Providing coverage of Alaska and northern Canada's oil and gas industry
June 2012

Vol. 17, No. 26 Week of June 24, 2012

Is propane being wasted?

Harold Heinze and BP engineers make the case for and against propane sales

Eric Lidji

For Petroleum News

A small amount of propane could help numerous rural Alaska communities break their dependence on expensive heating oil. The Prudhoe Bay unit produces thousands of barrels of propane, but reservoir engineers re-inject almost all of it back underground.

So why can’t they share some?

That’s what Harold Heinze wants to know.

In a hearing before the Alaska Oil and Gas Conservation Commission on June 19, the former head of ARCO Alaska and the Alaska Natural Gas Development Authority argued that current propane management practices at Prudhoe Bay could constitute waste.

But operator BP Exploration Alaska Inc. said propane is crucial for enhanced oil recovery — a program responsible for continued oil production from the aging field — and it couldn’t justify a sale until the economics for propane beat out the economics for oil.

While the commissioners described the hearing as purely “informational,” it raised questions that could re-emerge should North Slope producers ever be in the situation of sucking the last drops of oil from fields while also selling the gas used for that effort.

‘There is a local market’

Although the Prudhoe Bay unit has been using propane for field operations for a while, the question of waste didn’t rear its head until relatively recently, according to Heinze.

“There is a local market for Prudhoe Bay propane. There may not have been five years or 10 years or 30 years ago, but there is today,” he said. The producers could supply the market using an infrequently operated propane recovery facility at the Central Gas Facility or CGF, Heinze believes. “Instead of turning the switch off every month after a day and a half, it should be left on. And that propane can be made available,” he said.

Because Prudhoe Bay won’t produce forever, any propane not sold today would theoretically be trapped underground once the field is taken offline. And even that small hypothetical amount, Heinze argues, constitutes waste according to state statutes.

“Failure to grab it while it’s there sets the stage for lost production,” he said.

While Heinze said BP is a responsible operator, he believes the company isn’t challenging its engineers to find a way to produce more propane to be used in-state.

As one source of potential supply, Heinze pointed to a refrigeration unit recovering 25 barrels of propane per day but only run for a day-and-a-half each month. As another, he suggested tweaking the system, claiming there is no “exact formula” for miscible injectant. “In many ways, it’s a witch’s brew. You work with what you’ve got,” he said.

While the vast majority of propane produced at Prudhoe is used on-site, some 750 barrels per day is sent outside the field, either to the trans-Alaska oil pipeline, the BP-operated North Star unit or the ConocoPhillips-operated Kuparuk River unit. Heinze believes the Department of Natural Resource should look into the propane leaving the unit because “when things leave the unit they are subject to royalty consideration.”

Heinze said he copied the heads of the Department of Natural Resources and the Division of Oil and Gas on all correspondences on the matter, but received no “feedback” from either.

‘A direct and negative impact’

It’s not so simple, though, according to BP.

Over several hours of technical testimony, BP engineers attempted to show how every molecule of propane produced at Prudhoe Bay is used to pump more oil out of the field.

Prudhoe Bay’s propane use really maximizes the economic recovery of Alaska’s oil, helping to produce more than 2 billion barrels beyond initial recoverable reserve estimates for the field, according to Janet Weiss, vice president of resources for BP.

“The removal of propane would have a direct and negative impact on the number of EOR barrels we recover through enhanced oil recovery processes,” Weiss said. Additionally, “that propane remaining in the reservoir could be sold with an economic gas sale.”

The propane is used to enhance oil recovery in two ways.

First, as part of the miscible injectant pumped into oil fields and second through a residual stream injected into the gas cap to increase the pressure at the field.

Of the roughly 110,000 barrels per day of propane coming into the Central Gas Facility, BP includes about 70,000 in the residual stream injected back into the reservoir for pressure maintenance. Of the roughly 40,000 barrels per day remaining, more than 85 percent is used to make miscible injectant. (Roughly 11 percent is used for fuel.)

