Kenai LNG plant set to close this spring

ConocoPhillips, Marathon to mothball facility due to weak market conditions; plant has been shipping to buyers in Japan since 1969

By Eric Lidji
For Petroleum News


With news that ConocoPhillips and Marathon Oil plan to mothball their liquefied natural gas plant on the Kenai Peninsula this spring, Alaska is left standing on a bridge without a keystone. Since making its first shipment in 1969, the Nikiski export facility has held the Cook Inlet natural gas market together, even as that market began to change with age.
In its first few decades in operation, the facility justified the production of large Cook Inlet gas fields for local use by providing a large market outside Alaska. In the 2000s, it provided backup for utilities as local deliverability declined. Now, the plant could theoretically be converted to an import facility to bolster declining local production.
ConocoPhillips and Marathon made their decision based on market conditions, but those conditions aren’t easily delineated. As recently as last summer, the owners felt confident enough about the Asian market to apply for another two-year extension of their export license, but it appears the companies could not secure contracts through April 2013.
The reasons abound. The plant used to be the sole supplier to Japan, but now supplies only one half of one percent of that market. The LNG shipments leaving Alaska were once the largest in the world, but are now among the smallest. Supply contracts between Alaska and Japan used to run for 15 years, but have recently run for two-year terms.
Now, the future of the plant is uncertain.
“Right now, our intent is to get the plant preserved. We’re going to be evaluating options,” Dan Clark, ConocoPhillips’ manager of Cook Inlet assets, told Petroleum News. Those options range from closing the plant, to reconfiguring it, to selling it.
The bad news ripple effect
While Asian markets don’t appear to be mourning the news, the closure’s impact on Alaska markets will be wide ranging because of the unique role the LNG facility plays.
Once the plant is mothballed in April or May, it will jeopardize more than 100 direct and indirect jobs and tens of millions in taxes and royalties for state and local governments.
With the coldest months over by then, Southcentral should be no worse off than expected for this winter, but peak demand will be a critical issue next winter. Although Enstar Natural Gas, through Cook Inlet Natural Gas Storage Alaska, is building a new third-party storage facility, it won’t be ready until 2013. Even once it comes online, it won’t make up for the combined loss of the plant and declining Cook Inlet production.
“This storage facility is not intended to be a be-all end-all solution for Cook Inlet,” said John Sims, a spokesman for Enstar Natural Gas, the largest consumer in Alaska.
While Enstar expects to start getting firm shipments from the North Fork unit starting in March, those deliveries won’t fill the shortfall Enstar is facing in the coming years.
“That insurance policy that we had is lost,” Sims said. “And that’s a big one.”
Some wells to be shut-in
Until storage is available, ConocoPhillips will have to shut-in some wells once local demand drops in the summer. Because of the aging nature of Cook Inlet reservoirs, it’s unknown how those wells will produce once ConocoPhillips brings them back online.
(However, ConocoPhillips will continue to operate the Tyonek platform at the North Cook Inlet unit. While that unit primarily feeds the export facility, it is not isolated from the grid. North Cook Inlet and Beluga River will now be used to fill local contracts.)
The closure could also dampen exploration in Cook Inlet.
Through a deal with the state, ConocoPhillips and Marathon Oil bought third-party natural gas at their export facility, creating a market for explorers. Even though Alaska is craving natural gas, the local market might still not be large enough to support all of the potential production from the Cook Inlet leaseholders currently interesting in drilling.
The loss of an overseas market could also jeopardize plans to bring North Slope natural gas to Southcentral. Various plans for an in-state pipeline require an “anchor tenant,” like the export facility, to keep residential and commercial customers from bearing the full cost of the project. Meanwhile, an “all-Alaska line” from Prudhoe Bay to Valdez is based on exporting LNG, although the larger volumes available from the North Slope could change the market dynamics, allowing Alaska to better compete against other basins.
A plant in gradual decline
The closure of the plant is not entirely unexpected.
The last decade brought fundamental changes to the operation of the plant.
Phillips Petroleum and Marathon Oil built their facility at the dawn of the global LNG trade, only a few years after Great Britain began importing it from Algeria in 1964.
The Kenai plant started its life as a pioneering infrastructure system: a liquefaction plant in Alaska and a re-gasification plant in Japan, the two largest LNG tankers ever built and the new offshore Tyonek platform along with new pipelines and wells to support it.
The facility originally operated on long-term contracts with two Japanese utilities, Tokyo Electric Power Co. Inc., and Tokyo Gas Co. Ltd. The first export license ran from 1969 to 1984 with a five-year extension. The second license ran from 1989 to 2004.
Starting in the mid-1990s, the idea of shipping gas overseas caused heartburn at home.
In 1996, Phillips and Marathon applied for a five-year extension, through 2009, but local utilities and producers argued that continued exports would cause shortages in Alaska.
The U.S. Department of Energy approved the extension, but the issue reared its head again when ConocoPhillips and Marathon asked for a two-year extension through 2011.
The State of Alaska only backed the request after the companies agreed to certain concessions, like meeting local needs, increasing drilling and buying third party gas.
Utilities supported last extension
Last summer, when ConocoPhillips and Marathon requested another two-year extension, though 2013, the changing nature of the Cook Inlet changed the nature of the opposition.
Aside from a group of Democratic lawmakers worried about local supplies meeting local demand, the request got wide support from utilities, producers and the State of Alaska.
That happened for two reasons. First, ConocoPhillips and Marathon asked only for more time to ship volumes already approved for export. Second, storage and deliverability became more immediately pressing issues in Southcentral than production.
In the past decade, though, the plant and Cook Inlet began to show their age.
A 2006 report estimated that the plant would need significant investments to continue operating beyond 2011. ConocoPhillips recently put the cost of that investment in the range of several hundred million dollars. Except for an expansion in the mid-1990s, the plant, including its two turbines, has been in service since operations began in 1969.
(Reconfiguring the plant for imports would create additional costs.)
In 2007, Agrium mothballed its nitrogen fertilizer operations on the Kenai Peninsula after years of declining gas purchases because it could no longer secure a supply contract.
In April 2009, ConocoPhillips and Marathon cut their tanker fleet in half, reducing the volume of shipments. “Looking back on it, that was sort of the first step,” Clark said.

