Route change, bigger pipeline on table

Photo/Tim Bradner/AJOC

Gov. Bill Walker is working to put his imprint on the Alaska LNG Project, the $50 billion-plus North Slope natural gas pipeline and liquefied gas export project.

The state is a 25 percent partner in the project with North Slope producers BP, ConocoPhillips and ExxonMobil Corp. and, so far, with pipeline company TransCanada Corp.

Walker is considering changes in an agreement with TransCanada to be the state’s partner on its 25 percent of the “midstream” pipeline and North Slope gas treatment plant. The state-owned Alaska Gas Development Corp., the state is fully managing, however, its 25 percent share of the LNG plant planned at Nikiski.

The governor is now asking for additional changes in the project. In a June 8 letter to the three North Slope producers, Walker asked for an enlargement of the pipe size from a 42-inch diameter size to 48 inches so as to be able accommodate more gas in the future. Walker indicated that the state would be willing to pay for the additional capacity, subject to legislative approval, but would also own the added space.

Additionally, the governor asked for a change in the pipeline routing to cross Cook Inlet using a route from near Port MacKenzie in the Matanuska-Susitna Borough rather than a more western route to Tyonek now planned by the Alaska LNG Project team.

The eastern route would put the pipe closer to major population areas, the governor wrote.

Finally, Walker asked for a major decision on the way the partners, including the state, would market their respective shares of LNG from the project and address upstream issues. The governor is proposing a joint-venture marketing organization formed by the partners in lieu of a plan for “equity” marketing, or each partner selling its own share of LNG on its own.

Either alternative could work under Senate Bill 138, the state enabling legislation passed in 2014. The state has the option of contracting with one or more of the producing companies to market its 25 percent LNG share or forming a state gas marketing group. However, the joint-marketing approach is also on the table.

Since the letter was sent, the governor has met with each of the three producing companies on the proposed changes, said Walker’s press secretary, Katie Marquette.

“The Governor’s letter provides a broad framework for moving the project forward,” said ConocoPhillips spokesperson Natalie Lowman told the Journal June 23. “It provides fair and reasonable solutions to what we believe are key commercial issues: the gas supply agreement and LNG marketing arrangements. The letter also provides a basis for discussion of several other major issues that we believe can be resolved.”

Building a bigger pipe

In support of the pipe expansion Walker wrote in his letter, “Constructing a 48-inch line will alleviate the issues of access and expansion.

“The producers have said they do not need or want a 48-inch line. The state is willing to pay for this expansion, subject to legislative approval, but it would own all of the benefits of the increased size.

“The state would also pay for installing the valves and pads to accommodate four more compressor stations that will be added when demand exists from new developments or fields. The state intends to use this expansion capacity to encourage access.”

Under Federal Energy Regulatory Commission rules, non-discriminatory access to the pipeline would be guaranteed but Walker is concerned that the physical constraints of the current design will place limits on how much new gas can be shipped.

There is currently no estimate for the cost for enlarging the pipe, but Audie Setters, the state’s new gas project coordinator, said building in extra capacity for at least the pipe might be cost-effective if done at the outset, because incremental additions can be done when the additional gas is found for the gas treatment plant on the slope and the LNG plant at Nikiski.

“You can only size the pipe once,” he said in an interview.

However, there is already pushback from legislators on this. Questions are being asked how the state can afford to pay for the expanded pipe size given the huge current budget deficit and the draining of state cash reserves.

“I don’t see how we can pay for this,” Sen. Cathy Giessel, R-Anchorage, said in an interview. “The state is already dealing with multi-billion dollar budget deficits due to low oil prices. Even paying for its current 25 percent share of costs of a possible $50 billion-plus project, may be difficult.

Giessel said there may be less expensive ways to get additional capacity, such as by adding more compression.

“I’ve been told we could get another 1 billion cubic feet a day with more compression,” she said.

The project is now designed to deliver about 3.3 billion cubic feet of gas daily at a peak winter rate.

Setters also said the cost of the expansion could be mitigated to some degree if fewer compressor stations have to be built.

Setters, a 34-year retired Chevron LNG manager, signed on last year to advise the state on its LNG marketing and was recently named to manage the state’s overall interest in the project by Walker.

State geologists are bullish about prospects for more gas because most the North Slope is gas-prone, and exploration for gas will begin if a gas pipeline is built. However, there is no guarantee that more gas will be found, and if the state pays for the extra capacity it bears this risk.

Setters said that preliminary discussions with the producers are that they would like a share of the added capacity if the state insists on this. Thus, the state would bear only 25 percent of the cost, he said.

There may also be issues, however, about obtaining high-pressure 48-inch diameter steel pipe. One of the reasons why the 42-inch diameter was selected is that more sources for pipe of that size, using high-strength steel, would be available.

East vs. West

On another of Walker’s requests, a change in the pipeline routing across Cook Inlet, there is pushback from the LNG project team.

In his letter Walker wrote, “It is my understanding that the studies for the two routes (an eastern and western route) are underway but that the tentative conclusion at this point ing time is that the western route is the preferred alternative.

“The Mat-Su Valley constitutes the second largest population base in the state of Alaska and has some of the highest industrial potential in the state. Consequently, the state strongly prefers the eastern route since the studies to date do not indicate any insurmountable difficulties.

“Also, the eastern route will better enable this route to fulfill the statutory domestic gas mandate,” because the pipeline would be closer to population areas in the Mat-Su, requiring a shorter transit line for gas off-take.

However, Steve Butt, an ExxonMobil official who is managing the LNG project, told state legislators at a legislative hearing June 16 in Nikiski that there are obstacles with the eastern route.

The meeting was a joint session of the House and Senate Resources Committee, which convened for a scheduled update on the gas project by the Alaska LNG Project.

