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Deal of last resort Harold Heinze pragmatic as he works out what the Alaska Natural Gas Development Authority could contribute to un-stranding North Slope gas Kristen Nelson Petroleum News Editor-in-Chief
Harold Heinze is pragmatic about a state-owned project to get Alaska North Slope gas to market.
The players in a gas project, he says, are the North Slope producers, the state of Alaska and the federal government. The rest — pipeline companies, shippers, distributors, consumers and investors — are wannabes, Heinze says, who have to find a way to lower the risks of the project in order to get a ticket to the table.
And, while the Alaska Natural Gas Development Authority may not be the number one project to move gas to market, Heinze, the development authority’s chief executive officer, said he thinks that the authority, along with the North Slope producers, the Alaska Gasline Port Authority and others, has a feasible project.
Especially with falling pipeline and liquefied natural gas facilities costs, he said, the smaller development authority LNG project comes in at cost estimates in the range of those presented by the North Slope producers — BP Exploration (Alaska), ConocoPhillips Alaska and ExxonMobil Production Co.
And, given the lack of enthusiasm the North Slope producers have for moving North Slope gas, and potential problems with Canadian land ownership and rights of way issues, Heinze said Alaska needs a fallback position for North Slope gas development. Whether or not that fallback takes gas out of the state, he said it’s important to get gas to Alaskans, especially Southcentral Alaskans, whose Cook Inlet natural gas supplies are fast disappearing.
One role for the authority would be as a utility, moving North Slope natural gas to Southcentral at the lowest possible cost. Three things in the works The mandate for the authority — created by voter approval of an initiative on the November 2002 state ballot — is to determine the feasibility of a natural gas project from Prudhoe Bay to tidewater on Prince William Sound and a spur line to Southcentral Alaska. That has just been amended by the Legislature to include the option of going to tidewater on Cook Inlet.
Facilities at tidewater would convert the gas to liquefied natural gas for shipment to the Far East and the U.S. West Coast. The spur line to Cook Inlet would supplement declining Cook Inlet gas reserves for utility and industrial use.
The development authority is working on three things, Heinze told Petroleum News in a May 3 interview:
It is keeping a liquefied natural gas project alive. “We’re the only ones working on the LNG part of it,” he said.
“Second thing is, broadly, we have a mission to help the highway project” by seeing what contribution can be made to the project by “the public corporation of the state involved in gas.” That includes two things, he said. “One is making sure that the Alaska side of that project is taken care of.” When the overall concern is with a $20 million project to the Midwest, “they’re not going to spend as much attention on say the billion dollars worth of stuff that’s very important to Alaska,” Heinze said.
And the authority is also trying to determine if there is anything it can do to improve the economics or marketability of the highway project. So it is interested in how it can participate in the project to take gas to the Midwest, he said.
“The first 530 miles from Prudhoe Bay to Delta is shared by all projects,” and if the authority can “do something that helped the economics,” it would be making a contribution from the state “and not giving up anything but maybe doing it in just a whole different way,” Heinze said.
The third thing the authority is working on is bringing natural gas to Cook Inlet. That is a part of what Ballot Measure 3 included, and, Heinze said, Gov. Murkowski has also “made it a priority to deal with the industrial issues” in Cook Inlet: natural gas is the feedstock for the Agrium fertilizer plant on the Kenai Peninsula, and without continued low-cost supplies of natural gas, Agrium, a major Kenai Peninsula employer, has indicated it will be forced to close the plant.
Natural gas also goes to the ConocoPhillips-Marathon LNG plant. Feasibility report in August The authority’s mandate was to produce a report a year after the first board meeting, a development plan whose contents were specified in the ballot measure, and included project work and marketing studies.
“I’ve called it basically a feasibility report,” Heinze said.
That report won’t be ready on June 15 — the year specified from the board’s first meeting.
“We were just too late getting the money and too late contracting and it’s just not going to happen,” Heinze said.
The authority has moved back the target two months, he said, and plans to have the report out Aug. 15.
And, “in that same timeframe, before the end of summer, we will also have done a major piece of work on the Cook Inlet gas situation,” he said. Utility to Cook Inlet The authority has been meeting with a Cook Inlet working group of the major gas users, including Enstar, Chugach Electric Association, Municipal Light and Power.
What the authority has said to this group, Heinze said, is that it “may be able to become a utility whose no other purpose in life is to move North Slope gas to the Cook Inlet area.”
We don’t know where the line would start, he said. “It may be Prudhoe Bay, it may be Delta, it may be Glennallen, it may be Fairbanks.”
