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AGDC sees 2018 as crucial year for gas Recommends public ownership of gas line from North Slope to Fairbanks, Southcentral, with construction, operation contracted out Kristen Nelson Petroleum News
Alaskans could end up burning their permanent fund checks to keep warm — or they could take action to get North Slope natural gas to Fairbanks and Southcentral by 2018.
That was the way Dan Fauske, CEO and executive director of the Alaska Housing Finance Corp. and president of AHFC subsidiary Alaska Gasline Development Corp., put the options to the Anchorage Chamber of Commerce July 18.
He said he worked on AGIA, the Alaska Gasline Inducement Act, and really hopes it works, because in addition to gas that project would bring the state $2 billion in revenue.
But two concerns prompted the Legislature to ask for an evaluation of an in-state gas pipeline, Fauske said: the fear that AGIA might fail to produce a large line from the North Slope to market, and the fear that Southcentral Alaska was running out of natural gas.
Alaska’s two largest cities are currently at risk, he said: Fairbanks pays too much for energy and Anchorage could run out of natural gas, which has been used for electricity and home heating in the area for decades.
Fauske said that in his AHFC role he’s concerned that some $2.2 billion in mortgages the agency holds in the state’s central population corridor will be worthless without energy to heat those homes.
The establishing legislation, House Bill 369, requires that the Alaska Stand Alone Gas Pipeline or ASAP be economically feasible; deliver gas at the lowest cost to residents; allow connections for industrial use, utilities and residents; and use state land, existing highway and railroad rights of way to the maximum extent possible.
Fauske, with Dave Haugen, the AGDC project manager, and Michael Rocereta, AGDC’s commercial manager, briefed the chamber on the status of ASAP and why the project is important.
State ROW secured Haugen said proper project pacing is important and said that aspect of ASAP was reviewed by Independent Project Analysis, which assesses where a project is “in terms of a staged-gate approach.”
With megaprojects, those over a billion dollars in size, you work through phases with a go/no-go decision gate at the end of each phase, narrowing project uncertainty as you move through the phases.
Phase 1, business development, has been completed, Haugen said, and the project is moving into the phase which culminates in an open season.
In that open season, the market will determine whether the project is valid.
The state right-of-way lease has been finalized and signed by Fauske, “so we have over 400 miles of the pipeline alignment now in title to AGDC and that was accomplished just like it was supposed to be in HB369,” Haugen said.
The environmental impact statement and record of decision are expected in early 2012, followed by issuance of the federal right-of-way grant. The EIS will be out for public review later this summer, Haugen said.
While some private and Native corporation right-of-way agreements will be required, “early in the 2012 timeframe we should have a completed EIS as well as control of most of the right of way, all the way from Prudhoe Bay” to Southcentral, he said.
Some 2,000 other permits are required, some of which require long lead time, and that work is under way, Haugen said.
Supply issues Rocereta, the project’s commercial manager, said AGDC worked with a team led by Kurt Gibson from the Alaska Department of Natural Resources on a Cook Inlet gas production forecast.
In 1995, he said, Cook Inlet produced about 600 million cubic feet a day — consistent production and cheap gas. But in about 2005, production started to decline at a 6-8 percent rate per year, and there wasn’t enough gas to keep the Agrium fertilizer plant going. That decline continued at about the same rate and “toward 2010 we saw one of the trains at the Nikiski LNG plant shut down.” Early this year, the plant owners, ConocoPhillips and Marathon, said they would mothball the plant.
What does the future hold? Rocereta said if industry did in-fill drilling, deeper and shallower pool exploitation, with investment projects DNR knows about right now, production could be extended flat to 2018 at about 250 million cubic feet a day. If there were significant new discoveries brought online that could push the line out farther, he said, maintaining that 250 million which represents local demand.
But, he said, in-field drilling to maintain production takes perfect investment, and a lot of people in industry say that probably won’t occur. At 10 wells per year, production could hold steady out to 2018; at five wells a year, out to 2016.
