Enstar Natural Gas Co. says it may oppose a two-year extension of a federal export permit for liquefied natural gas from a plant owned by ConocoPhillips and Marathon Oil in Kenai, according to company officials. The current permit expires in 2009.
Enstar, the Southcentral Alaska gas utility, will be short of gas to meet its customers' needs beginning in 2009, said spokesman Curtis Thayer. If the LNG exports are approved, the utility hopes Marathon and ConocoPhillips will also be able to supply a deficit in Enstar's needs, he said.
The local utility's position could throw a kink in the oil companies' plan to extend the permit and the operation of the plant, which would close without the extension. “We opposed the last extension of the LNG export permit 10 years ago, and we may still oppose this one,” Thayer said.
The utility has met with ConocoPhillips and Marathon, however, and hopes to work out a solution. Enstar will soon issue an request for proposals for gas supply, to which the producers can respond, Thayer said.
“We need to have adequate reserves of gas committed to meet our customers' requirements for a long period of time. We must have contracts in place to reflect those commitments,” Thayer said.
The approval of the export permit by the U.S. Department of Energy is contingent on a showing that exported gas is surplus to local energy needs. The Kenai plant is the only U.S. LNG export project. Over the two-year period, the plant would export about 150 billion cubic feet of gas, ConocoPhillips said.
For their part, ConocoPhillips and Marathon said there are sufficient Cook Inlet gas reserves to meet local needs and to continue LNG exports for two years. “Our view is that there is more than enough gas, a 10- to 11-year supply, and we feel confident in moving ahead,” said Darren Jones, ConocoPhillips' manager for Southcentral Alaska assets.
Jones said the two companies will also operate the LNG plant in a way that production can be reduced to divert gas to meet peak winter needs of Enstar and local electric utilities, which use gas for power generation, Jones said.
Enstar, however, wants an assured gas supply under contract, Thayer said. The utility's problem is that a contract negotiated with Marathon to supply gas to meet a supply deficit from 2009 to 2016 was turned down in late 2006 by the Regulatory Commission of Alaska, the state's public utility commission.
The commission objected to a pricing mechanism in the contract that would link local gas prices to the Henry Hub index in Louisiana, and disapproved the contract on Sept. 28, 2006. Marathon and Enstar appealed the decision but the commission turned down the appeal Dec. 29.
The pricing mechanism in the Marathon contract was patterned after a provision in a contract Unocal Corp. (now Chevron) negotiated with Enstar several years ago that also linked the price of gas to the Henry Hub Index, and which was approved by the commission. The link to the Lower 48 index was a major departure from existing contract price provisions in Cook Inlet, which linked gas prices to crude oil prices.
A key difference, however, is that Unocal's contract price was intended as an incentive to explore and applied only to new gas the company would discover. Unocal did explore and make discoveries, and the new gas is now being supplied to Enstar.
The proposed Marathon-Enstar contract, however, applied the Henry Hub index price to already-discovered gas. It was this provision to which the commission objected, although Marathon and Enstar argued that the pricing mechanism would be as much of an incentive to Marathon in developing new reserves in existing fields as Unocal's contract was in encouraging new exploration drilling.
Marathon informed Enstar Jan. 3 that it was terminating the contract because of the RCA action. On Jan. 19, Marathon and ConocoPhillips announced they would seek the two-year extension of the DOE export permit for the plant.
Thayer said the regulatory commission left Enstar and Marathon in a difficult position because the commission offered no guidance in its order as to how the parties could develop a contract that would be approved by the RCA. Preliminary discussions with the producers have not resolved the pricing issue or the question of whether the RCA would approve it, he said.
An important part of the proposed Marathon contract was that it guaranteed a supply of gas for the utility's peak loads, during cold winter days, as well as a year-around base load. The RFP Enstar will issue will also ask for a base load supply as well as peaking. This could be in two separate contracts with different pricing provisions, he said.
Because guaranteeing backup supply for peak winter loads creates more costs for the producers that producing gas year-around for base load, it might be possible to have different pricing mechanisms in a contract designed just for peak demand periods.
Jones said the LNG export extension could actually result in more gas being discovered, because if it is granted, ConocoPhillips will drill two to four new development wells in the North Kenai field. Those wells are aimed at increasing reserves in the field. Any new gas discovered would produce over 10 to 12 years, he said.
If the LNG plant were not operating for two more years, these wells would not be drilled, Jones said.
Thayer agreed that having an operating LNG plant would encourage the producers to develop new gas supplies, which is also important to Enstar because gas going to the plant can be diverted to the utility if it is needed in cold weather. The Agrium Corp. fertilizer plant used to be able to do that for Enstar, but the fertilizer plant is now operating only during the summer.
ConocoPhillips owns 70 percent of the LNG plant and supplies 70 percent of gas needed for the plant from the North Kenai gas field in Cook Inlet. Marathon owns 30 percent of the plant and supplies its share of gas from onshore gas fields it owns on the Kenai Peninsula.
Current LNG sales contracts with Japanese utilities are set to conclude when the export permit expires in 2009. The companies will seek an extension of the contracts if the DOE grants the two-year extension, Jones said.
The LNG plant in Kenai was built in 1969 by Phillips Petroleum and Marathon as a way to commercialize large gas reserves discovered in Southcentral Alaska that were far in excess of local needs. It was the world's first long-distance LNG export project and Japan's first imports of liquefied natural gas.
Over the years, Japan has sharply expanded LNG imports and diversified sources of supply, mainly from Southeast Asia. In that time period, Alaska's share of Japan's LNG market has dwindled to a small percentage. The plant has been a reliable supplier, however. There has not been a shipment missed more than 37 years.
However, over the years Cook Inlet's gas reserves have also declined, from about 7 trillion cubic feet originally discovered to current estimates of 1.7 tcf. ConocoPhillips said the region does not face a supply shortfall. The reserves-to-production ratio is about nine to 10 years, which is approximately consistent with the ration in the Lower 48, Jones said.
Tim Bradner can be reached at
tim.bradner@alaskajournal.com.
