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State gets mixed reviews on proposed Cook Inlet sale of royalty in kind natural gas Agrium urges state to pursue sale, citing economic importance of fertilizer plant to Alaska’s Kenai Peninsula Kristen Nelson Petroleum News Editor-in-Chief
The volume of Cook Inlet natural gas is not changed by state ownership of a royalty interest, typically 12.5 percent. But if the state sold its royalty gas, rather than accepting payment for the gas when producers sell it, the volume of natural gas available to individual customers could change.
If the state sold its royalty gas to Agrium that might help keep the Nikiski fertilizer plant open, but it wouldn’t solve long-term supply problems, the Alaska Department of Natural Resources Division of Oil and Gas was told when it asked for “expressions of interest” from parties who would be interested in — or affected by — a sale of the state’s Cook Inlet royalty gas.
The state can either sell its royalty gas or take it in value; it currently takes it in value, i.e. the royalty gas is sold by producers along with their own gas, and the producers pay the state for the portion of the gas that is royalty.
Responses were due at the beginning of April, and the state received a number of them. Mixed responses Agrium U.S. Inc., which needs low-priced natural gas for its Nikiski fertilizer plant, and has said it may be forced to close the plant because of a decline in the gas it can purchase at industrial rates, is in favor of the state offering its Cook Inlet royalty gas for sale, as is the Kenai Peninsula Borough, home to the Nikiski plant.
Chugach Electric Association, Enstar Natural Gas and Municipal Light & Power — Southcentral Alaska’s major electric and natural gas utilities — see a royalty gas sale as reducing the gas available to them, and accelerating the date at which they would need to find additional supplies. They fear such a sale would simply shift the currently short-supply of gas to their customers.
Cook Inlet’s major natural gas producers — ConocoPhillips Alaska, Marathon Oil and Unocal Alaska — oppose the idea, questioning whether such a sale would be in the state’s best interest and citing transportation difficulties in moving royalty gas.
Other than Agrium and the Kenai Peninsula Borough, those in favor of at least evaluating a royalty gas sale are Forest Oil, primarily an oil producer in Cook Inlet, which told the state it could use royalty gas as fuel gas at its oil production facilities, and Fairbanks Natural Gas, which ships Cook Inlet natural gas to Fairbanks as liquefied natural gas. Economic value of Agrium Agrium would like to buy the state’s Cook Inlet royalty gas, and cited a report the company had done by the McDowell Group on the impact closing the fertilizer plant would have on the Kenai Peninsula’s economy.
Since 2001, Agrium told the state, it has experienced a 30 percent decline in its production “due to an inability to secure adequate gas supply.” The company said it projects it may have to close the Nikiski plant by the end of 2005 if it can’t purchase enough natural gas to keep the plant running. Natural gas is the feedstock for ammonia and nitrogen, fertilizers which Agrium sells on the world market. The state’s royalty gas, Agrium said, could provide “a portion of the gas” required to run the facility.
Agrium said the McDowell Group report shows an economic multiplier of more than $9 for every thousand cubic feet of natural gas consumed at the plant. Even at 2003 levels, 70 percent of capacity, the benefit of the fertilizer plant to Alaska’s economy was $350 million a year, the company said. The plant accounts for more than 650 direct and indirect jobs, and more than $30 million a year in payroll.
A shutdown of the plant would increase the seasonal swing in Cook Inlet gas production, Agrium said: “This would result in additional cost to the consumer for their gas as the cost of infrastructure will then be borne by fewer customers.” And with increased seasonality of gas use, money may have to be invested in storage facilities and there may be operational difficulties with wells that are shut in part of the year, both events increasing costs to consumers.
The sale of royalty gas to Agrium would also, the company said, “act as a catalyst to spur new gas development in the Cook Inlet” because it would increase the demand for gas, thus stimulating exploration and development.
If the Agrium plant is shut down, the company said, there would be decreased demand for gas, an increased available supply and “elimination of the only market accessible to new entrants.” Agrium would take all state’s gas Agrium said it would take all the state’s royalty gas, but wants to be able to opt out of taking the royalty gas from some fields, such as those where it already receives the gas under its gas sales agreement with Unocal.
Agrium also said it “would expect to keep the state whole on the value it receives today” for its royalty-in-value gas, but requires a gas supply price that allows it to be internationally competitive in the fertilizer market.”
The company said it believes transportation “could represent the largest impediment” to the sale of the state’s Cook Inlet royalty gas, because many of the gas pipelines in the Cook Inlet basin “are not common carriers and would not be available to all potential purchasers of RIK gas on an equitable basis.”
Agrium said it would seek the state of Alaska’s “support in having all required lines designated common carriers in a timely manner.” And, it said, it would expect that designation to have occurred before the beginning of any royalty gas sales.
If, however, the state sold royalty gas to a party other than Agrium, it “could jeopardize Agrium’s existing gas supply” because the gas available to the plant would be reduced by the loss of royalty gas the company receives under its sales agreement with Unocal and would interrupt other commercial purchases the company makes.
“Both could hasten the demise of the Kenai plant,” Agrium told the state. Interest for fuel gas, LNG The Kenai Peninsula Borough told the state that, while a royalty sale to Agrium might not solve the plant’s supply problems, the borough believes “it is important that this option be fully explored through the process of a best interest finding and solicitation for offers.”
Forest Oil said it “is not prepared at this time to discuss price provisions or other parameters” of a royalty gas sale that would “engage Forest’s participation,” but encouraged the state to proceed with an evaluation. Forest’s interest is in gas necessary to produce crude oil.
“The availability of fuel gas, and at a price that will not adversely affect operating costs, will become an increasingly important issue regarding the producing life of the oil fields in Cook Inlet,” the company said.
And Fairbanks Natural Gas, which has a small liquefied natural gas operation at McKenzie Point and sends LNG to Fairbanks by truck, said it would be “very interested in a long-term gas supply agreement” with the state, and encouraged the state “to make its gas available to in-state users.”
Editor’s note: Part 2, which will appear in the June 27 issue of Petroleum News, contains the views of Cook Inlet natural gas producers, the other industrial user, the liquefied natural gas plant at Nikiski, and area utilities.
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