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ANS gas could expand Cook Inlet industries Heinze tells Natural Gas Development Authority board that it should consider expansion projects first because economics will be better than greenfield project Kristen Nelson Petroleum News Editor-in-Chief
Natural gas has been plentiful in Alaska’s Cook Inlet for decades, but no longer. Now there isn’t enough — at the right price — for the fertilizer plant, the liquefied natural gas plant and the utilities.
Could Alaska North Slope natural gas play a role in Cook Inlet?
The Alaska Natural Gas Development Authority board considered that issue at its July 28 meeting.
Mark Myers, director of the Alaska Division of Oil and Gas in the Department of Natural Resources, briefed the authority board on the state’s natural gas resources, from known reserves on the North Slope and in Cook Inlet to gas from new sources — coalbed methane and gas hydrates — and the possibility of as-yet-undiscovered gas in the foothills of the Brooks Range.
The authority’s CEO, Harold Heinze, distinguished the natural gas at Prudhoe Bay and Point Thomson as reserves you could take to the bank, and told the board that one of the problems in Cook Inlet is that when long-lived projects, such as new power plants, are up for financing, a 20-year project with eight to nine years of known reserves isn’t the kind of project a banker likes to see. Supply and demand in balance in Cook Inlet “We’re seeing more gas exploration in Cook Inlet” because “commodity prices are coming up,” and that is happening because supply and demand are coming into balance, Myers said.
Cook Inlet had so much stranded gas that the LNG plant and the fertilizer plant were built to deal with the excess gas, which was more than could be used in Southcentral Alaska. The rest of the gas was used by utilities for power and heat, and those utilities got gas on long-term contracts, Myers said.
Now, however, the natural gas supply is pretty well balanced with demand — except in winter months, when heating demand peaks, and natural gas to the fertilizer plant is reduced to meet utility demand.
The utilities are willing to pay for the gas, and Enstar’s latest contract is indexed to the Henry Hub price in Louisiana. “That knocked the price way up,” Myers said, relative to what others were paying, creating “a huge disparity in price.” People are now out exploring for gas to sell into that utility market.
As a result, the fertilizer plant is having a hard time getting enough gas, and is also involved in a contract dispute with Unocal, the former fertilizer plant owner, over Unocal’s obligations to provide gas to the plant.
Myers said the bottom line is that “fertilizer plants can’t pay as much as utilities can and stay economically viable,” and when you have short supply, “it pinches the low end, the low-cost supply.”
Myers said he expects to see exploration keep the supply of Cook Inlet gas at about where it is now, an eight- to nine-year supply.
North Slope gas to Cook Inlet? Myers said he could see a couple of possibilities for North Slope gas in Cook Inlet, but a lot is dependent on price. By the time you pay the producers for the gas at the well, pay the tariff to Anchorage and pay the cost of a spur line, that gas would be pretty expensive for the fertilizer plant.
“I do think, potentially, that you could see an increase in the LNG plant … or a new LNG plant built” with North Slope gas, Myers said. In the $4 range, North Slope gas would probably be competitive at the LNG plant, he said, and for utility customers, but probably not for the fertilizer plant.
If North Slope gas came into Cook Inlet in enough quantity, it could push local companies out of the market, or, since Cook Inlet producers could produce at a lower price, “you potentially create more local market gas that could go to the fertilizer plant, you might lower the utility prices.” It just depends, Myers said, on how much gas comes down a spur to Cook Inlet and how it competes in price with local gas. Reserve situation deteriorated Heinze said that in conversations he has had with local utilities, he’s hearing that price really isn’t the issue. “The reserve situation has deteriorated enough — at least in people’s minds in the Cook Inlet — from what it was, that it is harder for them to borrow money, frankly, to deal with long-term projects.
“It’s harder to justify 20 years for that power plant” when you can’t show bankers gas availability to run the plant 20 years down the road, Heinze said. If reserve additions in Cook Inlet don’t start to look “really good, even the utilities, I think, will start to be impacted in a negative way from supply.”
He also said he thinks “the demand side within the broad Southcentral area has probably been underestimated.” If there were larger gas supplies available, industrial customers and utilities would make use of that supply.
Expansions would make sense Heinze said he thinks that with strong uses for natural gas within the state, the authority needs “to put less stress in the early going on the LNG export terminal.” The Valdez LNG plant would be a new project, he said, and expansion projects always have better economics than greenfield projects.
“Expansion of those existing plants by a factor of at least two, maybe three, has got to have better economics than greenfield start from scratch. … If we could base load the project with some of that, that’s got to help the total economics of the project.”
Based on preliminary discussions he’s had, Heinze said, “there’s potentially a better market in the broad area around Cook Inlet, on both sides, than there probably was … 10 years ago.”
Editor’s note: see part 1 in Aug. 3 issue of Petroleum News.
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