Demand issues With a line sized at 500 million standard cubic feet a day, an industrial anchor will be needed, Rocereta said, and accounts for some 270 million cubic feet of the proposed demand. That anchor could be the existing liquefied natural gas plant in Nikiski; it could be a greenfield plant; or “other industrial users that we haven’t imagined.”
There are several mining projects which could use natural gas, and AGDC included one, at 30 million cubic feet a day. There is also an enriched stream of natural gas liquids in the fuel gas volume, which totals some 60 million cubic feet a day.
There will be some ethane, propane and butane shipped along with the methane, and the idea here is whether additional propane and butane can be mixed into the stream and perhaps exported, he said, so some 30 million cubic feet a day of NGLs were included with fuel gas, a total volume of about 60 million.
“Does the project live or die by shipping that enriched stream,” Rocereta asked. “The answer is absolutely not.”
Without that stream the net tariff impact is about a dollar, but “we have other commercial levers that we can pull in other places that could make up for that,” he said.
Fairbanks demand of about 60 million cubic feet was included, along with about 100 million for Anchorage residential, commercial and Railbelt power, to make up the 500 million cubic feet of forecast demand for ASAP.
Anchorage demand continues to grow as Cook Inlet supply declines, so over time ASAP would meet some, but not all, of the demand from Cook Inlet.
The Susitna dam project, projected to come online in 2026, would be equivalent to some 50-60 million cubic feet of gas a day, Rocereta said, so the dam isn’t in competition with ASAP.
Shipper, buyer interest ASAP held an expression of interest meeting, a non-binding open season, which brought together the North Slope producers — the suppliers of natural gas — and potential users of the gas. Rocereta said the meeting was covered by confidentiality agreements, so he couldn’t talk about individual expressions of interest, “But what I can say is that this estimate that we put together of the total capacity being desired by off-takers is really close to the aggregated numbers that we got after this expression of interest meeting.”
And not everyone who attended expressed an interest in taking gas, which indicates, he said, that there’s still unmet demand.
Supply agreements will be required, and potential gas suppliers expressed an interest in negotiating gas supply agreements with interested off-takers. Rocereta said the suppliers requested names of contacts within companies, which AGDC will be providing this week.
“So people are actually going to start talking — the people who are really going to make this thing go are actually going to be talking,” he said.
Another thing which came out of the expression of interest meeting was that people were interested in longer-term contracts, 10-year plus contracts, which is another encouraging thing, Rocereta said, because without long-term contracts financing won’t be possible.
State owns, others operate AGDC is recommending a state-owned pipeline because that produces the lowest tariff.
But the state wouldn’t be running the line, Rocereta said, it would be like the trans-Alaska oil pipeline which is operated for the owners by Alyeska Pipeline Service Co.
The state would finance the line, some $7.52 billion, and the financing would be paid off by the pipeline tariffs, he said.
Fauske said he’s gotten a lot of questions about state ownership, and noted that the state owns AHFC, which has returned $1.9 billion; it owns the Alaska Permanent Fund; it owns the Alaska Railroad; it owns Ted Stevens International Airport; it owns the Alaska Industrial Development and Export Authority, AIDEA.
Fauske said that return on pipeline investment is regulated throughout the country at 12 percent.
“Our attitude is, pay yourself the 12 percent, minus from that a smaller fee to have someone come in and manage it and let’s say it’s a 3 or 4 percent fee. That 8 percent that you’ve freed up can be used for any public purpose,” he said.
And the projected tariff — $9.63 per thousand cubic feet in Anchorage, $10.45 in Fairbanks — compares to current rates of $8.85 in Anchorage and about $23 in Fairbanks, or $30 based on heating fuel.
While the Anchorage tariff is higher than what Southcentral residents pay now, he said the best numbers AGDC has for imported LNG — an alternative source of gas, and one utilities believe they may need within a few years — are in the range of $14 to $18 for a thousand cubic feet.
“So the state’s going to invest $7.52 billion, earn 12 percent return on those dollars and at the end of 20 years will have returned to itself $5.2 billion,” Fauske said.
If that project were offered as an investment, “I’m going to be the first one jumping on this one, because your partners are going to be substantial and the need’s going to be long-term.”
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