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Vol. 16, No. 26 Week of June 26, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

LNG in 2014 for Alaska

Utilities say they will need LNG to ensure sufficient gas as CI fields decline

By Alan Bailey

Petroleum News

A working group of Southcentral Alaska utilities and Donlin Creek mine has determined that it will be necessary to start importing liquefied natural gas into the Cook Inlet region starting in 2014, Daniel Helmick, manager of regulatory affairs for Municipal Light & Power, told the Regulatory Commission of Alaska June 22. The utilities are in the process of negotiating commercial arrangement for LNG supplies, working together to share the cost of solving a shared problem, Helmick said.

“This is a high-priority matter and it needs to be until we have a solution to it,” Helmick said. “We’re simply at a point where decisions will have to be made, and they will have to be made in a timely manner.”

Projected shortfall

Helmick said that, taking into account projected gas demand, known Cook Inlet drilling plans and plans for the implementation of new, more efficient power generation, the utilities anticipate a shortfall of 2 billion cubic feet of gas in 2014. That shortfall could climb to 29 bcf in 2017, jumping to 47 bcf in 2018 if gas is needed to generate power for Donlin Creek mine, if the mine goes into operation in that year.

Characterizing LNG importation as a kind of insurance policy, protecting gas consumers against the possibility of outages in gas supplies for utilities, Helmick said that the utilities cannot depend on other options, all of which are too uncertain to meet the utilities’ needs.

“The group has come to the conclusion, at least on an intermediate basis, that our only option to solve with certainty our gas supply needs is through the importation of LNG,” Helmick said. “We see no way around that, whether we like it or not. … That’s just the way it is.”

No other options

The working group discounted upping the number of new Cook Inlet gas wells drilled as an option to meet the utility gas shortfall because the drilling of wells is an uncertain possibility that the utilities have no control over. The provision of North Slope gas through a direct gas line to Southcentral Alaska, or through a spur line from a future North Slope gas line to Canada, is also an uncertain future possibility that would not come into place in time to accommodate the 2014 gas shortfall. The group viewed the use of compressed natural gas technology as insufficiently proven for reliable use. And, at this stage, doing nothing is not an acceptable option either, Helmick said.

He said that the commercial terms involved in negotiations over LNG supplies are confidential but that significant financing will be required at a time when the bond market is especially difficult. However, engineering decisions will require parallel funding decisions this year. It will also be necessary to make investment decisions this year, to ensure that permitting of the project can be carried out in a timely fashion. Several different options for LNG importation are under consideration, including the shipping of LNG on conventional LNG carriers, with the LNG being converted to gas onshore; the gasification of the LNG offshore on special-purpose LNG vessels; the use of barge and tug technology; and the use of floating or submerged LNG technology.

Interrelated components

There are several interrelated components to the LNG import question, with several issues needing resolution, including decisions over the size of ships required; the need for appropriate docking facilities; and the possible need for ice-hardened ships. Solutions to these issues will impact the capital requirements, Helmick said.

Sea ice in the Cook Inlet will impact options for shipping the LNG, especially as the provision of adequate utility gas supplies during the winter is critical to Alaska residents. And additional gas storage capacity in the Cook Inlet region may be desirable to accommodate the gas supply arrangements.

The pricing of the LNG will depend on the source of the commodity. Only relatively small quantities of LNG will be required, and it is not clear how far into the future the supplies will be needed. The utilities have not yet determined whether to contract a single entity to provide all of the LNG supply services as a bundled package, or whether to use multiple service providers, Helmick said.

In a world market

With gas from different locations around the world having different energy contents, the quality of the gas will in part determine the choice of LNG source. But the import of LNG will involve the Southcentral utilities participating in a world market. And one concern is the regulatory issues that will arise if Southcentral consumers end up having to pay more for their gas. The intent is that LNG importation will not impede continuing development of gas resources in the Cook Inlet basin, Helmick said.

“Our primary driver is to eliminate the risk of not having adequate gas supplies and minimize our customers’ costs,” he said.

Regulatory timeframe

RCA Chairman Robert Pickett expressed concern about what seems a short timeframe for regulatory approval of the LNG import arrangements, especially since the commission has not had to deal with this type of gas supply arrangement in the past. Helmick said that he thinks that there is sufficient time for the regulatory process, although the working group does not anticipate submitting a complete docket for the project to RCA by the end of this year, given that yet-to-be-made decisions on the LNG supply arrangements will determine the gas supply rate-making solution.

“We don’t have time to study this issue to death and we don’t have time to adjudicate it to death,” he said. “It’s a crumby deal, but it’s a deal we’ve got.”

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