Route change, bigger pipeline on table

  • By Tim Bradner
  • Sunday, June 28, 2015 9:55pm
  • News

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.”

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.

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.

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.

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