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vol. 14, No. 34 Week of August 23, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Seeking CI gas storage

Enstar working with TransCanada subsidiary on Cook Inlet gas storage facility

By Alan Bailey

Petroleum News

Faced with a slowly increasing natural gas demand accompanied by steadily declining Cook Inlet gas deliverability, Enstar Natural Gas Co, the main gas utility in Southcentral Alaska, is working with Houston-based ANR Pipeline Co, a subsidiary of TransCanada, to establish a new Cook Inlet underground gas storage facility with an eventual capacity of up to 15 billion cubic feet, to alleviate a pending gas deliverability shortfall, John Lau, Enstar’s director of transmission operations, told Petroleum News Aug. 17. The two companies plan to make a final decision by the end of this year on whether to proceed with construction of the facility, he said.

ANR would fund, build and operate the facility as a third-party operator, with Enstar and other utilities paying for storage space.

With Southcentral Alaska utility gas predominantly used for heating homes and business, gas demand in the cold of winter typically peaks at levels 10 times greater than the troughs in demand during the summer. And in the past this huge seasonal demand swing has been accommodated by full-service supply contracts, in which Cook Inlet gas producers take responsibility for upping the supply rates during the winter.

Years ago increasing gas delivery was simply a matter of opening up valves on gas wells, but now there isn’t that excess deliverability, Lau said. Instead, the producers now need expensive infrastructure to accommodate the demand swings, he said.

No new contracts

In addition, with 25 percent of its required gas supplies in 2011 not under contract, and no significant new gas supply contracts in the offing, Enstar is facing a supply crunch in about 16 months. And, since the Regulatory Commission of Alaska has rejected as too expensive all new gas supply contracts that Enstar has negotiated since 2001, Enstar anticipates that any new contracts that might fill the pending gas supply gap would involve constant rates of delivery year-round at constant pricing, an arrangement known in gas utility parlance as “flat gas.”

“There’s noone coming to us with contracts for us to take before the RCA anymore,” Lau said. “So what we’re looking at for contracts that we … most likely will get in the future is that we’re going to have to buy flat gas, or near flat gas.”

The expected future introduction of these near constant delivery rate contracts will require Enstar to have access to a storage facility, to warehouse gas purchased in the summer for bolstering winter delivery. That storage need is the more pressing because of the possibility of the LNG export terminal on the Kenai Peninsula closing in 2011, when the current U.S. Department of Energy LNG export license expires — the LNG plant currently provides an invaluable service during severe cold weather by curtailing LNG production, to divert gas for utility use.

And even if gas from the North Slope starts flowing into Southcentral Alaska through a direct “bullet” pipeline from the slope, or through a spur line off a main North Slope gas line, Cook Inlet gas storage will be needed to enable a relatively constant flow of gas through the line year-round, to ensure viable pipeline operations, and to provide backup capacity for periods when the pipeline is shut-in.

Investigating options

Enstar has been investigating gas storage options for about three years and had proposed establishing its own storage facilities as part of the terms of two gas supply contracts that RCA rejected in 2008, Lau said. Subsequently, the utility has been considering options for storage that it now believes will be vital to the future of Southcentral utility gas supplies.

“Now we’re looking at what we need in four years, six years, eight years,” Lau said. “… The storage that’s implemented here in the next couple of years, it’ll be used in the Cook Inlet for decades to come.”

And the gas producers will likely need to continue to operate their own storage facilities, to enable them to accommodate utility demand swings under the terms of some gas supply contracts, he said.

Although it would typically take about 36 months to permit, construct and fill a new underground storage facility, Enstar has asked ANR to work out how to make a new facility available to Enstar for the winter of 2011-2012, Lau said.

In fact, the coming winter of 2009-2010 could see a gas deliverability shortfall, if the weather becomes especially cold. But by 2011, under current supply arrangements, a shortfall will become certain, regardless of the weather, Lau said.

“We’ve identified dire consequences that will happen if we do not have gas available out of storage in the winter of 2011-2012,” he said.

Four issues

ANR has extensive experience of operating gas storage in the Lower 48 and believes that the 2011 deadline for bringing the new Cook Inlet storage into operation is feasible, Lau said. But the aggressive project timeline will involve spending the next six months resolving four crucially important issues.

First of all, the companies need certainty about whether the Regulatory Commission of Alaska would approve Enstar’s tariff changes for factoring in the fees that Enstar will need to pay to ANR for storage usage — Enstar must be sure that it will be able to recover the storage costs from the gas supply rates that it charges its customers, Lau said.

“No private entity will spend any capital on putting together any process or storage, unless they’re sure they can recover their costs,” he said.

Secondly the companies need to make sure that it will be possible to obtain the use of a suitable storage reservoir, given that all Cook Inlet field reservoirs are currently controlled by gas producers. Four possible reservoirs are under consideration and discussions are in progress with the relevant producers about gas storage possibilities, Lau said.

All of the reservoirs being considered are currently producing gas, a situation preferable to converting a completely depleted reservoir for storage, given that the remaining field gas, occupying perhaps 20 to 30 percent of the field reservoir, can be purchased as “pad gas,” gas that simply supports the underground gas pressure and which would otherwise have to be injected into the reservoir, Lau explained.

The purchase of this in-place pad gas from the field owners would form a significant part of the capital cost of the gas storage project, he said.

A third issue is ensuring that all of the permits required to build and operate the storage facility can be obtained, including environmental permits and state approval of a gas storage lease in the chosen field reservoir.

The fourth challenge being addressed in the coming six months is the development of a viable business plan that would work effectively for all of the companies involved in some way with the gas storage project, Lau said.

Supply uncertainty

In addition to these primary challenges, significant uncertainty about the sources of future Southcentral Alaska add complications to Enstar and ANR’s gas storage plans — future gas supplies could come from new gas discoveries in the Cook Inlet basin, through some form of gas line connecting to the North Slope or from the import of LNG. In particular the import of LNG though the existing LNG export facility on the Kenai Peninsula — a scenario that, based on current trends, Enstar thinks could come into play around 2014, 2015 — would impact the optimum way in which to design the new storage facility.

In fact, Enstar has started evaluating what additions will be made to Cook Inlet gas reserves in the coming years, to try to pin down the time when will begin to be necessary to boost Cook Inlet gas supplies by importing gas from elsewhere. In particular, the company wants to know how much of the reserve additions that the state has projected are certain rather than just being possible.

“When it comes to keeping customers warm we need 100 percent (certainty),” Lau said.

Enstar is also discussing with ConocoPhillips and Marathon, the owners of the LNG facility, the possibility of re-gasifying LNG, to support peak utility gas deliverability during severe winter cold. However, uncertainty regarding the renewal of the LNG export license in 2011 complicates that option — Enstar is seeking an opinion from the federal regulators on what the renewal decision is likely to be.

But the core question of establishing a new underground storage facility comes back to ensuring that utility gas continues to flow to consumers during the cold Alaska winter.

“It’s not going to be cheap, but it’s certain supply,” Lau said.

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