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Vol. 16, No. 31 Week of July 31, 2011
Providing coverage of Alaska and Northwest Canada's mineral industry

Mining News: Alaska mines, utilities eye LNG imports

Cook Inlet expansion, ASAP may not prevent Southcentral residents from joining Pebble, Donlin in looking abroad for reliable gas

Shane Lasley

Mining News

Alaska boasts some of the largest metals deposits on earth as well as vast quantities of coal, oil and natural gas. Ironically, companies such as Donlin Gold LLC (formerly Donlin Creek LLC) and Pebble Limited Partnership are looking overseas to find a reliable source of natural gas as they study the economics of building global-scale mines at their projects.

“My guess is, our base case will be imported LNG. Which seems sort of weird to import natural gas into the State of Alaska, but right now that is the only option that we know actually could work,” Pebble Partnership CEO John Shively forewarned back in 2008.

The some 350,000 residents of Anchorage and the surrounding Southcentral region may join these projected global-scale mines in sourcing LNG from abroad.

Natural gas reserves in Cook Inlet, which have long provided the residents of Alaska’s population center with a nearby and reliable source of energy, are projected to fall short of meeting the growing demand of the region.

Daniel Helmick, manager of regulatory affairs for Municipal Light & Power, informed the Regulatory Commission of Alaska that a working group of Southcentral Alaska utilities and Donlin Gold mine has determined that, due to increased demand and declining dependable reserves of Cook Inlet gas, it will be necessary to start importing LNG into Southcentral Alaska in 2014.

The utilities anticipate a shortfall of 2 billion cubic feet of gas in 2014. That deficit could climb to 29 bcf in 2017, jumping to 47 bcf in 2018 if the proposed Donlin Gold mine goes into operation that year.

“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.”

Donlin Gold LLC – a partnership between Barrick Gold Corp. and NovaGold Resources Inc. to develop a 33.6-million-ounce gold project in the Kuskokwim region of Southwest Alaska – is penciling in imported LNG as the base scenario for an updated feasibility study expected to be completed by the end of 2011.

“We have to do the study based on what we can today say we can do,” NovaGold Resource Inc. President Rick Van Nieuwenhuyse told Mining News July 22. “There is a shortfall right now and LNG is seen as at least an interim solution to either finding more gas in Cook Inlet and/or bringing gas down from the North Slope.”

Donlin Gold’s feasibility study includes building a pipeline from Cook Inlet 320 miles (515 kilometers) northwest to the Donlin Gold (formerly Donlin Creek) project.

The proposed mine at the Donlin Gold project is expected to require a base load of around 150 megawatts of electricity, or about the same as Fairbanks. The estimated 30 million cubic feet per day, or 11 bcf per year, required to generate this power is around 15 percent of Alaska’s current natural gas usage.

Early in 2010, when Donlin Gold first looked into reconfiguring its electrical generation to burn natural gas instead of diesel to generate its electricity, it envisioned needing 25 million cubic feet of natural gas per day. But the partnership is now incorporating more electric-powered heavy equipment into the new mine plan.

“We have been switching more equipment over to electric – like the drills and excavators – so it has actually gone up to 30 million cubic feet,” Van Nieuwenhuyse explained.

“We are going to look at the trucks too but that won’t be part of the feasibility study. That is something that is actually being worked on by Caterpillar and the big truck manufacturers,” he added.

The Pebble Partnership – a 50-50 joint venture between Vancouver B.C.-based Northern Dynasty Minerals Ltd. and London-based Anglo American plc – is currently studying the feasibility of building a mine at its massive copper-gold-molybdenum deposit about 220 miles (350 kilometers) southwest of Anchorage.

Until the Pebble Partnership rolls out a plan to mine its global-scale copper-gold-molybdenum deposit it is unclear how much gas their project would call for, but it is presumed that the project’s electrical requirements will be substantially larger than Donlin Gold.

Cook Inlet gas

Shortly following Hemlick’s message to RCA, the Alaska Division of Oil and Gas released a report predicting that, with adequate investment and a storage field, Cook Inlet could meet the growing gas needs of Southcentral residents until at least 2018, but leaves potential mines in the dark.

