Is LNG the answer for Alaska gas?

Senate Resources Committee hears proposal to truck Cook Inlet LNG throughout Alaska as a way to expand the local natural gas market

Eric Lidji

For Petroleum News

An independent Cook Inlet explorer and an Outside liquefied natural gas industry executive are hoping to use LNG to expand the natural gas market in Alaska.

LNG Alaska, a partnership between Buccaneer Alaska LLC and LNG Central, believes it can increase the market reach of Alaska natural gas by connecting Fairbanks utilities and the Alaska Marine Highway System to the existing LNG facility in Nikiski (and also by potentially restarting exports from that soon-to-be-mothballed facility in the future).

“It’s going to take several groups coming together to say: We want to do this plan,” Keith Meyer, CEO of LNG Central, told members of the Senate Resources Committee at an interim hearing in Kenai on Oct. 21. “If we come together. It’s actual very competitive.”

Although he didn’t offer any details about LNG Central, Meyer said he has 30 years of experience in the energy industry, including a stint as president of Cheniere LNG Inc., chairman at the floating liquefaction company Flex LNG and time at other companies.

Buccaneer expects to become the newest Cook Inlet producer this year, but the local subsidiary of Australian independent Buccaneer Energy Ltd is concerned its long-term plans for the basin could be stymied by limitations in the local market. When news broke that ConocoPhillips and Marathon planned to shut down the Kenai LNG plant it “sent a cold chill through our corporate offices,” COO Jim Watt recently told lawmakers. (See sidebar this page.)

While the Southcentral supply crisis of recent years isn’t resolved, the basin is busier than it’s been in many years and regional utilities have all or most of the natural gas supplies they need for the near term. That is leading potential producers to worry that after all the commotion about flagging production the market won’t be able to handle additional supplies.

The Cook Inlet has a “bad reputation,” Meyer said, and policymakers are using the declines in the basin to justify energy projects ranging from an in-state natural gas pipeline to a major hydroelectric project on the Susitna River. “If people think there’s no gas in Cook Inlet, then demand is not going to be there. If demand is not there, producers are not going to want to be there,” he said, adding, “Virtually every producer in the inlet that I’ve talked to is willing to be supportive of a market growth initiative.”

Fairbanks and Southeast

With those volumes, Meyer said, Alaska could produce LNG for around $10 per million Btu before transportation. Without exports, though, the cost jumps to just more than $12 per million Btu and without GVEA and Flint Hills it jumps to around $18 per million Btu.

“The more volume we can get, the cheaper it is for all,” he said, noting that rural villages could also be connected to the system through regional re-vaporization hubs.

The Alaska Marine Highway System is the best place to begin, Meyer said, because as ships in the aging fleet retire, they could be replaced with dual-fuel ships that run on natural gas, as well as diesel. “The Alaska Marine Highway System would be an ideal demand because of its large load and scheduled route. With the Alaska Marine Highway, we know where the ships are going to be and when they are going to be there,” he said.

The pipeline problem

If an in-state natural gas pipeline option is available before an in-state LNG project comes online, the pipeline could probably provide lower cost fuel, Meyer acknowledged, but an LNG project could act as a “rubber pipeline,” or a road and rail option used to justify infrastructure build outs in communities that would support a pipeline in the future. “I believe long term you’re going to have a pipeline solution here,” Meyer said. “I don’t think it’s going to happen in the next 10 years, and it’s not forecasted to.”

The LNG Alaska proposal would be cheaper and more reliable than a GVEA and Flint Hills project to truck LNG from the North Slope, Meyer said, because LNG coming from south to north can take advantage of numerous transportation options, both road and rail.

The LNG Alaska proposal is completely conceptual at the moment.

While Meyer said he brought the idea to ConocoPhillips, now the sole owner of the Kenai LNG facility, he said the meeting was “not a formal discussion.” He called the plant “an ideal facility,” but said it isn’t crucial to the success of the plan. He hasn’t presented the idea to GVEA, Flint Hills Resources or the Alaska Marine Highway System.

Buccaneer plans to be busy in 2012

The local subsidiary of Australian independent Buccaneer Energy Ltd. expects to become a producer at its Kenai Loop prospect this December, drill wells at its two offshore prospects next summer, and possibly drill wells at two other onshore prospects in 2012 or 2013, President and COO Jim Watt told the Senate Resources Committee on Oct. 21.

“We feel like the basin is underexplored and very attractive,” he said, pointing to recent studies showing the undiscovered potential of the region, and to the exploration tax credits in the Alaska’s Clear and Equitable Share, or ACES, fiscal system.

Buccaneer is not a “Big E” company, Watt said, meaning it doesn’t take on major exploration projects. “Companies like Apache can take the risk of shooting such large surveys,” he said. “We’re more interested in well control, existing seismic and combined phases or stacked opportunities, and that’s what we’re pursing here in the Cook Inlet.”

The company managed to find five prospects in Alaska that fit those requirements: the onshore Kenai Loop field north of the city of Kenai, the onshore West Eagle prospect on the southern Kenai Peninsula north of the city of Homer and the onshore West Nicolai prospect on the west side of Cook Inlet near Nicolai Creek, as well as the offshore Southern Cross unit and the offshore Northwest Cook Inlet unit in the upper Cook Inlet.

Under its current development plan, Buccaneer expects to bring Kenai Loop online late this year or early next year, begin production from West Eagle and West Nicolai in late 2013 and begin production from Southern Cross and Northwest Cook Inlet in late 2014.

Three onshore prospects

Buccaneer is currently building a pipeline at the roughly 9,000-acre Kenai Loop field in preparation to bring the field online in December. Through a contract with Enstar Natural Gas Co., Buccaneer will begin delivering 5 million cubic feet per day starting in April and is contracted to deliver as much as 15 million cubic feet per day depending on drilling results.

At 49,808 acres, the West Eagle prospect is the largest in the Buccaneer Alaska portfolio.

Although West Eagle was still fairly remote when Buccaneer acquired the acreage in early 2010, the prospect is now only six miles from the regional distribution grid thanks to the work Armstrong Cook Inlet did to bring its North Fork unit online this year.

Buccaneer is reprocessing 2-D seismic over the region, and plans to apply to form a unit at West Eagle in April that will include a commitment to drill by September, Watt said.

The region is thought to be prospective for both natural gas and oil.

Finally, Buccaneer plans to drill at the 4,952-acre West Nicolai prospect once it acquires seismic over the region. Watt noted that Apache is shooting seismic over West Nicolai, and added, somewhat jokingly, “I’m sure they’ll be very open to a reasonable deal.”

Buccaneer expects to drill at West Nicolai in 2013, but could drill as quickly as next year, Watt said. The prospect is only three miles southwest of Aurora Gas’ Nicolai Creek unit.

Jack-up getting closer to Alaska

Buccaneer currently has a contract to buy a jack-up rig — previously known as the Transocean Adriatic XI but now called Endeavour-The Spirit of Independence — and recently hired Archer Drilling LLC to mobilize the rig, operate it for Buccaneer next summer and market it to other operators in the Cook Inlet as well as the Chukchi Sea.

Buccaneer hopes to have that rig in an Asian shipyard for modifications for sub-Arctic and Arctic Alaska by November in order to begin drilling in Cook Inlet next summer.

The company plans to drill first at Southern Cross and then at Northwest Cook Inlet.

Although both units are believed to contain oil and gas, Southern Cross is believed to be oil prone and Northwest Cook Inlet is also thought to contain deep oil deposits.

—Eric Lidji