Andeavor lets Nikiski LNG export license lapse

In the near future Andeavor won’t be exporting natural gas from the liquefaction plant and terminal in Nikiski it acquired on Feb. 1 from ConocoPhillips.

The plant’s license from the U.S Department of Energy to export liquefied natural gas expired on Sunday and Andeavor — the San Antonio, Texas-based oil-refining company formerly known as Tesoro — did not acquire the license from ConocoPhillips and has not applied for an export license of its own, U.S Department of Energy spokesperson Gayland Barksdale wrote in an email.

Built in 1969 by ConocoPhillips and Marathon, the terminal operated at a time when enough gas flowed from Cook Inlet wells to support not only local heat and electricity, but a fertilizer plant and regular LNG shipments from the Nikiski terminal to two Japanese utilities, Tokyo Gas and Tokyo Electric. Cook Inlet natural gas production peaked at 311 billion cubic feet in 1991, but declining investment in drilling and exploration have since slimmed the exportable surplus and driven up local gas prices. By the early 2000s, the prevailing value for 1,000 cubic feet of Cook Inlet natural gas began climbing from a range between $1.30 and $1.80 to the present range between $5 and $7, according to the Alaska Department of Revenue.

Exports from ConocoPhillips’s Nikiski LNG terminal became intermittent after long-term contracts with the Japanese utilities were not renewed after 2010, and ConocoPhillips let its export license expire in 2012. Pressured by the Alaska Department of Natural Resources — whose then-acting Commissioner Joe Balash said resuming gas exports would provide a key incentive for further Cook Inlet drilling and exploration — ConocoPhillips revived the export license for two more years in 2014, then in 2016 successfully extended the license to Feb. 18, 2018.

When ConocoPhillips put the terminal up for sale in November 2016, it was the last natural gas asset the company owned in Cook Inlet. The Kenai Peninsula Borough has assessed the LNG terminal at approximately $55 million, but in his Feb. 6 mayor’s report, Kenai Peninsula Borough Mayor Charlie Pierce said Andeavor had purchased it for $10 million. Andeavor spokesperson Kate Blair would not confirm the price, saying the transaction is confidential.

Andeavor representatives have said the company is evaluating different options for using the LNG facility and have declined to say what options are under consideration.

One possible use may reverse the terminal’s function — using it to import LNG for power generation rather than exporting it, reducing Andeavor’s dependence on the local gas market for electricity. Though Cook Inlet natural gas is no longer an easily viable export, it still fuels approximately 80 percent of Southcentral Alaska’s electricity and most of its heat. Importing natural gas requires a different U.S Department of Energy license, which Andeavor has not applied for.

Following Andeavor’s purchase of the LNG facility, spokesperson Scott LaBelle wrote in an emailed statement that “this acquisition further strengthens our integrated value chain by optimizing our operations in Kenai and providing low-cost fuel for our refinery to produce the fuels that consumers in Alaska need to keep their lives moving.” Andeavor representatives have refused to say whether “low-cost fuel” refers to imported LNG.

Andeavor’s Nikiski refinery — which uses all of Cook Inlet’s oil production to make gasoline, diesel, jet fuel, and propane for in-state use — is among the heaviest energy consumers on the Kenai Peninsula. Between Andeavor’s refinery, dock, and pipeline system, it’s the largest customer of regional utility Homer Electric Association, responsible for about 15 percent of HEA’s annual kilowatt-hour sales, according to a September 2016 letter from HEA General Manager Brad Janorschke to state utility regulators. Andeavor “provides a substantial portion of revenue and is a significant economic contributor to HEA’s Kenai Peninsula service area,” Janorschke wrote. The company was then known as Tesoro, a name it changed in August 2017.

The company was then seeking to lower its power bill — it owned at the time approximately 8 megawatts of generating capacity at the Nikiski refinery and had “demonstrated a genuine and verifiable ability and intention to bypass HEA,” Janorschke wrote.

“The (Nikiski refinery) has capacity to install additional generation and Tesoro has identified a project that would allow it to economically generate virtually all of its own electric and steam requirements,” Janorschke wrote. “In recognition of Tesoro’s ability to bypass the HEA system, and in order to retain Tesoro as a customer, HEA decided to price its sale of power to Tesoro on a marginal, rather than fully allocated cost basis.”

Since 1989 HEA has supplied the refinery’s power under a series of special contracts, rather than its normal industrial rate. As of September 2016, HEA’s other special contract customers were the cities of Homer and Seldovia, and had previously included the ConocoPhillips LNG terminal and the Swanson River oilfield. The most recent extension of the HEA-Andeavor contract was signed April 2016 and will expire in March 2021.

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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