Offer made for LNG facility: State co-op, ANGDA explore options for natural gas

Posted: Sunday, March 21, 2010

A natural gas supply cooperative backed by the state gas development authority has offered to purchase the liquefied natural gas plant near Kenai that ConocoPhillips Alaska Inc. and Marathon Oil Co. currently own.

Alternatively, ANGDA and the cooperative, the Natural Gas Supply Co., could invest in LNG regasification facilities to help ensure future gas supply to regional utilities, the gas authority's CEO, Harold Heinze, told a state legislative committee in Juneau March 16.

The LNG export license for the Kenai plant expires March 2011 and so far no application for a renewal of the permit has been made by ConocoPhillips and Marathon.

State and local officials are concerned that if the export license is not renewed, the companies may close the plant, which now plays a vital role in helping utilities meet mid-winter gas deliverability needs, Heinze told the Senate Resources Committee.

ConocoPhillips spokeswoman Natalie Lowman said no decisions have been made on the future of the plant, and that she could not comment on the offer to buy the facility.

In the past, ConocoPhillips has said it is interested in having the plant continue to play a role in meeting regional gas needs whether there are LNG exports or not.

The offer, made in a March 2 letter to ConocoPhillips CEO James Mulva, was by the Natural Gas Supply Co., a cooperative formed by the ANGDA and three Alaska electric utilities, Golden Valley Electric Cooperative of Fairbanks, Matanuska Electric Association of Palmer and Homer Electric Association of Homer.

A similar letter was sent to Marathon, Heinze said.

Chugach Electric Association, the state's largest electric utility, is not a member of the gas supply co-op but could participate in gas supply initiatives, he said.

The gas development authority is an independent state corporation with its own bonding capability. It has the capability to finance acquisitions by the gas supply cooperative, which could also include gas reserves, an interest in gas storage facilities and capacity in pipelines, Heinze said.

Heinze told the Senate Resources Committee that the cooperative and the authority could buy the entire LNG plant or it could invest in regasification facilities, possibly in a partnership with ConocoPhillips and Marathon, which would help meet regional utility needs.

"The Kenai LNG plant has played an important role in Alaska's Cook Inlet region. The future operation of the Kenai plant could look different, but play just as important a role in helping meet regional energy needs," Heinze said in the letter to Mulva.

Heinze said the authority wants to use the plant as a peaking facility for Southcentral Alaska utilities, and to develop loading and barge facilities to move LNG in bulk to coastal communities, where it could replace diesel used now in power generation.

The gas authority would issue revenue bonds to finance acquisitions, which would be backed by gas purchases from the regional electric utilities. While the state of Alaska would not be legally obligated to pay off the bonds in the event of default, the state's "moral obligation" to back its independent corporations usually makes such financings attractive to Wall Street, Heinze said.

It's vital to keep the plant in operation, because if it closes, that would endanger gas production in existing gas fields in the region, Heinze said. Without year-round baseload demand from the LNG plant, the production from aged gas wells in the region would have to be reduced, during the low-demand summer period, he said.

Reservoir water encroachment in the idled wells would make it unlikely the wells could be restored to previous production levels during the winter, Heinze said.

ConocoPhillips, which operates the plant, supplies its share of gas to the facility from the offshore North Cook Inlet field. Marathon supplies its share of gas from several gas fields it operates including the Kenai and Ninilchik onshore gas fields on the Kenai Peninsula.

Heinze also told the committee that the gas supply cooperative and the authority are in discussions with "more than one" Cook Inlet gas owners about purchasing gas reserves.

Public ownership of gas reserves is not new in Alaska. Several years ago the municipality of Anchorage purchased Shell's one-third interest in the Beluga gas field west of the city, which is operated by ConocoPhillips. The municipality supplies gas to the city-owned Municipal Light and Power utility. Today ML&P's customers in Anchorage enjoy some of the state's lowest electricity rates.

Similarly, the North Slope Borough owns and operates gas fields near the far-north community.

The idea of keeping the LNG plant operating is also not the only plan being considered to ensure winter gas deliverability.

Enstar Natural Gas Co., the regional gas utility, is in negotiations with a TransCanada Corp. subsidiary on development of a large gas storage facility in a largely depleted gas field on the Kenai Peninsula.

Having the gas storage facility available could also help sustain summer production in the gas wells, Enstar has said.

Tim Bradner can b e reached at tim.bradner@alaskajournal.com.



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