Cook Inlet share of Prudhoe gas up in the air

Posted: Thursday, March 01, 2001

Momentum is building to bring Prudhoe Bay gas to market, but it is an open question whether Cook Inlet homes, businesses and industry will get a share.

The producers are exploring three main options for moving Prudhoe gas -- a pipeline to the Lower 48 states, a plant to convert the gas to synthetic crude oil, which could be shipped through the existing oil pipeline to Valdez, or a gas pipeline to Nikiski or Valdez, where the gas could be cooled to a liquid and loaded onto ships.

A gas line to Nikiski also could supply homes and businesses from Fairbanks to Kenai and prolong the life of the Agrium Inc. fertilizer plant and the liquefied natural gas plant Phillips Petroleum Co. runs in Nikiski. That could be a big plus, since known Cook Inlet reserves are dwindling, said Sen. John Torgerson, R-Kasilof, who chairs the Senate Resources Committee.

"We need to get gas to Cook Inlet, long term, because unless they hit another big field, we have 14 or 15 years worth of gas, then all of a sudden, we're dry," he said.

However, it is unlikely that exporting Prudhoe gas as LNG will be economically viable for at least a decade, said Ed Small, director of Canadian energy for Cambridge Energy Research Associates in Calgary, Alberta. Because of the cost of bringing Prudhoe gas to tidewater, he said, Alaska LNG cannot compete with vast supplies in the Middle East and Asia.

"If it's an issue of expanding (Nikiski) LNG facilities and using LNG as a means of getting Prudhoe gas to market, that's not going to be economical until at least 2015, because you have the pipeline cost, new liquefaction facilities, new tankers, and you're going to have to compete with all the LNG in the world," Small said. "To get Prudhoe gas to market, the only viable alternative is a pipeline to the Lower 48. Then, you have the question of does a spin-off to supply gas to Cook Inlet make sense."

Small said the Lower 48 states consumed roughly 22.1 trillion cubic feet of natural gas last year. There already is a shortage, he said, and demand is rising. Cambridge Energy projects Lower 48 demand in 2010 at 26.7 trillion cubic feet.

"Without the Alaska gas, it would be very difficult to meet that demand," he said.

Phillips, BP and Exxon Mobil, the three major owners of North Slope gas, pooled their resources in December to explore the feasibility of a pipeline to the Lower 48. They expect to spend $75 million this year, complete much of the engineering and design and be ready, if the project looks feasible, to apply for permits.

BP also is building a pilot plant in Nikiski to test its technology for converting natural gas to synthetic diesel fuel.

"The bulk of our energy is behind the gas pipeline, because that looks like the best way to commercialize Alaska natural gas," said Ken Konrad, BP vice president for Alaska gas.

Early estimates put the cost of a pipeline from Prudhoe Bay to the existing distribution system in Alberta at $8 billion to $10 billion. The gas could flow by 2007. By then, though, Cambridge Energy expects the Canadian distribution system will be operating at capacity. That means the companies would have to build additional pipelines -- likely to the West Coast and Midwest -- to carry Alaska gas the rest of the way, Small said. They will have to include the cost in their calculations.

Konrad said there are two possible routes from Prudhoe Bay to Alberta. The 1,650-mile northern route runs under the Beaufort Sea, then follows the Mackenzie River valley through the Northwest Territories. The 2,000-mile southern route parallels the trans-Alaska pipeline to Fairbanks and Delta Junction, then follows the Alaska Highway through the Yukon Territory.

A northern route pipeline also might carry gas from the Mackenzie River delta, where there are 9 trillion cubic feet of proven reserves and potential reserves of 60 trillion cubic feet.

An Alaska Highway pipeline also could supply Fairbanks and open the doors for a pipeline to Cook Inlet.

Alaska Gov. Tony Knowles came out in November for the Alaska Highway route.

The Cook Inlet Pipeline Terminus Group, formed by the Kenai Peninsula Borough to lobby for a gas line to Nikiski, also favors the Alaska Highway route, said Kenai Peninsula Borough Economic Development District director Betsy Arbelovsky, who sits on the group.

"We believe that supports and makes more viable an LNG line," she said.

However, Phillips Alaska Inc. president Kevin Meyers believes it could cost a couple billion dollars less to build a pipeline along the northern route, said Phillips spokesperson George Findling.

"Our focus would be on the most cost-competitive way to get the gas to market," Findling said.

"From the preliminary numbers, the northern route seems to have the advantage. What we're going to do with this year's work is identify whether that advantage is real."

The primary market is the Lower 48 and Canada, he said.

"In the next year, we're going to have to find which route -- if either -- gives us an economic route to reach that market," he said. "Then, we can look at how to get gas to Cook Inlet or other markets."

Cambridge Energy's Small said the northern route certainly would be less expensive. However, the oil companies also must consider strong objections from environmental groups to a pipeline across the Beaufort Sea.

