With pressure from Alaska officials and local utility companies, a ConocoPhillips subsidiary has applied to keep exporting liquefied natural gas out of its Kenai facility for at least two more years.
ConocoPhillips Alaska Natural Gas Corp., the subsidiary that runs the LNG facility, applied to the U.S. Department of Energy to export 40 billion cubic feet of natural gas to international markets. If granted, the license will expire in February 2018.
The company had originally planned to close the facility because of decreasing prices in the LNG market overseas and increased competition at home — Hilcorp produces natural gas in the Cook Inlet region currently and BlueCrest Energy plans to begin producing gas from its Cosmopolitan project near Anchor Point in the future.
The facility was originally licensed in long-term contracts, the first granted in 1967. The original contract ran through 1984 and allowed the facility to ship LNG specifically to Japan for electricity and natural gas.
By 2011, when a two-year authorization ran up, the company decided not to pursue a renewal because of “uncertainties regarding the near-term adequacy of natural gas supplies in the Cook Inlet region for regional needs,” it wrote in its application.
The authorizations gradually grew shorter in length of time. Gas production has decreased over time and some of the utility companies became nervous about exporting gas when their own needs may not be met, according to Larry Persily, the special assistant on oil and gas projects to Kenai Peninsula Borough Mayor Mike Navarre.
One of the rules of the Department of Energy’s authorizations for shipping LNG internationally is that domestic gas needs must be met first. However, with the coming of other gas producers in the Cook Inlet, the domestic gas needs may be met for some time, allowing ConocoPhillips to export.
“Southcentral Alaska’s utilities have their gas needs met through the spring of 2018,” Persily said. “(Gas producers would) be hard pressed to go to the Department of Energy and get a 10-year export approval. The feds would ask you if your local utilities had been met, and you’d have to shrug and say, ‘I don’t know.’”
At this point, the ConocoPhillips application is a fairly safe bet — unless there are any strong letters of objection, the permit will probably be granted, he said.
“If you’re a producer and the utilities don’t need your gas, you want to export if you can,” Persily said. “The Department of Energy’s attitude is that ‘As long as the locals are happy, we’re happy.’”
The only challenge may be the fluctuating LNG market. ConocoPhillips’ Kenai facility is still the only operating LNG export facility in the U.S., but another plant is under construction in New Orleans, set to begin shipping later next year, Persily said. More companies are jumping into the market worldwide, pushing down prices, and ConocoPhillips will have to decide where to go with that.
The company has long looked to Japan as a trade destination. Natalie Lowman, a spokesperson for ConocoPhillips, said in an email the company would not comment on other possible markets.
ConocoPhillips did choose to renew their export authorization in 2014, allowing the facility to ship 40 billion cubic feet of LNG to countries both covered and not covered by the Free Trade Agreements of the U.S. The current authorization expires on Feb. 18, 2016.
The facility’s long term-fate is still unknown. Lowman said the company is still in the early stages and cannot yet determine how the Alaska LNG Project — tentatively determined to go in just down the Kenai Spur Highway from ConocoPhillips’ current plant and which the company is a partner in — will impact the facility.
The Kenai LNG facility employs approximately 85 people when operating, some for ConocoPhillips and some for contractors, according to the application. Lowman said the company would not speculate on what would happen to the employees if the facility should close or stop exporting.
ConocoPhillips has backed out of natural gas production in the Cook Inlet region, auctioning off its production assets in July 2015. Lowman said the Cook Inlet fields in the North Cook Inlet Unit and the Beluga River Unit are “no longer considered core to our Alaska operations.”
“Their sale will allow us to focus on higher growth areas of our portfolio,” Lowman said. “However, we currently have no plans to sell the Kenai LNG facility.”
In 2013, Alaska Department of Natural Resources then-acting commissioner Joseph Balash sent a letter outlining how the LNG facility is important to the region, including that it serves as storage for extra gas during the warm months, when demand is lower. The agency asked ConocoPhillips to reapply and keep looking for other markets for the gas, which could avoid some gas wells being shut-in during the summer months when public demand is low, according to the application.
“The Kenai LNG Facility has historically provided a base level of demand for natural gas in the summer months, which ensured that natural gas wells were not curtailed or shut-in due to decreased local utility demand during those months, hence protecting reserves and well deliverability to serve utility demand during the colder months,” the company wrote in its application.
Multiple local gas producers wrote to the Department of Energy in support of the application, including AIX Energy, Aurora Gas, Furie Gas and WesPac Midstream, which is partnering with BlueCrest Energy to develop the gas in the Cosmopolitan field.
BlueCrest President Benjamin Johnson has said that the development of the gas in the field is temporarily on hold until the state government decides whether to continue the oil and gas tax credit program. WesPac Midstream wrote in its support letter that the Kenai LNG facility provides access to world markets, which will encourage exploration and development of the gas there.
“Given the geographic disposition of Alaska’s resources, proximity to markets, the lack of infrastructure and the overall high cost of development, the ultimate success of any program is contingent upon a robust local and export gas market along with the current development incentives provided by the State,” wrote WesPac Midstream vice-president Michael Cox.
Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.
