LNG plant closure talked over in Juneau

Posted: Wednesday, February 16, 2011

Legislators sat down with labor, industry and regulatory representatives on Tuesday to discuss the upcoming closure of the Liquified Natural Gas plant in Nikiski and what it means for Alaska.

The take-away message?

When a butterfly flaps its wings in Australia, Alaska feels the ripple effects.

A series of questions made it clear that Alaska is, in part, losing out to Australia.

In the meeting of the House Special Committee on Economic Development, Trade and Tourism in Juneau, Rep. Anna Fairclough, R-Eagle River, asked ConocoPhillips' Dan Clark about the company's Australian investments.

Those are large investments, made feasible by long contracts in the Asian markets, Clark said. He wasn't sure exactly how long, but tossed out 20 years as a possibility.

"Something very long to justify the very large investments that we made," he said.

Where in Asia, she asked.

Japan is the largest market on that continent, he said.

What makes Alaska less competitive than Australia?

Clark stressed that multiple factors are at play. It can't export the volumes needed to be competitive.

"The smaller the plant, the higher the cost per unit," he said.

Earlier in the hearing, he stressed the importance of the Nikiski facility's longevity and role in the company. It was the first of its kind. And now it is outdated.

"Nowadays, plants are built much bigger," he said.

Legislators posed their own possible problem: taxes. But Clark didn't lay blame there.

They're always part of the decision, he said.

"I will say, taxes are very low in the Cook Inlet."

Clark did say, when asked, that companies like to secure longer contracts when possible. ConocoPhillips has one such agreement with Tokyo Electric, the company that used to buy its LNG from Nikiski.

Before the questioning began, Rep. Kurt Olson, a Soldotna Republican, talked about his view on the closure.

When the Nikiski plant couldn't get a 10-year license to export, they couldn't sign a 10-year contract with Tokyo Electric to supply the company with natural gas, Olson said.

"We lost that tool and that commitment," he said.

But Clark didn't say whether a longer license would have meant a longer contract, or kept the plant operating.

"That's a very difficult question to speculate on," he said.

But not everything is the result of external forces, Olson said. The length of deliberations and final decisions by the Regulatory Commission of Alaska also came into play.

The RCA sent a representative to help explain its processes. Commissioner Jan Wilson said the commission has to look out for rate-payers, and consider the appeals of numerous parties.

The timing isn't always within the commission's control, she said.

Wilson also explained that sometimes, the decisions are based on details within a docket, rather than the overall purpose. The rate setting mechanism might be a problem in a natural gas contract, for example.

Those present also discussed what the closure means for the plant and the region's future.

Any long-term use would require the company to invest in the facility, Clark said.

"There would need to be some significant investments in the plant," he said.

For now, the company is keeping its options open by maintaining the facility, he said. The company has contracts with Chugach and Enstar that it intends to uphold, he said. Future options include importing LNG, Clark said, or exporting it again, if the market aligns.

"ConocoPhillips will take steps to preserve the plant for future options," he said. "We intend to maintain it, keep it in good condition."

Wasilla Republican Wes Keller asked the question on everyone's mind.

"What baffles me is we're looking at a shortage in the supply to Southcentral, and we're shutting down (production)," he said.

Clark explained that demand on a warm summer day is different than demand on a cold winter day.

"The local market in Southcentral Alaska is highly cyclical," Clark said. Contrasted with that, wells produce about the same amount, regardless.

Clark said the variable demand highlights the need for storage,

"What that project will do is help flatten out demand," he said, referring to the proposed storage facility near Kenai that is currently working it's way through the regulatory process.

Clark added that there is some producer-owner storage in the area.

He declined to speculate very much on what this means for exploration in the Cook Inlet.

As far as natural gas, it definitely reduces the market for it, he said. But oil is probably in the same position it was before.

Tom Nelson, from the state's Department of Labor, had more positive news.

There are currently job openings for operators, roustabouts and equipment technicians, the main jobs being lost, he said. And more are likely to open this spring.

"The timing may be good for those employees," he said.

But jobs aren't the only loss, said Rep. Chenault, R-Nikiski, in his pre-recorded message to the committee.

"It's a sad day for Alaska," he said.

In his own statement, Olson said that his district and Chenault's have an interesting relationship. The people who work on the North Road, in Chenault's district, often live in Soldotna or Kenai, within the bounds of Olson's district. The whole area is impacted, he said.

"The impact is felt throughout the central Peninsula," he explained.

Molly Dischner can be reached at molly.dischner@peninsulaclarion.com.

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