Butt said the problems include an old gunnery range on the eastern route that might contain unexploded munitions; complex subsea soil issues in lower Knik Arm due to heavy sedimentation, and the presence of several subsea electrical transmission cables connecting the Beluga power station with the Anchorage bowl.

There could also be complications in anchoring large pipe-laying barges in the upper Inlet near Knik Arm.

These problems are not present on the proposed western route, which would be near the Tyonek community. In addition, it is shorter, Butt told the lawmakers.

Joint marketing

Legislators appear to be more open the idea of the joint-marketing approach for LNG, although the concept is not yet well understood.

Under the equity marketing alternative, each producer would sell its share of LNG itself, as would the state for its share of gas, which would be for state royalty and the production tax taken “in-kind,” or in the form of gas.

However, the state now believes a stand-alone Joint Venture Marketing approach, where all producers and the state form a separate marketing entity instead of the alternative of separate marketing efforts, by each producer and the state, is superior, according to Setters.

In his June 8 letter sent to the producers, Walker wrote, “The state believes it will be very difficult, if not impossible, for this project to proceed with the Prudhoe Bay and Point Thomson fields with all the current participants outside a Joint Venture Marketing context.”

Walker is referring to a key difficulty that has emerged is getting consensus for a gas production “balancing agreement” among the producers that would guarantee production sufficient for the pipeline and LNG purchasers. The joint-venture LNG marketing unit, if it is formed, is an alternative, and possibly simpler way, of accomplishing these ends, Setters explained.

A production balancing agreement is still needed but it achieving it could be easier.

Setters said the joint-venture approach is actually the norm in large LNG project marketing although the “equity” marketing approach, where each producers markets its own share on LNG by itself, is gaining popularity.

A key advantage of equity marketing, at least for large companies who are in the LNG business worldwide — like two of the Slope producers — is that companies retain the flexibility to offer customers LNG combined from several sources.

“It can help them de-risk the contract,” Setters explained.

If there is a shortfall of gas from Alaska, due to a production upset for example, a company with many sources of LNG can very easily supplement the contract supply with LNG from other places.

“However, the state wouldn’t have the ability to do this, so our risk profile is different,” he said. That’s because Alaska doesn’t have access to LNG from elsewhere, he said.

Supply guarantees can be done under joint-venture marketing too but it gets more complex because there are distinct contacts. The customer is buying from the joint-venture, not a specific producer.

Setters explained that joint-marketing arrangements also typically require combining of upstream interests into a single unit, which simplifies the coordination for production, and the balancing of commercial interests, among producing companies who are contributing gas.

The North Slope gas supply situation is complicated, however, because gas for the Alaska LNG Project will come at least initially from two fields, the Prudhoe Bay and Point Thomson fields, which the same companies own but in different percentages. The volume of gas coming from each field, and when it would come, are issues currently being negotiated.

What complicates this further is that Prudhoe Bay is also an oilfield and gas production must be weighed against probable loss of crude oil recovery as the underground pressure is drawn down by gas being produced from the same reservoir.

The oil loss can be reduced by taking gas early from Point Thomson, which allows the gas to be retained for a period in Prudhoe Bay to produce more oil. However, the timing of this, and how it affects   field owners who have differing shares of ownership in the two fields is a complex issue.

Yet another complication is that the reservoir risk profile of the two fields are different, which can be a big issue. Prudhoe Bay has been producing since 1977 and the reservoir is well understood. Point Thomson, however, is a new field with no production history, and there are still uncertainties as to how well the reservoir will perform, although an “Initial Production Project” planned to produce liquid condensates from the field is due to begin early next year, and that will answer some questions.

Meanwhile, the need for a producers’ “balancing agreement” on all these issues is proving more difficult than expected and Walker is worried that a delay getting a consensus, which is crucial, could bog down a schedule that is already extremely tight.

Setters said that if the joint-venture marketing approach is adopted the organization formed can provide an alternative, or at least supplementary, mechanism for balancing the gas supply issues and making contractual guarantees to customers.

There are, reportedly, mixed views among the producers on this matter, sources close to the companies said. ConocoPhillips is said to favor the idea, while BP is reported to be neutral and ExxonMobil is said to have reservations, the source said.

On the timing, the marketing organization could be set up fairly quickly, and certainty in time for the critical decision on FEED, which will trigger serious marketing efforts by the project partners, the source said.

At least one legislator is cautious about the joint-marketing approach, however.

“This is a serious shift. It is one that could complicate things if the state wants to return to an equity arrangement in the future,” said Rep. Mike Hawker, R-Anchorage, who chairs the Legislature’s Budget and Audit Committee, in a statement.

“I haven’t seen the analysis of how significantly this locks us into a certain arrangement, and what the benefits and consequences are for Alaskans. Until I see the analysis supporting this major decision, including the implications to the state’s overall interests, I have to be concerned.”

In his letter Walker also offered the state as a facilitator to mediate differences among the companies.

Giessel, who chairs the Senate Resources Committee, said she is concerned about the governor’s intention to push the negotiations.

“The governor wants to speed this up but everything we’ve been told about the planning of megaprojects is that we should avoid allowing them to become schedule-driven because that’s when costly mistakes are made,” Giessel said.

“These are difficult issues and I want to give the companies the space to work things out themselves without the state interfering.”

State officials had something to say about this, however:

“We are not interfering. We are a 25 percent owner at the table and should not sit at the back of the room,” Setters said in a statement issue from the governor’s office. “That is why this project has not moved for 30 years. If aggressively pursuing a gasline project by mediating with and among the producers is interfering, then it’s about time. It should have been done a long time ago.”

Currently the project partners and the state are aimed at getting key agreements by late summer, in time for a special legislative session in the fall for ratification of certain of the gas-related contracts.

06/24/2015 - 12:55pm