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Vol. 15, No. 33 Week of August 15, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Parnell backs exports, with conditions

Tells DOE the state supports exports if utilities have the gas they need, still too early to know if another settlement is needed

Eric Lidji

For Petroleum News

The State of Alaska is asking the federal government to continue allowing exports of liquefied natural gas from the Kenai Peninsula, but only on a conditional basis.

The condition is that ConocoPhillips and Marathon Oil, the companies that own the export facility in Nikiski and want an extension of the export license, operate under some of the terms of a 2008 settlement with the state covering the existing license extension.

The Parnell administration submitted comments on Aug. 3, a day after the U.S. Department of Energy closed the comment period for the application.

The administration asked DOE to accept the comments anyway, saying it waited until the last minute to comment in order to monitor ongoing contract negotiations between Cook Inlet producers and utilities, but ultimately missed the deadline because Gov. Sean Parnell was traveling from Juneau to Anchorage at the time to attend a memorial service for National Guard members recently killed in an airplane crash.

The state said the DOE should still consider the comments because the state’s “point of view cannot be adequately represented by any other party or commentator.”

The state supports continued exports as long as “local utility gas supply needs are met, particularly during times of shortage, under terms that protect Alaskans’ interests,” and third-party producers can use the export facility under terms set out by DOE.

Conditions from 2008 settlement

Both of those conditions come from the 2008 settlement governing the current export license, concessions and milestones the producers agreed to meet in return for state support for exports, but they aren’t the only concession included in that document.

In 2008, the Palin administration also required ConocoPhillips and Marathon to reduce exports if they didn’t reach certain milestones in meeting local demand, to sell regional seismic information to Cook Inlet’s other explorers on reasonable terms to encourage exploration and development, and to drilling several new wells to increase reserves.

Parnell did not include those provisions in his recent letter to DOE, but that doesn’t mean those or other conditions for state support are off the table, according to Joe Balash, special assistant to Parnell for energy and natural resource development.

The 2008 settlement came after the close of the comment period, as the state and the producers looked to come to terms on an agreement outside of the DOE process.

For this current round, “it’s kind of early in the dance,” Balash said.

However, the fact that the companies only want more time to export pre-approved volumes, and not higher volumes, could influence what the state does or doesn’t demand.

“Exactly how this is going to play out isn’t particularly clear,” Balash said.

In the 2008 settlement, the state also agreed to support future applications to DOE for export authorizations, but only if the needs of local utilities had first been met.

Is there enough gas left?

The concerns about local needs mirror those of seven Democratic state lawmakers who also commented on the case, saying they would only support continued exports if the producers first agreed, or if DOE forced them to agree, to meet local needs.

Because ConocoPhillips and Marathon are asking for additional time to ship volumes approved back in 2008, as opposed to additional volumes, they have argued that DOE already deemed the exports to be in excess of known reserves needed for local demand.

Those reserves, though, won’t meet local demand without negotiated supply contracts.

ConocoPhillips and Enstar Natural Gas recently signed a supply contract that provides the regional gas utility with additional non-firm supplies over the coming years. The exact amount and term (as well as price) remains unknown until the companies submit their contract to the Regulatory Commission of Alaska in the coming weeks.

Enstar and Chugach Electric Association, the second largest gas user in the region, both got approval for supply contracts with Marathon earlier this year. Chugach now has all the gas it needs through April 2013, while Enstar still needs some additional volumes.

Parnell noted several proposals to increase storage in the Cook Inlet basin, which would allow producers to store excess volumes in the summer and sell them in the winter without having to modulate well production throughout the year, but noted that until those facilities are operational, the export facility was still needed as de facto storage.

Hawker ties LNG to gas line

Rep. Mike Hawker submitted comments before the deadline supporting more exports.

In addition to the reasons provided by others supporting the request, such as the facility’s ability to back up the local market on cold days and moderate seasonal swings, Hawker said the facility needed to remain in operation to provide incentives for local producers.

Hawker said the demand for natural gas in Alaska is relatively small and the ability to export LNG to Asia “has expanded a narrow, unappealing market for producers.”

Hawker acknowledged that regional utilities still don’t have all the gas they anticipate needing in the next few years, but said the gap “is a small percentage of total need.”

Before the new ConocoPhillips contract, Enstar estimated shortfalls of 900 million cubic feet in 2011, 1.1 billion cubic feet in 2012 and considerably more starting in 2013.

“I fear that without the option of continued exports at Kenai, producers will be confronted with additional disincentives to maintain current production levels, potentially darkening the chances of contracts closing even that narrow gap,” Hawker wrote.

He also said the export facility is needed to “boost the attractiveness” of bringing North Slope natural gas to Southcentral Alaska in an in-state pipeline, or a “bullet” line.

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