“With the current limitations to the process, if we removed more propane it would remove its ability to be used for miscible injectant process,” Weiss said. While the Prudhoe unit owners could theoretically make money by selling the propane, “you make less oil because you wouldn’t have that propane to be used as miscible injectant.”

Weiss also suggested BP couldn’t change the profile of the miscible injectant. What Heinze described as a “witch’s brew,” Weiss described as “careful chemistry.”

With the right project — EOR or a sale — BP could expand the Central Gas Facility to recover more propane, Weiss acknowledged, but while the owners have investigated opportunities, “we don’t have an expansion option that’s economic enough,” she said.

(During the testimony, a BP engineer said the company has more potential miscible injectant targets than volumes to serve its needs. Additionally, the engineer suggested the current tax code made it difficult to justify a plant expansion, but when Commissioner Cathy Foerster pressed for details the engineer only said that the code, called Alaska’s Clear and Equitable Share, removed the upside of investments at high oil prices.)

Asked how the unit owners would determine if a propane market justified producing fewer barrels of oil from enhanced recovery, Weiss said the companies would use “standard economics,” but suggested such an arrangement might require approval from the AOGCC because it would change the ultimate recovery profile for the field.

The issue is complicated further because any commercial decision would require the approval of all Prudhoe Bay unit owners, and BP only owns 26 percent of the field.

Although BP has heard from ANGDA and other entities on potential propane projects, “currently we don’t feel it’s commercially viable to do anything else with (the propane) at this moment,” said Sherri Gould, business development lead for BP in Alaska.

Asked what would happen if the state demanded a volume of propane as royalty-in-kind, Gould said, “I would definitely have to scratch my head on that one and seek some additional expertise,” but said she suspected any use for the propane other than enhanced recovery would require the unit owners to amend their operating agreement.

What about the big line?

Afterward, Heinze summed up the testimony: BP needs every molecule of propane it is producing for enhanced oil recovery, but enhanced oil recovery doesn’t currently justify expanding the Central Gas Facility to increase propane production. “If the Prudhoe Bay unit, as the owner of a piece of equipment, can’t figure out a way to slightly modify that facility to do something more with it, as a third party I have no chance economically of doing anything. … I will accept that, currently, the answer is, ‘Hell no,’” he said.

Additionally, Heinze said the testimony didn’t square with long-term pipeline plans.

In particular, Heinze referred to a Northern Economics study recommending 3,000 to 5,000 barrels per day of propane use within the first five years of a large-diameter North Slope pipeline and 20,000 to 30,000 barrels per day within the first 10 to 15 years.

“A lot of people working on longer term implications of North Slope gas to market and other things like that need some clarity,” he said. “If (miscible injectant) is the greatest thing since sliced bread, so be it. Let’s figure it out and put it on the table. If there really is other things we can do with propane, then let’s figure that out and put that on the table and get on with it.” By extension, while the use of the currently recovered propane is “clearly beneficial,” the producers and the state still have an opportunity to “do better.”

“I still can’t walk away from that one,” Heinze said.

While he appreciated the information BP added to the record before and during the hearing, Heinze said it was “unfortunate” it took an AOGCC investigation to get “what I consider to be some very basic CGF performance data.” He suggested the facility information should be reported monthly, similar to field level oil and gas production.

“I don’t see any reason that the CGF performance data needs to be confidential or proprietary. It looks to me just like well production reporting data,” he said.

The commission agreed to leave the record open for 30 days.

‘A possible energy bridge’

That technical discussion, though, does little to help rural Alaskans.

When discussions for ANGDA began a decade ago, many hoped a pipeline would by now be taking North Slope gas to tidewater and supplying rural communities along the way through a series of off take points, according to Nels Anderson Jr., former energy czar to Gov. Frank Murkowski. “The disparity among Alaskans for their energy is huge and we see propane as a possible energy bridge from diesel to when the state of Alaska finally develops an energy distribution system that can deliver energy equitably to all Alaskans, so that we can all benefit, as Anchorage does, from very low cost energy.”

Calling BP “a good corporate partner” and saying it wasn’t “a target,” he said other operators should be present and the administration should consider the issue a priority.