The authority’s role, he said, would be to move gas “at the lowest cost of service possible, because we would be a state utility.” It will work with consultants over the summer to look at issues like pipeline costs, how such a line would be financed, what the permitting-environmental issues are, and what the regulatory issues are.
Heinze said he can’t answer these questions now, he just knows “that as a utility we have a chance to do it under the most favorable financial circumstances.”
There are certainly companies which could do this as utilities, he said, but they have profit motives, “and you don’t have to raise your eyebrows with me at this moment, because I don’t have that profit motive.” Someone else may end up doing this, “but at least we need to define what it would look like for a utility.” Prices converging The interest in North Slope natural gas is driven by rising U.S. natural gas prices, Heinze said, with gas prices in Japan, Europe and the United States rising and converging. The convergence isn’t accidental, he said.
“There’s this tremendous emphasis on LNG, and as that LNG business grows, basically all the markets — the gas markets of the world — will become linked. And once they link, it’s a commodity situation.”
There isn’t a commodity situation in LNG yet, he said, but “I’ll just argue that there is a reasonable chance that the structure of gas price in the United States, and maybe in the world, … has changed.”
The interest in the Alaska project is driven by the sense, he said, not the reality, but “the idea that supply is tight.” Three players who count Heinze said the only three players who count in the game to commercialize North Slope natural gas are the producers, the state and the federal government.
“The producers, because they have control of the gas;” the state of Alaska because the natural gas is a public resource and the state garners taxes from its production, as well as benefits of economic activity in the state, and the federal government through federal income tax.
“So those three people are absolute players in the game — there’s no way to deal them out,” Heinze said. “Everybody else in this game is a wannabe,” including the development authority. The only way you can get a ticket to the table is to contribute something that is of value towards it.”
Something of value, he said, would be something that affected the risks: wellhead price, construction cost, tariff calculation, market volume, market price, fiscal changes, regulatory setting and legal challenges.
The producers, the state and the federal government “absolutely right now have to deal with the risks if the project’s going to happen. Why we need a fallback What are the overall project challenges right now?
Heinze sees some obstacles to the highway project that have to be overcome.
First, the known resource of some 35 trillion cubic feet isn’t enough to fill a pipeline for enough years to pay it off.
The producers have acknowledged that it will take about 50 tcf. “Who’s out there getting the other 15?” he asked.
And the project is going to require all of the producers — and not just for the gas, either. You already have potential financers for the project asking about proven reserves, but what if one of the three major owners decides not to participate?” Heinze asked. “How are you going to explain to the bankers that a very successful major company doesn’t see it” as a project it should be in? If you’re a nervous banker, and you’d like to really be convinced, how do you ever overcome the problem of one guy who doesn’t go?”
The state of Alaska also has to want the project, Heinze said. “And it would sure help if the feds were pretty unequivocal about it, too.”
Then, if you have all the players lined up, there is still the problem of right-of-way issues in Canada.
Canada, he said, doesn’t “have a definite process that overcomes whatever challenges.” You may have to go through an environmental impact statement process in the United States, “you may have to suffer through things — but there is a point where you can get to and you get a yea-nay.” Not so in Canada. Authority plan a fallback position Heinze said that, from where he sits, when “you look at what’s involved and all the pieces that have to come together and you assess what that probability is — it’s not real overwhelming as we sit here today.”
The state needs fallbacks, he said.
“And so my argument is, I don’t care if I’m second, third or fourth on the list: I just want to be on the list.
“I’m not trying to prove I’m better, I’m trying to prove that I am within reason to be considered if, at the end of the day, you can’t see your way down this path — then we need to look down these other paths.”
And, “based on everything I have been able to evaluate at a feasibility level of these projects — again, this is not detailed economics, this is feasibility — all these projects are feasible.”
The projects Heinze was talking about include: the port authority’s $26 billion Y-line proposal (both a highway pipeline and LNG); the producers’ $19 billion highway line to Alberta; the producers’ $15 billion highway line to Alberta; Yukon Pacific’s $12 billion 2.2 bcf per day LNG project; the authority’s $10.5 billion 2 bcf per day LNG project; the ANS group’s $6.7 billion 1.1 bcf per day line; a Cook Inlet “bullet line” from the North Slope at $3 billion; and a $500,000-$1 billion spur line to Cook Inlet.
Heinze said he argues that “it is important that the state keep open its options.”
It may like the producers’ highway route proposal best, but it needs other options.
“And I’m sort of the project sponsor of last resort,” Heinze said.
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