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Cook Inlet natural gas supply goes short Major industrial gas user Agrium working with exploration companies exploring for gas, might even partner to find more gas Kristen Nelson Petroleum News Editor-in-Chief
The fertilizer plant on the Kenai Peninsula south of Anchorage, Alaska, was built to take advantage of a stranded gas situation, as was the liquefied natural gas plant next door: big gas discoveries had been made on the Kenai and in Cook Inlet by companies exploring for oil.
That plants started up in 1969, Bill Boycott, general manager of Kenai Nitrogen Operations for Agrium, told the Resource Development Council in Anchorage March 4.
Today Agrium, which acquired the Nikiski facility when it purchased Unocal’s fertilizer operations in 2000, is struggling in Cook Inlet with both shortages of natural gas to run the plant and with rising gas prices.
“2001 was the last year that the plant operated at full capacity, and that was roughly 53 billion cubic feet” of natural gas for the year.
Last year the plant only got 40 bcf of natural gas,” Boycott said.
“In 2004 we’re projecting roughly 36 billion cubic feet of gas deliveries to the facility,” he said. Cost of plant written down last year Agrium, a global producer and marketer of fertilizer based in Calgary, Alberta, wrote down the carrying cost of the Alaska nitrogen facility at the end of last year by $140 million.
Mike Wilson, Agrium’s president and chief executive officer, said in a Dec. 2 statement that the write-down occurred because Unocal failed to meet the plant’s natural gas requirements. An arbitration hearing is scheduled to begin in May.
When the sale to Agrium was completed in September 2000, Unocal said its Alaska oil and gas business unit would continue to supply natural gas to Agrium “from certain Cook Inlet fields and other sources pursuant to a 1998 agreement…”
Agrium said in December: “The indicated gas supply from Unocal to the Kenai, Alaska, facility will be insufficient to operate the facility past the end of 2005.”
Unocal has made or participated in new gas discoveries on the Kenai and is selling that gas to the local gas distribution company, Enstar Natural Gas, under a contract which bases the price of the gas on a 36-month NYMEX average. Enstar negotiated that contract with Unocal because it was running short of natural gas for its customers (see story in March 7 issue of Petroleum News.) Gas supply picture has changed in Cook Inlet Boycott said he was sure most people were aware that “the gas supply situation has changed in the Cook Inlet.” It is still a stranded gas play, he said, but Cook Inlet no longer has long-term stranded gas; now it only has short-term, i.e., Cook Inlet is still not connected to a larger natural gas market, and its supply of gas has dwindled.
“The reality of that is that our future is threatened by that. We’ve seen the gas availability to our plant decline and we’ve seen upward pressure on pricing in the Cook Inlet.”
Agrium’s Alaska ammonia and urea competes with producers around the Pacific Rim.
“Gas is far and away the largest component of our cost of production and so as you start looking around the world, and looking at who your competition is and what sets the … value of your product, you’re going up against folks that are pulling gas from other stranded gas fields in the world,” Boycott said.
Cook Inlet natural gas prices are in the $1.50 to $3 range, he said, but in Indonesia and Malaysia gas is $1-$2 and in Trinidad $1.
“We have to have a large supply of gas at a competitive rate to stay economically viable,” Boycott said. Based on forecasts of natural gas availability in Cook Inlet, he said, the economic viability of the Nikiski plant “is threatened beyond the end of 2005, if the picture doesn’t change.” Employees have taken over on maintenance Agrium isn’t sitting idly by waiting for Cook Inlet gas to dwindle away, Boycott said.
Over the winter, when the plant could only be operated at 50 percent of capacity, Agrium reassigned people to maintenance. Within the last two weeks, some of the gas has come back, and “we’re now running about 80 percent of capacity,” Boycott said.
The company is trying to find new gas, but if it doesn’t succeed, and Agrium closes down, “the Cook Inlet would go from a short position to a long position of gas, and the incentive for exploration would be reduced.”
Agrium also brings value to the gas industry because it has a large, stable gas demand, not dependent on weather.
And while there is promising exploration going on in Cook Inlet, and discoveries have been made, “we are still short in the market … We need to see continued exploration and we need to see success.”
Price is also a concern, Boycott said: “We’re actually seeing pressure towards Lower 48 type pricing, and quite frankly, if we were to see Lower 48 pricing the way it exists today, our business cannot economically exist.”
Agrium is “aggressively seeking a solution” on the supply side, Boycott said.
“We are trying to encourage exploration. … I believe we’re probably working with everybody who is or has the potential to produce natural gas in the Cook Inlet.”
Agrium is also concerned that independents have access to pipelines to move their gas, he said, and access at reasonable rates. “And so we’re interested in ensuring that we have reasonable pipeline tariffs, that we have reasonable access to pipelines.” Agrium might even look at partnering in exploration Chris Tworek, Agrium’s Calgary-based vice president of supply and management, told Petroleum News that Agrium is looking at several ways to work with companies who want to explore for new supply.
The easiest thing is a commercial contract, Tworek said, but Agrium will take “any version of a take or pay contract,” anything that will provide supply security.
“We’ll even prepay for the gas to allow the producer to use the prepay to do his development.”
Agrium is also working with producers to see if there is “a way of actually participating in the venture, and that’s were we do some sort of farm-in type situation,” Tworek said, “some sort of situation where we’ll put in some of the capital to de-risk his exploration effort” in exchange for a contract assigning the gas to Agrium. “And so it’s a bit of a pre-buy.”
A third option, Tworek said, would be for Agrium to get “directly involved in exploration and production.” It’s not the company’s area of expertise, he said, “so we’re stepping outside of our core competency,” but “in Alberta we do have a small oil and gas company.” If Agrium exercised that option, it would probably be looking at a partnership, “preferably with a little more experienced operator,” and “what we bring to the party is some capital and what we also bring is a take-away gas contract.”
Tworek agreed that Agrium has talked to everyone working in Cook Inlet.
“There is no one in Cook Inlet that we have not talked to,” he said. “… We’ve talked to people who have reserves, who’ve got a developed track record of exploration and production, and we’ve talked to people who’ve got more ideas than money, so we’ve covered the gamut.”
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