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Vol. 10, No. 5 Week of January 30, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska gas line port authority tackles Jones Act tanker issue

Sempra LNG believes West Coast market can absorb Alaska gas; port authority has option on Yukon Pacific permits, would buy company if project moves to financing

Kristen Nelson

Petroleum News Editor-in-Chief

The Alaska Gasline Port Authority and Sempra LNG targeted some of the questions about the authority’s liquefied natural gas project in a presentation to the Alaska Legislative Budget and Audit Committee Jan. 26.

The West Coast market can handle Alaska gas, the Yukon Pacific permits give the project an edge in timing and an LNG project will cost about the same as taking gas to Chicago, the authority and Sempra told the committee.

And it should be possible to get an exemption to the Jones Act which requires that ships moving between U.S. ports be U.S.-built, U.S.-owned and U.S.-crewed. This has been an issue for the port authority, which proposes to build a pipeline from the North Slope to Valdez, with a spur line into Southcentral Alaska, and liquefy gas at Valdez for shipment to the West Coast.

Darcel Hulse, president of Sempra LNG, told the committee that the United States has “lost the capability to compete in the world on LNG shipping and if you were to build in the United States an LNG carrier today, it would cost you at least three times as much as it would on the open market.”

Hawaii, he said, faced the same issue. They needed luxury cruise liners to operate between the islands, “and they’ve got an exemption from the Jones Act” allowing them to use vessels built in foreign shipyards.

“If they can do it for tourism, we certainly think you can do it for a compelling reason to avoid further imports of foreign gas into the United States.” The tankers would be built in foreign shipyards, Hulse said, but owned by a U.S. corporation and crewed by U.S. maritime employees. “It is one of the hurdles,” he said, but Sempra believes the reasons for an exemption are “compelling, and it’s been done before.”

Rigdon Boykin, development counsel for the port authority, said the port authority has visited some of the large shipyards in the United States, and was told that even if those yards started today to develop the capacity to build large LNG tankers, they wouldn’t have that capacity available until “long after this facility came online.” He said the port authority has also talked to some maritime union representatives and “they’ve assured us they will work with us to work out a solution to this issue and we believe we will achieve one. They’ve been most cooperative so far.”

Sempra: we are committed

Hulse was asked by Sen. Gary Wilken, R-Fairbanks, about Sempra’s commitment to the project, and Hulse said Sempra has “made a commitment to develop this project. We’ve backed that commitment with a substantial amount of money to help fund just the development.”

Rep. Ralph Samuels, R-Anchorage, the committee’s vice chair, asked Hulse how Sempra would handle a volume of Alaska gas estimated at 2.5 billion cubic feet a day to 4.5 bcf a day, and Hulse said that after you take the liquids out of the gas and allow for in-state use, you get down to 2 bcf to 3 bcf a day. In addition to an expansion of the Baja facility Sempra has under construction, “there are other West Coast facilities that are under consideration that we think we could move this gas through.”

Hulse said Sempra markets 13.5 bcf a day in North America, second only to BP at some 24 bcf a day. Asked by Sen. Gene Therriault, R-North Pole, the committee’s chair, about the size of the West Coast market, Hulse said that some 9.5 bcf a day is consumed in Washington, Oregon, California, Arizona, Nevada and Baja, with only some 700-800 million cubic feet a day produced in the region. That market is already importing more than 90 percent of its gas. “It is almost like Japan as far as needing gas imported.”

What would happen if Alaska LNG came into the West Coast, Hulse said, is the same thing that would happen if Alaska gas came down a pipeline into Chicago. “Chicago’s needs are currently all supplied. If the gas pipeline comes down there will be displacement and there will be more rational movement of the gas into the marketplace. The same thing will take place on the West Coast.”

Hulse said Sempra thinks that by 2012 it could easily put 3.5 bcf to 4 bcf a day into the West Coast market.

He also noted that, with the exception of the Rockies, all of the basins currently supplying gas to the West Coast are in decline, “so we’re going to be facing this necessity to make up for our declining reserves and that’s going to come, if it doesn’t come from here, it will come from foreign sources…”

Sempra: costs about comparable

A pipeline from the North Slope to the Canadian border and a pipeline to Valdez are almost exactly the same length, Hulse said, and those costs should be comparable. He said Sempra believes the Mackenzie Delta pipeline will be built before an Alaska gas pipeline, and that gas from Mackenzie will take up existing capacity in Canadian infrastructure, requiring that an Alaska highway pipeline be built all the way to Chicago.

On that basis, and with known liquefaction and shipping costs, Sempra believes that the cost to move North Slope gas to the West Coast as LNG would be comparable to the cost to move North Slope gas to Chicago through a pipeline. Sen. Fred Dyson, R-Eagle River, asked why Sempra would “want to buy expensive gas from Alaska” when Qatar and Sakhalin Island “can deliver it at tidewater far cheaper than we can?”

Hulse said shipping cost is a big item. Sempra has averaged the costs of shipping from Alaska to the Pacific Northwest and Baja and come up with 35 cents per million Btu; the cost to ship from Qatar is about $1.30, he said, some 80-86 cents from Indonesia, “so you have that much advantage on them” in shipping, compared to their lower production costs.

Administration talking with port authority

The port authority signed an agreement with Sempra about 60 days ago, Jim Whitaker, mayor of the Fairbanks North Star Borough and chairman of the port authority board told the committee. The authority’s agreement with Yukon Pacific for its permits is about 30 days old. “We are as a result of those two events significantly more substantial and credible than we were 60 days ago and the (Murkowski) administration has responded very timely in engaging as our credibility has increased,” Whitaker said in response to a question from Therriault, who asked if the administration was working with the port authority and if the authority was getting the attention it needed. The administration is negotiating with the North Slope producers and pipeline company TransCanada under the Alaska Stranded Gas Development Act. It is having discussions outside of the stranded gas act with the port authority, pipeline company Enbridge and the Alaska Natural Gas Development Authority, among others.

The port authority has an option to purchase the Yukon Pacific permits, Boykin told the committee, an option the authority has paid for, which allows the authority to use their permits and data during the development phase. If the port authority project goes ahead, the authority would then purchase Yukon Pacific. “But during the option period we have the right to use the permits and the data,” he said.

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