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Guide to Alaska natural gas projects
Bill White Researcher/Writer, Office of the Federal Coordinator (Editor’s note: This is part 2 of a summary of Alaska natural gas projects by the Office of the Federal Coordinator. Part 1, published in the Sept. 14 issue of Petroleum News, includes the Alaska LNG Project, a partnership of BP, ConocoPhillips, ExxonMobil, TransCanada and the Alaska Gasline Development Corp.; a smaller-scale LNG project in Southcentral proposed by Resources Energy Inc., a Japanese company; and a pipeline to Alberta, a project active until 2012.) Pipeline to Southcentral
A 737-mile, 36-inch buried pipeline from the Prudhoe Bay field on Alaska’s North Slope to the Big Lake area north of Anchorage. From there, the gas could flow to consumers, utilities and other industry via the local distribution pipelines of ENSTAR Natural Gas Co. The pipeline also would supply the Fairbanks area.
The line would parallel the trans-Alaska oil pipeline from Prudhoe Bay to just north of Fairbanks, then continue south to Big Lake, roughly parallel to the Parks Highway.
The pipeline would move up to 500 million cubic feet of gas per day. The project also is known as the “bullet line,” the in-state line and the Alaska Stand Alone Pipeline, or ASAP.
Sponsor
Alaska Gasline Development Corp., a state agency the Legislature created in 2010. The state-led effort is a backup if the larger producer-led LNG-export project stalls.
Estimated cost $5.4 billion to $10 billion (2012 dollars). Sponsor is using midpoint of $7.7 billion as a working number.
The cost includes a gas treatment plant at the Prudhoe Bay field to remove propane, butane and other gas liquids as well as water, carbon dioxide and other impurities from the gas, then compress the gas before it enters the pipeline. The cost also includes a separate 35-mile spur line between the main pipeline and Fairbanks.
Project cost does not include a local gas distribution network needed for Fairbanks. The local gas pipeline network already exists in much of Southcentral.
Gas for Alaskans Gas for Alaskans was the main idea when the state Legislature funded a feasibility study in 2010.
Status The feasibility study issued in July 2011 provided a preliminary plan. In 2013, the Alaska Legislature appropriated about $355 million to continue design, permitting and commercial work. That’s in addition to $72 million in funding for 2010-2012. The Legislature in 2013 also granted the state gas pipeline corporation unlimited authority to issue bonds to pay for construction, with the restriction that the state is not legally or morally responsible for the debt. Bond buyers would be repaid from revenue collected from the pipeline’s customers, including utilities and large commercial customers.
Possible timeline 2013-2015 - Project sponsor sharpens engineering and cost estimate, obtains permits.
2016 - Customers solicited to ship gas on the pipeline, called an “open season.” Customer response will help determine the project’s economic viability.
2016 or later - Final decision on whether to build project.
Construction would take an estimated three years, with gas then initially flowing to Fairbanks, followed by gas flows to Southcentral Alaska a year later.
Pluses •Short-term economic boost to Alaska during construction of multibillion-dollar project.
•Assuming the pipeline operates at full capacity and preliminary construction-cost estimates hold true, Alaska’s Railbelt consumers could be assured of an affordable gas supply for decades. In Southcentral Alaska, the gas could supplement Cook Inlet supplies used for heating and power generation. Delivering natural gas to Fairbanks could greatly lower that community’s high cost of energy.
•The project might feed the Kenai Peninsula LNG plant. That plant exported gas from 1969 through 2012. It then shut down due to a lack of Cook Inlet gas supply. When more Cook Inlet supply became available, the plant restarted in 2014 under a federal authorization to resume limited exports to 2016.
Problems •Requires the state gas line corporation to issue billions of dollars in revenue bonds for construction, and could need direct state funding if the pipeline lacks enough customers to carry the full cost. The state Legislature would need to approve direct financial aid.
•The construction cost estimate is soft until more engineering work is done. A much higher cost than the midpoint $7.7 billion estimate would alter the project economics.
•Requires major gas shippers to make long-term commitments to use the pipeline.
•The project would produce far less state revenue than a larger pipeline for an LNG export project due to the small volume of gas moved.
•Requires the state to bear all of the pre-construction cost because no private developer will do so.
•The cost of gas to Alaskans would be higher than gas from the larger LNG export project.
•The project would not spark as much Arctic oil and gas exploration as the bigger pipeline.
*The project relies on assumptions about customer demand that must come true to meet the pipeline rates and consumer prices predicted for the project. These include:
1. A major mine, such as the Donlin gold prospect in Western Alaska, will start up by 2019 and contract for a significant volume of gas down the line.
2. A utility or utilities will build a local gas distribution pipeline network in Fairbanks by the time the pipeline from Prudhoe Bay is ready.
3. Cook Inlet gas production will fall to such a point that power plants and the local gas utility in Southcentral Alaska will consume a lot of North Slope gas.
4. A revived liquefied natural gas export plant on the Kenai Peninsula or other large-volume industrial customer(s) will contract for much of the pipeline’s capacity.
Cook Inlet gas Out of concern that aging Cook Inlet fields might not produce enough gas for local needs after doing so for nearly 50 years, two Anchorage electric utilities and a gas utility in 2011 jointly began considering the idea of importing liquefied natural gas or compressed natural gas to Southcentral Alaska. Other utilities soon joined the effort. In particular, the utilities were concerned they didn’t have enough gas supply under contract for coming years.