In early July the United States Geological Survey issued its own report suggesting that Cook Inlet could hold 19 trillion cubic feet of undiscovered gas and 599 million barrels of undiscovered oil.

This prospective gas has the potential to supply the needs of Donlin and Pebble, but until reserves are proven they can not be relied upon.

“Unfortunately, there currently isn’t enough gas in Cook Inlet to say we can plug into an existing gas field there,” Van Nieuwenhuyse said.

“There are people exploring and there is certainly potential they can find additional gas,” he added.

At least two independent companies — Escopeta Oil and Buccaneer Energy — believe at least some of those resources exist in their offshore leaseholds. Escopeta plans to drill at its Kitchen Lights unit this summer, while Buccaneer is aiming to drill at its Southern Cross and North West Cook Inlet units later this year, or more likely next summer.

Van Nieuwenhuyse said additional discoveries do not necessarily add up to enough gas for both Southcentral residents and the potential mines.

“We are also very cognizant of the fact that Anchorage relies on gas from Cook Inlet,” he explained.

Slope gas ‘ASAP’

Though reserves of commercially-viable natural gas in Cook Inlet are currently too tight to depend on, there is an abundance of the fuel on the North Slope. And, according to a report released July 5 by the Alaska Gasline Development Corp., the economics seem to pan out to build a 737-mile pipeline to deliver this gas to Alaska consumers.

The in-state pipeline concept was previously referred to as the “bullet line” but AGDC has bestowed the project with a new name, the Alaska Stand Alone Pipeline, or ASAP, an acronym presumably chosen to reflect the growing sense of urgency to do something about tightening gas supplies from the Cook Inlet basin.

ASAP is envisioned as a 24-inch buried line carrying gas from Alaska’s northern oilfields to the state’s consumers along the Railbelt and in Southcentral. The pipeline’s proposed capacity of 500 million cubic feet of gas per day is the maximum amount allowable under the Alaska Gasline Inducement Act. This stipulation of AGIA provides for in-state use of North Slope gas without compromising the economics of a future natural gas export pipeline.

Dan Fauske, president of AGDC, told legislators that Fairbanks and Southcentral Alaska would consume around 200-240 million cubic feet per day of natural gas carried by ASAP and unnamed industrial shippers have expressed an interest in the remaining capacity.

Under the current schedule, a draft environmental impact statement for ASAP is due out in August, with the final EIS anticipated in the first quarter of 2012, a timeframe that Fauske characterized as “an incredible accomplishment.”

Even at this pace, the AGDC president does not foresee gas flowing to Southcentral Alaska until 2019, which may be not soon enough to prevent residential gas shortages or circumvent a mine at the Donlin gold project from initially burning imported LNG.

This lack of surety is why potential mega-gas consumers such as Pebble or Donlin must look abroad when they pencil in the economics of building and operation their proposed mines.

“Clearly, in terms of our planning, we can’t take into account a gas line,” Shively told Mining News.

Prefer Alaska gas

Though Pebble and Donlin see imported LNG as the only energy source reliable enough to base their feasibility studies, they would rather buy their gas in Alaska.

“Even if we started with imported LNG, if Alaska gas became available in the future we would use it,” Shively told Mining News.

This preference for in-state gas is driven largely by project economics.

“LNG will be more expensive than if it were gas produced in Alaska. We are obviously incentivized financially for people to find more gas in Cook Inlet or to bring the gas down from the North Slope,” Van Nieuwenhuyse explained. “Anything that would result in more local gas, will likely result in a better cost structure for us.”

Donlin and Pebble have some time before they must lock in contracts for the gas needed to power their mines.

Donlin hopes to apply for its permits by early 2012, a process that is expected to take upward of three years.

“Sometime during the permitting process we certainly expect to enter into more earnest discussions with potential suppliers,” Van Nieuwenhuyse said.

The Pebble Partnership, which anticipates entering the permitting process around early 2013, says a reliable gas source will need to be located by the time the construction begins.

“To get into construction we would have to have some type of long-term guarantee, but given the length of time we will be in permitting it is possible things will change,” Shively said.

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