AGIA an issue in Juneau

House Bill 142 says line uneconomic without firm commitments by summer
Kristen Nelson Petroleum News



Is it time to declare AGIA dead? That’s the question some Alaska legislators are asking.
The TransCanada-ExxonMobil Alaska Pipeline Project, one of two projects to move Alaska North Slope gas to market, was licensed by the state under the Alaska Gasline Inducement Act.
Tony Palmer, vice president of Alaska development for TransCanada, said after the close of the July 30 open season last year for the Alaska Pipeline Project that “we have received multiple bids from major industry players and others for significant volumes.”
The next step, he said, is to work with potential customers to resolve conditions on the bids: “That’s what we’ll be doing over the next several months.”
Palmer told Petroleum News just prior to the close of the open season that the goal was to have precedent agreements signed by the end of the year. If conditions are simpler, it may take less time, he said.
On the other hand, “If we get many complex conditions we may not be able to achieve it in 100 business days,” extending beyond the end of the year when precedent agreements could be signed, Palmer said.
Because year-end has come and gone without signed precedent agreements, some members of Alaska’s Legislature are now concerned that the AGIA-licensed project is a failure and they want to legislate a way for the state to get out of its contract.
State required continuation
Under AGIA, the state required that in the event of a failed initial open season — no bidders for pipeline capacity or not enough bidders — the licensee would be committed to continue through certification by the Federal Energy Regulatory Commission.
That was one of the must-haves in AGIA, which in return provided a number of incentives, including $500 million in state matching funds for work on the project through FERC certification.
Palmer told legislators during the 2007 debate over AGIA that TransCanada preferred — in the case of a failed initial open season — to focus on obtaining customers “as opposed to doing the engineering and regulatory and legal work to capture a FERC certificate.”
Palmer said that even though the state offered a higher cost-share match after an open season, that TransCanada would prefer not to pursue the certificate “until we had customers or credit.” Told that fellow Canadian pipeline company Enbridge had told legislators “no producers, no pipeline,” Palmer said in his view it is “no customers, no credit, no pipeline.”
The Legislature passed AGIA in 2007, and despite its concerns over the FERC certification requirement, TransCanada submitted an AGIA application and received the AGIA license in 2008.
Both the Alaska Pipeline Project and the competing BP-ConocoPhillips Denali project held open seasons last year. Both reported receiving bids; neither project has completed negotiating precedent agreements.
HB 142 introduced
Which brings us to the new session of the Alaska Legislature, and concerns by some House Republicans that since precedent agreements have not been signed the AGIA-licensed project may not be economic and may not result in a pipeline, while the state is committed to reimbursing TransCanada up to $500 million.
The sponsors of House Bill 142, introduced Feb. 4, say the bill would provide an exit strategy for the state if there are insufficient firm transportation commitments resulting from the initial open season.
House Speaker Mike Chenault, R-Kenai, speaking at a Feb. 7 press conference, said the Legislature is in the dark.
“We’ve heard from TransCanada after the open season that gas was bid,” but don’t know if there is enough gas for a pipeline, he said.
Chenault also said “our perception of natural gas supplies in the Lower 48 at the time of the AGIA process are considerably different than what they are today,” with shale gas production growing at a rapid rate.
Rep. Mike Hawker, R-Anchorage, said the goal of the legislation is “to create a sense of urgency about moving forward with the AGIA process.” That urgency was “not mandated in the original AGIA legislation and … I think it was an oversight in the original AGIA legislation,” he said.
The bill creates “a rebuttable presumption that the project licensed under the Alaska Gasline Inducement Act is uneconomic because of insufficient firm transportation commitments during the first open season,” gives TransCanada until July 15 to disclose that it received firm transportation commitments sufficient to support construction of the project, and requires the commissioners of Natural Resources and Revenue to notify the Legislature before Aug. 1 whether firm transportation commitments were disclosed to them prior to July 15.