Since then, their sense of urgency has eased as Cook Inlet producers are stepping forward to offer increased gas production to cover the next several years.
Also, in June 2011 the U.S. Geological Survey said the Cook Inlet region still holds an estimated 19 trillion cubic feet of natural gas that could be produced using current technology.
That’s about double the total Cook Inlet gas production over the past 50 years. But how much of the gas could be produced profitably with current technology likely is a much smaller number, possibly as little as 10 percent.
Separately in June 2011, the Alaska Division of Oil and Gas estimated that Cook Inlet alone could continue to profitably supply all of the region’s natural gas needs until 2018–2020, at which time supplemental supplies would be needed. The study said the gas industry must continue investing in the Inlet for this prediction to hold.
The state Legislature in recent years has approved incentives to boost Cook Inlet gas exploration and production.
New players, led by Hilcorp, which acquired Chevron and Marathon’s holdings in Cook Inlet, have boosted oil and gas production.
In 2010, state lawmakers passed tax credits and other incentives to encourage development of an underground gas storage facility on the Kenai Peninsula. The goal was to help utilities meet peak winter demand by storing surplus spring-and-summer production. Such a storage site opened in 2012.
Gas to Fairbanks by truck Ideas have been floated for getting North Slope natural gas to the Fairbanks area, where energy costs are much higher than in Southcentral Alaska and only a little natural gas is available, via truck deliveries from a privately owned LNG plant north of Anchorage.
In 2013, the Alaska Legislature approved a $333 million cash-and-loan package requested by Gov. Sean Parnell for a small-volume North Slope LNG plant as well as storage and distribution infrastructure in the state’s Interior. A year earlier, state lawmakers approved $30 million in tax credits for the LNG storage tanks the Fairbanks area would need to receive trucked deliveries. Escalating heating-oil bills in the Fairbanks area prompted the state to act.
With private money added, the Interior Energy Project, as the state named it, could total $430 million or more. This total would include building gas distribution pipelines in a limited area of the Fairbanks region; the state estimates expanding the grid could cost an additional $200 million.
At the center of the funding is the Alaska Industrial Development and Export Authority, a state agency that supports economic development. With the state’s financial assistance for the project, AIDEA believes LNG will be more affordable than oil-based fuels.
AIDEA would use the $57.5 million cash appropriation from 2013 for an equity stake in the LNG plant and perhaps other aspects of the project. AIDEA also is authorized to lend $125 million at a low interest rate and issue on the open market $150 million in other low-interest debt to raise money for the project.
The plan is for a private operator or operators to:
•Build the gas liquefaction plant on the North Slope.
•Own and operate a fleet of LNG delivery trucks running between the plant and Fairbanks. The trucks were not included in the state’s cost estimate for the project.
•Build and operate aboveground LNG storage tanks.
•Build and operate “regasification” equipment to warm the gas back into a vapor and feed it into a distribution grid for delivery to residences and businesses around Fairbanks.
The LNG plant would be designed to process up to 9 billion cubic feet of gas a year - averaging 25 million cubic feet a day - slightly more than the forecasted Fairbanks-area demand 10 years after start-up (capacity would be greater than demand to accommodate seasonal swings in demand, AIDEA says).
In January 2014, the AIDEA board chose global infrastructure firm MWH Americas Inc. to develop and run the LNG plant at Prudhoe Bay. MWH proposed to invest $82.5 million in equity and debt. MWH needs to lock in a gas supply from North Slope producers as well as buyers for the gas before building the plant.
The LNG would be used as a fuel to heat buildings, including homes, and generate electricity.
The project sponsors foresee three main customers:
Fairbanks Natural Gas, a small, privately owned local utility that already has a limited pipeline network in the city of Fairbanks. The company now distributes LNG trucked from Southcentral Alaska.
Interior Gas Utility, a new utility that the cities of Fairbanks and North Pole set up in 2012 and that the Fairbanks North Star Borough eventually took over. In December 2013, the Regulatory Commission of Alaska chose this utility over Fairbanks Natural Gas to provide gas to North Pole and other somewhat densely populated areas outside the city of Fairbanks. Interior Gas plans to install a local gas-pipeline distribution system to be ready when LNG deliveries begin. The North Pole population totals only a little more than 2,000 people, but a sizable power plant is there.
Golden Valley Electric Association, the regional power company with a generating plant in North Pole that currently burns diesel and naphtha. The naphtha turbine could be converted to burn natural gas instead.
In 2014, the outlook for Fairbanks demand became fuzzier. Flint Hills stopped processing crude oil at its North Pole refinery. Flint Hills could have been an important industrial customer of the trucked-LNG project, substituting less expensive natural gas for oil to fuel operations. Flint Hills also has been an important commercial customer of Golden Valley, including as naphtha supplier to the power utility’s North Pole plant.
AIDEA says that if the proposal’s many parts come together easily and quickly, the first LNG could move to Fairbanks in 2016. But AIDEA acknowledges that schedule is “aggressive.” And the agency says it is exploring alternatives, such as burning Cook Inlet gas in the Fairbanks area.
Federal Coordinator Larry Persily contributed to this article.
Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/guide-alaska-natural-gas-projects.
Part 1 of this story appeared in the Sept. 14 issue of Petroleum News.
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