North Slope LNG study to continue

Industry consortium agrees to keep looking into pipeline

Posted: Tuesday, August 08, 2000

An industry consortium announced agreement Monday to continue its feasibility study for a project to liquefy North Slope natural gas for export to Asia.

"We think the key is to develop a project that can be competitive with other new liquefied natural gas projects and be ready when the market shows up," said Steve Allman, commercial manager for the Alaska North Slope LNG Project.

The consortium, which now includes Phillips Alaska Inc., BP Exploration (Alaska) Inc., Foothills Pipe Line Ltd. and Marubeni Corp., started looking in 1998 at the feasibility of building a pipeline to tidewater, where North Slope gas could be cooled to a liquid, reducing its volume for shipment to Asia.

"A key for us is to maintain our options and keep everything as flexible as we can, including the route to Nikiski or to Anderson Bay," Allman said.

The first phase of the study cost between $12 million and $15 million, Allman said. That narrowed the choices for the pipeline terminus to Nikiski and Anderson Bay near Valdez and halved the size of the project from the initial proposal for a plant to produce 14 million metric tons of liquefied natural gas per year.

Asia presently consumes about 65 million tons of LNG per year, Allman said. It is difficult for a new LNG plant to compete with existing facilities, he said, so market growth represents the greatest opportunity for selling North Slope LNG.

"We believe there will be sustained growth over time. What that is is anybody's guess," he said. "It's a question of does the Asian market continue to recover from the so-called Asian flu."

Consortium members believe they have a better chance of marketing 7 million tons of LNG per year than 14 million tons per year. The 7-million-ton plant still could be expanded, but starting small defers the up-front capital investment, he said.

"We're trying to reduce risk," he said. "One area is reducing capital risk."

Kevin Meyers, president of Phillips Alaska Inc., said there must be additional cuts in cost risk to make a North Slope LNG project viable. He said the best opportunities are in marketing, financing, government fiscal and regulatory policy and synergies with other projects.

Allman said one goal now is to negotiate tax breaks under the Stranded Gas Act, which passed the Legislature in 1998. The act allows developers of North Slope gas to negotiate tax breaks with the commissioner of the Department of Revenue. The Legislature must ratify any agreement it reaches. The consortium may negotiate to defer taxes until the project is producing revenue, he said.

It also will look for ways to share costs with other projects, such as a gas pipeline to the Lower 48 or a plant to chemically convert North Slope gas to a liquid fuel. For example, a tidewater LNG plant could share the first leg of a pipeline to the Lower 48, he said. A pipeline to a LNG plant in Nikiski or Valdez also might supply a tidewater gas-to-liquids plant.

A gas-to-liquids plant could be built on the North Slope, where its output could be shipped through the existing oil pipeline to Valdez. However, producers likely would want to ship high-value synthetic fuels in separate lots rather than mix them with crude oil. That would require building additional storage to avoid interruptions of crude production or of crude deliveries to the Williams Co. refinery at North Pole.

"If you've got it at tidewater, you're not concerned with batching, and you're not concerned with storage," Allman said.

Allman said the consortium also will explore what advantages would accrue if a port authority or other government entity builds and operates the pipeline and LNG plant.

The North Slope Borough, Fairbanks Northstar Borough and Valdez recently formed a port authority to build and operate a gas line and LNG plant in Valdez. Their Alaska Gasline Port Authority proposes a $12 billion project to export about 14 million metric tons of liquefied natural gas per year. The Internal Revenue Service recently ruled that the port authority is tax-exempt, and organizers say that effectively cuts $3 billion from the project's cost.

Kenai Peninsula Borough officials say if a port authority works for the Valdez route, it will work for the route to Nikiski. The borough assembly recently appropriated $50,000 to explore forming a port authority, too.

Meanwhile, there do seem to be advantages to a Nikiski terminus, said Phillips' George Findling. A pipeline to Nikiski would cost less, he said, and Cook Inlet homes, businesses and industry would provide a local market for some of the gas. For technical reasons, an LNG plant could operate more efficiently if some gas could be sold locally. Meanwhile, Kenai Peninsula Borough officials say Nikiski has more room to build and more skilled labor.

Betsy Arbelovsky, director of the Kenai Peninsula Borough Economic Development District, said she was pleased with the consortium's Monday announcement.

"They'll continue. They have to get these cost breakthroughs, and if they do, maybe sometime next summer they might announce a site. If they do, there's a lot of advantages to Nikiski," she said.



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