The commissioners would have until Aug. 15 to submit a report to the Legislature that there are sufficient firm transportation commitments for the project to go forward, or that the project has credit support sufficient to finance construction and predicted costs of transportation “would result in a producer rate of return that is not below the rate typically accepted by a prudent oil and gas exploration and production company for incremental upstream investment that is required to produce and deliver gas to the project.”
TransCanada, administration, respond
Palmer told Petroleum News Feb. 8 that TransCanada “is confident that we have done everything we can do to advance the project and meet the obligations we have to the State of Alaska; and to date the State of Alaska has met their obligations to us as the licensee.”
He said he wouldn’t prejudge what might happen with the bill, but will “participate as requested and we’ll see how that plays out.”
The Associated Press is reporting that the administration plans a legal review of the bill.
Deputy Commissioner of DNR Joe Balash told AP there are concerns about “impacts and potential exposure” from the measure.
Larry Persily, federal coordinator for Alaska Natural Gas Transportation Projects, told Petroleum News in a Feb. 8 e-mail: “I understand Alaskans’ frustrations with the pace of the gas pipeline project and I know people want to see some positive news about the open seasons. I only ask that people not confuse the debate over AGIA with the project itself. The pipeline is possible, the project would be good for the state and the nation, and the federal government is ready to work with whichever company or companies are willing to risk the tens of billions of dollars needed to finance the pipeline.”
Legislative reactions
Members of the Senate Bipartisan Working Group had mixed reactions to the bill.
Senate President Gary Stevens, R-Kodiak, said in a Feb. 8 press availability there were some concerns in the Senate about whether the state has given the process enough time, and said he didn’t “anticipate a similar bill on the Senate side, but we’ll see how things progress on the House side.”
Sen. Bert Stedman, R-Sitka, said he thinks discussion is timely, and said he’s “concerned that we could be tied up in the contractual obligations for years into the future.”
Sen. Tom Wagoner, R-Kenai, said he thinks the Legislature needs to wait to see the results from the open season “and then sort it out at that time.”
House Democrats, speaking at House Minority press availability Feb. 8, were opposed.
Minority Leader Beth Kerttula, D-Juneau, said she thinks “the State of Alaska should be taking down barriers to entry instead of putting them up and I think that unfortunately what the new AGIA bill would do is break our deal to get a gas line.” She said she thinks the bill would produce a lawsuit by “breaking our deal and setting an artificial deadline.”
The bill has been referred to only one committee, House Finance, and Kerttula said she intended to talk to Chenault about that.
Rep. Scott Kawasaki, D-Fairbanks, a member of House Resources, said “certainly AGIA and the whole concept of AGIA is a Resources issue” and should be heard by that committee.

Alaska lawmakers propose ditching Palin's pipeline plan

JUNEAU – Leading state lawmakers introduced legislation Friday to abandon a centerpiece of former Gov. Sarah Palin’s administration: a state-sanctioned effort to advance a major natural gas pipeline.

The measure from Alaska House Republicans underscored the impatience and skepticism that many lawmakers have expressed about the current process and a belief the state is no closer than it was several years ago to realizing the long-hoped-for line.

Under the Alaska Gasline Inducement Act championed by fellow Republican Palin, the state promised TransCanada Corp. up to $500 million to advance a line. TransCanada won the exclusive license in 2008.

The state has reported that reimbursements so far have topped $36 million.

The company missed a self-imposed target for reaching agreements with shippers at the end of 2010 but has cautioned against reading much into that, noting that negotiations are complex and continuing.

But a number of lawmakers are losing patience — and faith — that this process will succeed in getting a line built this decade, if ever. The measure Friday was the first such introduced by the Legislature.

The bill, introduced by Republican Reps. Mike Chenault, Mike Hawker, Craig Johnson and Kurt Olson, would presume the project is uneconomic if TransCanada cannot show proof to Gov. Sean Parnell’s administration before July 15 that it has received firm shipping commitments.

Parnell has stood behind the process, saying he supports efforts by private industry to build a line that could carry gas from the North Slope to market.

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