"The oil companies also will have to look at the political aspects," he said. "Knowles wants the southern route because that would benefit Alaska communities and provide more short-term jobs."

Yukon officials are lobbying for the Alaska Highway route, and Northwest Territories officials are lobbying for the Mackenzie River route. However, Canada's national government has not yet expressed a preference, Small said.

Ottawa will consider whether a pipeline along the Alaska Highway route would preclude development of Mackenzie River gas, he said. The Cambridge Energy analysis suggests that a pipeline carrying 2.5 trillion or 3 billion cubic feet per day would not.

"But if it carries 4 billion cubic feet or greater, there's extreme doubt that there would be the economics to build a separate Mackenzie delta line," he said.

Phillips, BP and Exxon Mobil contemplate a pipeline carrying 2 billion to 4 billion cubic feet per day.

Small said it seems more likely than ever that the pipeline to the Lower 48 will be built.

"But that doesn't mean it's a slam dunk," he said.

If the northern route turns out to be the viable option, he said, state insistence on the Alaska Highway route could kill the project.

"Knowles looks at the politics, which include the benefit to Alaska," he said. "From the companies' perspective, the drivers are going to be different. If it doesn't meet an economic test, the rest is irrelevant."

Alaska's main problem is to get the gas to market, he said, because the greatest benefits will be in taxes and royalties. Meanwhile, he said, exploration may find new Cook Inlet reserves. Other areas closer than Prudhoe Bay also potentially could produce gas.

"Really, to keep Cook Inlet facilities alive, is there a closer supply of gas?" he asked. "Does it work to build the Alaska Highway route and a spur to Cook Inlet? But then it comes back to which is going to be the route that makes the gas flow to (the Lower 48) in the first place."

The state puts known Cook Inlet gas reserves at about 2.8 trillion cubic feet, with consumption of about 215 billion cubic feet per year.

The Potential Gas Agency, which includes industry and academia, estimates that .6 trillion to 2.4 trillion cubic feet in Cook Inlet reserves probably remain to be found and says undiscovered reserves could run as high as 13.6 trillion cubic feet, said George Eynon, director of North American oil and gas supply for Cambridge Energy in Calgary.

Coal-bed methane in the Matanuska-Susitna area could exceed 3 trillion cubic feet, he said.

The Potential Gas Agency estimates that Bristol Bay and the Alaska Peninsula could hold up to 7.4 trillion cubic feet, Eynon said, though that estimate is highly speculative.

BP's Konrad said the issue of bringing Prudhoe gas to Southcentral Alaska is largely commercial, since two-thirds of present Cook Inlet consumption is exported as fertilizer from Agrium or LNG from Phillips. There is plenty of Cook Inlet gas to heat homes and businesses, he said.

"If supplies got tight, there would be a price response. That would impinge on the export industries," he said. "If they didn't have an attractive supply, they would stop exporting, or they would have to decide if it's feasible to build a spur to support that."

Until recently, he said, there has been an over-supply of Cook Inlet gas, so there has been no incentive to explore. But people will explore when supplies get tight, said BP spokesperson Ronnie Chappell.

Phillips Alaska, BP Exploration (Alaska) Inc., Foothills Pipe Line Ltd. and Marubeni Corp. expect to spend $2.8 million this year to complete the second phase of a feasibility study for a pipeline to Nikiski or Valdez, where Prudhoe gas could be cooled to LNG for shipment to Pacific Rim buyers. Konrad said Phase III of the LNG study depends on the outcome of Phase II, which focuses on markets and possible synergies with other projects.

"If there are possible synergies or a path ahead, the work would continue.

"If it looks like most of the work should go behind the (Lower 48) gas pipeline -- and that should go first -- we'll adjust our resources accordingly."

Meanwhile, Findling said, Phillips expects an over-supply of LNG through 2010.

"We're trying to find a way to make that project economical so that toward the end of the decade, we could get a piece of it," he said. "But the end of the decade is the first opportunity we see to get into it."

Kenai Peninsula Borough Mayor Dale Bagley, who chairs the Cook Inlet Pipeline Terminus Group, said there is little the group can do if industry rules out an LNG project.

"We're mainly a cheerleader for getting the word out that the Cook Inlet route is superior to the Valdez route if there's going to be an LNG pipeline," he said.

Kenai Mayor John Williams said there are a myriad of projects on the table, from LNG to gas-to-liquids to the pipeline to the Lower 48.

"I really can't tell you what's going to happen," he said. "I don't think anyone has the true answer."

Meanwhile, Torgerson noted the boom in exploration throughout North America that came with the recent spike in oil and gas prices.

"If they happen to find a major field of gas that's closer, it's logical they would use that before Alaska gas," he said.

Former Kenai Peninsula Borough Mayor Mike Navarre, who sits on the Cook Inlet Pipeline Terminus Group, said that if industry settles on the northern route, it may be in the state's best interest not to let the project go forward without construction of a spur at least to Fairbanks.

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