State natural gas line could be lifeline for Kenai Peninsula

Posted: Thursday, February 17, 2005

Trapped beneath the North Slope may lie an estimated 250 trillion cubic feet of natural gas waiting for an economically feasible way to get to market.

Some of that gas surfaces with the production of oil, but is pumped back into the ground in an effort to force still more oil from the deep strata that confines it. With no pipeline to ship the gas, it remains a valuable commodity in storage.

Alaskans have longed for a gas pipeline for the past 50 years, and today such a project may be closer than ever to becoming a reality. There are several proposals for building a pipeline that would carry gas to the Lower 48 and deliver some of it to gas-hungry markets here in Alaska.

In December, BP, ConocoPhillips and Exxon submitted a Stranded Gas Act application to the state and proposed a joint venture to construct a pipeline in response to a state proposal. Earlier last year, Gov. Frank Murkowski voiced his support for exploring whether the state should take an equity share of ownership in a pipeline, thereby spreading the risk.

TransCanada of Calgary applied earlier last year under the SGA. Others pursuing pipeline ventures in Alaska include the Alaska Natural Gas Development Authority, the Alaska Gas Port Authority, Enbridge Inc. and Calpine Corp.

Any pipeline carrying North Slope gas Outside is likely to include a spur line to Southcentral, possibly from Fairbanks or Glennallen.

According to a 2004 U.S. Department of Energy study (Southcentral Alaska Natural Gas Study), a 24-inch diameter Fairbanks-to-Cook Inlet spur pipeline with a capacity of 330 million cubic feet per day (tapping off a 4.5 billion cubic feet-per-day line from the North Slope) could cost about $500 million. A spur from Glennallen would cost roughly the same, according to Bill Popp, the Kenai Peninsula Borough's liaison to the oil and gas industry.

Under that scenario, the Department of Energy analysis showed North Slope gas could be delivered to Southcentral at about $1 per 1,000 cubic feet cheaper than Lower 48 prices.

Also being explored is a 2 bcf/day LNG project for the North Slope to tidewater at Valdez with a spur to Southcentral costing about $10.5 billion and a 1 bcf/day "bullet line" from the North Slope direct to Cook Inlet costing $3 billion.

The economics of building a line to Southcentral, however, hinge on there being sufficient demand.

According to the study, total current demand includes 356 million cubic feet per day (130 bcf/year) for industry and a combined total of about 192 million cubic feet per day (70 bcf/year) for residential and commercial use. The study points out that for a spur line to be viable, industries using gas, and perhaps utilities as well, would have to be profitable at gas prices "significantly higher" than historical Cook Inlet contracts.

It was the availability of low-cost gas discovered during the quest for oil in the Cook Inlet Basin that prompted industrial expansions in the region, such as the Unocal (now Agrium) fertilizer manufacturing plant and LNG export contracts with Japan. The cheap fuel (compared to Lower 48 prices) also served utility and residential users well.

As the DOE study points out, however, the supply of low-cost gas has run out. Agrium has said it will close its plant by November because it can't operate at higher gas prices, the LNG export license expires in 2009 and more gas must be found to support ConocoPhillips' LNG plant, and an upward trend is pushing Cook Inlet gas prices toward those of the Lower 48. For instance, Unocal and Enstar Natural Gas Co. recently indexed a new contract to the Henry Hub (an Outside pricing regime).

Consumer costs already are reflecting the change and will continue rising as demand at all levels exceeds supply.

On the other hand, the higher price of gas has prompted some new exploration in about the past five years. Among the players are Unocal, Marathon, Aurora Gas LLC and Forest Oil.

Regardless, the amount of gas in the basin may not be enough to meet the rapidly rising demand for energy in the Southcentral area. A pipeline for the North Slope seems the only real option if natural gas is to supply the energy needed.

State natural resource officials are in talks with possible pipeline builders attempting to work out mutually agreeable terms. Whether the price of gas climbs high enough and favorable tax terms with the state prove achievable such that pipeline builders will take the risks necessary to build the multibillion dollar project remains to be seen.

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