just $4-$5 per mcf from full development of a North Slope export LNG project, with a pipeline to Nikiski connected to a large new LNG facility, there are no commitments for that project and it has the longest timeline, 7-8 years.
The range of prices for Cook Inlet natural gas was cited in a March 4 presentation by McKay's staff, who noted that prices for Cook Inlet gas would rise as less economic volumes were brought into production. (See story in March 17 issue of Petroleum News.)
In the utilities' study by Berkely Research Group the Kenai LNG option is described as "retrofitting the Kenai LNG export facility located in Nikiski (owned by Marathon) to be utilized as an LNG import and regasification facility for a broader group of customers than the Kenai refinery as currently proposed by Marathon," and would use the existing pier and storage tanks, with LNG coming in by tanker, "stored in the existing storage tanks, and then vaporized and injected into the Kenai Beluga Pipeline system." The study pegged the required capital investment at $768 million.
Why is the price too low? Keithley said Enstar and the Chugach Electric Association are trying to keep the price of natural gas down because consumers want the price low.
The utilities are concerned they will be questioned by the Regulatory Commission of Alaska if prices rise and want to find another way to get more supply. RCA has ample authority to be involved and needs to be part of the discussion, he said, because RCA's obligation is to ensure that the utilities meet their obligations. Both Enstar and Chugach Electric have said they can't meet their obligations without more supply.
The problem, he said, it that it takes a higher price to bring in more supplies and cited the situation in the Lower 48 in the 1970s when the natural gas price was regulated at such a low level that there was a perceived gas shortage; with a higher price, competition grew, more gas was brought to market and ultimately enough gas was produced that the price came down.
Consumers did complain when the price went up, but the result was adequate supply.
Keithley said he sees supply as the tradeoff for a higher price. You can have $9 gas, he said, but the supply isn't guaranteed. Adding $12 LNG guarantees the supply, and since LNG would initially make up a small portion of the supply, there would be less of an immediate impact on utility bills.
No subsidies The Legislature is looking at various bills to incentivize Cook Inlet gas development, from bringing in another jack-up rig to royalty reductions and other financial incentives.
Keithley said any action taken by the Legislature should have the lowest overall cost statewide. If there are subsidies, it should be clearly understood who is paying for them and who benefits from them, he said.
He argued that previous subsidies, enacted during the earlier perceived shortage of Cook Inlet natural gas, ultimately lowered the permanent fund dividend, thus having a statewide impact primarily on middle- and lower-income families, while benefits for Cook Inlet gas were received primarily by Southcentral residents.
--KRISTEN NELSON
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