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Unocal doesn’t think gas pipeline to Southcentral economic before 2010 Company’s new Alaska vice president says to expect higher natural gas prices, some shortages, in 2004-2007 before exploration catches up Kristen Nelson PNA News Editor
Unocal Alaska has preliminary approval for a capital budget of $65 million for 2001, about double what the company did last year, Unocal’s new Alaska vice president, Charles “Chuck” Pierce, told the Alaska Support Industry Alliance Dec. 1. About $40 million is for Cook Inlet and $25 million for non-operated projects on the North Slope, he said.
What’s driving that investment, Pierce said, is current high oil prices and a need for more natural gas in Cook Inlet.
That’s because the company doesn’t believe a pipeline to bring North Slope gas to Southcentral will be economic in this decade.
Three things are behind the company’s position on Cook Inlet natural gas, Pierce said.
“We’re moving into an under-supply of natural gas in the Southcentral region, basically the Anchorage and Cook Inlet markets, which we think at Unocal is due in the 2004 to 2007 timeframe: you’re going to start to see some shortages of gas. …
“The second point is, in the short term and I would say in the intermediate term, I’d say between now and 2010, we don’t believe there’s a significant market available to bring North Slope gas into the Anchorage market. …
“Those two points really set up the third point, which is that gas prices will rise here in this area to stimulate exploration in Cook Inlet. We believe that will happen, and we think exploration in Cook Inlet’s going to be the best way to fill the market between now and 2010.” Reserves have dwarfed production Gas was found in Cook Inlet when companies were looking for oil, and until recently, Pierce said, there was a 20-year supply:
“We were all looking for oil; we found gas. And the dynamics of the market development since the ‘60s have been one of oversupply.”
And because of all the gas that’s been discovered in Cook Inlet, “there’s really been no significant gas exploration — some guys in our shop argue maybe never — but certainly not in the last 15 years.”
Cook Inlet has finally gotten down to a reserves over production ratio of about 10 years, Pierce said: “So now I think we’re getting into the right level of R over P ratio to stimulate exploration.”
Southcentral market small This is a fairly small, compact market, he said, with about 220 billion cubic feet a year of requirements spread among the liquefied natural gas facility, the fertilizer plant, home heating, electric generation and the military bases and some other small users. Usage averages about 600 million standard cubic feet a day, but there is significant swing in the market of about 2 to 1, he said.
“So the coldest day of the winter we’re at about 850 million standard cubic feet per day; in the summer around 400.”
The swing in home heating is about 6 to 1 between winter and summer, and there are very limited storage facilities, so the swing is managed by shutting in wells.
The small market and the variation in demand, Pierce said, “creates a very difficult challenge to bring in a large pipeline and finance it.”
As long as there’s an over supply, the swing demand can be handled, he said.
“And we can do that for another couple of years, but in the 2003-2004 time horizon we see the potential for some shortages, curtailment of the plant, maybe looking at five-, 10-, 15-day problems,” Pierce said. Those problems will be the sign posts that the opportunity exists for additional supply, as well as for storage.
But something is going to have to happen to Cook Inlet natural gas prices to make exploration economic, he said, noting that prices for natural gas were $6.50 per million Btu in Louisiana (the end of November) and spot markets in California hit $15 million a Btu.
Prices for Cook Inlet natural gas have been in the $2-”ish” range, he said. “We’ve got some projects together and I have to go back to corporate to get capital to advance the projects here and they have to be competitive really with the rest of the world. And so to do exploration here is going to take more than $2-ish, I think.” Capital budget for Alaska $65 million One leg of the company’s commercial plan, Pierce said, is to meet its nine-year gas supply contract for the Nikiski fertilizer plant which Unocal sold to Agrium.
“We’ve got nine years of work ahead of us to meet that contract and … for our competitors out there, there — probably in the 2004 and 2005 time horizon — start to be openings at the fertilizer plant for more gas.”
Over the next five years, the natural gas shortage in Cook Inlet will probably be seasonal and short-lived, Pierce said. “And it’s probably more storage and swing management related than it is actual reserves.”
Even if we’re extremely lucky, a pipeline from the North Slope probably won’t be here before 2008-2010, he said, and Unocal expects a problem in the local market before that. But with Cook Inlet infrastructure in place, “it’s going to be very cost effective and timely to put wells on line once you have the gas. And at the end of the day for the new markets the lowest cost will, should and will, prevail in the marketplace.”
Beyond 2010, North Slope gas looks like the solution, he said. Two offshore rigs possible With current high oil prices, Pierce said, Unocal will invest in incremental oil projects from its existing facilities.
He said the company has a team dusting off all of the company’s old prospects and hopes to have a second rig working offshore oil prospects next year.
In addition to development gas drilling to meet its contract with Agrium, the company will invest in gas exploration to meet future gas market requirements.
“We’re going to start a program next year to drill a couple of exploration wells. We don’t want to be too far out ahead and have stranded investment. We are going to start exploration next year,” Pierce said.
And Unocal will also selectively invest in North Slope properties.
“We currently have 5 percent interest in Kuparuk and 10 percent interest in Endicott. And we’re interested in looking at more opportunities there, but in a non-operating role.”
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