LNG project also facing hurdles

Posted: Sunday, July 02, 2000

Phillips Alaska Inc., Foothills Pipe Lines Ltd., Marubeni Corp. and BP Exploration (Alaska) Inc. are members of an industry consortium exploring the feasibility of a pipeline to bring North Slope gas to Nikiski or Valdez.

There, it could be cooled to a liquid for export to Asia.

Foothills also is pursuing construction of a pipeline to bring North Slope gas to the Lower 48. During a Friday forum in Soldotna sponsored by the Alaska State Chamber of Commerce, John Ellwood, vice president of engineering and operations for Foothills, said it is easier to add to a big market such as the Lower 48 than to capture part of a small one, such as Asian demand for liquefied natural gas.

Henry McGee, senior vice president for Phillips Alaska said the economics of an LNG project are marginal.

"We have a lot to overcome with an 800-mile pipeline," he said. "Most of the projects we're competing with are at tidewater."

He said the industry consortium plans to pursue financing options and tax incentives that could improve the economics.

The North Slope and Fairbanks North Star boroughs and the city of Valdez have formed a port authority to build a pipeline to their proposed LNG plant in Valdez. The port authority would be exempt from federal income taxes, improving the economics, and could use tax-exempt bonds to fund some or all of the construction. McGee said the idea may have merit.

Kenai Peninsula Borough Mayor Dale Bagley promoted a Nikiski terminus for the LNG project, since a pipeline along that route also could supply homes, businesses and industry from Fairbanks to Anchorage and the Kenai Peninsula. Barges from Nenana could carry gas from the pipeline to Western Alaska villages. Nikiski offers more room for industry, he said, and if a port authority works for Valdez, it will work for Nikiski.

Bill Walker, attorney for the Valdez port authority, steered clear of debating the merits of the competing proposals.

"You don't really want to engage in a criticism of the (Kenai) borough proposal," he said. "I have a lot of respect for the borough proposal and their desire to bring development to their community. We all hope a pipeline will be built somewhere in Alaska."

However, he said, other communities are welcome to join the port authority, which could bring $10 billion to $20 billion in tax advantages. The port authority might agree to fund a spur to Cook Inlet, he said.

Shane O'Leary, gas-to-liquids development manager for BP Exploration (Alaska) Inc., described the $86 million plant BP plans in Nikiski to test its gas-to-liquids process. If that succeeds, a larger plant on the North Slope could produce synthetic fuels for shipment through the existing oil pipeline to Valdez, he said.

"If a gas pipeline were built through Southcentral Alaska, it may be advantageous to build a gas-to-liquids plant on the coast," he said. "That's the type of analysis that's going on now."

He said 35 percent of the natural gas consumed by a gas-to-liquids plant is lost as waste heat. It would help if the gas-to-liquids plant could be coupled with a power plant to turn waste heat to electricity.

McGee said there are advantages to a tidewater gas-to-liquids plant. Contaminating high-quality gas-to-liquids fuels with natural crude reduces their value, he said, and sending separate batches through the oil line to Valdez could require construction of $1 billion in storage facilities to avoid interruptions in production of natural crude.

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