“This is an instance where Alaskans see a resource that they believe belongs to them, stranded gas on the North Slope, right now, belongs to Alaskans. And when it’s developed we will own 12.5 percent on the royalty,” he said, asking the commission and the governor to make it a priority. “We need to make it possible for propane to be made available to reduce the cost of energy for Alaska, because we are in crisis up there.”

A pitch for the pipeline

Although Heinze requested the investigation as a citizen, the issue has long been an ANGDA priority. As early as 2005, the voter-mandated public corporation proposed a propane extraction facility at the Yukon River crossing of any North Slope gas pipeline.

“Why wouldn’t we do something at that point and use the river as a transportation system to move energy up and down?” Heinze asked the Alaska Legislature at the time.

While piped gas would be cheaper than propane, the majority of communities in Alaska would not enjoy the direct benefits of a pipeline. With a propane distribution system “you in essence touch 99 percent of the population of Alaska,” Heinze told the ANGDA board in December 2006, when he announced plans to launch a propane demonstration project.

As part of that project, Heinze pitched the idea to BP, he said at the time.

The village of Tanana took the bait in 2007, testing the feasibility of the propane by converting its teacher-housing unit to run on the fuel. Although still expensive by urban standards, propane proved cheaper than heating oil, particularly in bulk purchases.

‘Another good idea’

With Tanana as a starting point, ANGDA proposed a wholesale delivery point at Prudhoe Bay pulling propane from the rich gas stream passing though the Central Gas Facility.

In June 2009, Heinze said one of the three major North Slope producers had agreed to sell propane at a low cost if an independent third party could prove the project was technically feasible and show a market existed. “We believe it’s got every basis in the world to go forward,” Heinze said at a conference in Fairbanks. If the private sector wasn’t interested, ANGDA would “write it off as another good idea that didn’t launch.”

Although ANGDA garnered general endorsements from the Alaska Congressional delegation and then-Gov. Sarah Palin, the project failed to climb to the top of the large pile of competing or complementary projects to bring natural gas products to Alaska.

While those conflicts remained hypothetical in some cases — such as the potential of a large diameter or in-state pipeline to undercut the propane project — Fairbanks Natural Gas President Dan Britton accused ANGDA of “getting in the way of a private entity that is trying to do a similar project,” referring to its proposal to build a liquefaction plant on the North Slope and truck liquefied natural gas to its distribution grid in Fairbanks.

“I think we’re complementary,” Mary Ann Pease, a contractor working on the propane project for ANGDA, said at the time. “And I think anybody — any entrepreneur that wants to come in at that point and have at it — is more than welcome to do so.”

At the time, both considered the Interior electric cooperative Golden Valley Electric Association to be a potential anchor customer. While an FNG affiliate recently received regulatory certification to move ahead on the liquefaction project, Golden Valley is now looking into sponsoring its own operation in partnership with Flint Hill Resources.

By late 2010, Heinze said propane could be profitable for the Prudhoe Bay owners, but suggested it might be too small to attract the attention of multinational companies producing hundreds of thousands of barrels of oil daily. “It’s very hard to get people to focus on secondary and tertiary type levels of contribution to their bottom line,” he said.

‘The end of our rope’

Over the course of 2010, according to letters released as part of the investigation, ConocoPhillips claimed extracting propane from residue gas would decrease the amount of injectant produced at the facility and could impact enhanced recovery, but told ANGDA it would be “willing to continue discussions to determine whether there are technical or operational innovations that are feasible but have not yet been considered.”

In October 2011, Heinze said at least two of the three Prudhoe Bay unit owners appeared to be ready to sell propane. In December, though, he asked the AOGCC to investigate.

“We have reached the end of our rope,” Heinze told the ANGDA board.

In an initial letter to the AOGCC, he wrote, “While the Prudhoe Bay Unit Owners have indicated a willingness to sell propane I have been unable to discern the direction and schedule of the needed actions by the Unit Operator BP. I understand that BP is under no obligation to inform me or the public as to plans, if any, for making propane available.”

Earlier this year, Heinze left ANGDA to open a private consulting firm.

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