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Alaskan export future under pressure

THE government has extended the US' only gas-liquefaction facility's export licence beyond next year, but the plant is facing calls for the permit to be revoked, writes Anne Feltus.

The unit, on the Kenai Peninsula of south-central Alaska's Cook Inlet basin, has been exporting LNG to Japanese utilities since 1969. Earlier this year, the Department of Energy (DOE) authorised the plant to continue to export LNG to Asia, extending its licence beyond March 2009.

ConocoPhillips, with 70%, operates the plant; Marathon Oil has a 30% stake and controls the two tankers delivering LNG to Japan. The facilities' feed gas comes from the companies' nearby fields and represents about one-third of regional gas production.

In January 2007, the partners applied for a two-year extension to their export permit, requesting authorisation to ship up to 98.1bn cubic feet (cf) of gas to Japan, and possibly other Pacific Rim countries. They argued that sufficient gas supplies and other energy resources were available to meet regional demand and the export market.

Delivering LNG to the lower 48 states was not viable, they claimed, because no import terminals existed on the west coast and delivering to the east or Gulf coasts would cost more than exporting to Asia. Denying the extension, they added, would jeopardise the future of the facility, which provides employment for residents of south-central Alaska and contributes about $50m in royalties and state and local taxes. It would also discourage investment in development of the Cook Inlet's gas resources, which are already in decline.

But with local gas supplies tightening, state officials wanted assurance that continued exports would not create shortfalls as regional gas demand continues to grow. Opposition also came from a local Agrium fertiliser plant and the Tesoro refinery, both claiming a shortage of natural gas had adversely affected operations.

By January 2008, the State of Alaska and the plant's co-owners had reached a compromise. To promote exploration and development in the Cook Inlet, the oil firms agreed to sell seismic and well data to other potential producers and to purchase at least 30m cf/d of output. They also agreed to drill at least seven wells in the area in 2008. In addition, they would continue negotiations on gas-supply agreements with the region's primary gas utility and the state's largest electricity firm to satisfy local gas requirements, and agreed to reduce LNG exports if certain local supply milestones are not achieved.

In exchange, state officials agreed not only to signal to the DOE that they supported the pending licence extension, but also to back future licence extensions if export volumes were in excess of regional requirements. In June, the DOE accepted Alaska's recommendation and authorised the licence extension.

Controversy erupts

But export controversy has erupted again. Early in September, senator Ron Wyden of Oregon requested that the DOE reconsider its decision. A significant economic obstacle to shipping LNG to the lower 48 states was removed in mid-May, he said, when the Sempra-operated Energía Costa Azul terminal, in Baja California, started up. The plant is connected to the US by a cross-border pipeline system and, under the North America Free Trade Agreement, no additional duties or tariffs apply to gas trade between the US and Mexico.

Wyden also cited Energy Information Administration (EIA) forecasts that gas prices in the western US, the target market for the terminal, are expected to rise by more than 24% this winter. "The EIA predicts gas prices will remain high ... with the spot price in 2009 averaging 25% more than in 2007," he reported. Wyden requested a response from US energy secretary Bodman by 15 September. As of 1 October, no response had been received.

The region's gas supply/demand situation could change in the next few years. Alaskan officials have proposed construction of a pipeline that would carry up to 450m cf/d from south-central Alaska to the state's interior by 2013. The pipeline would stimulate further development of the Cook Inlet, which the DOE claims could hold as much as 13 trillion cf of undiscovered gas reserves.

Meanwhile, the Kenai LNG facility's contracts with the two Japanese utilities, Tokyo Electric Power and Tokyo Gas, are set to expire in March. No contract extensions have been announced.

Falling imports wreak havoc on US receiving terminals

HIGHER-than-expected domestic gas production, lower demand and intense global competition for liquefied natural gas (LNG) have threatened plans for dozens of import terminals in the US. Meanwhile, operators of existing terminals are taking measures that they hope will enable them to remain solvent until market conditions improve, writes Anne Feltus.

With US gas consumption climbing and domestic output falling, the future of the LNG import industry looked promising for much of 2007. As imports reached a record 0.77 trillion cubic feet (cf), companies pushed ahead with plans for more than three-dozen terminal projects. But as 2007 drew to a close, import levels began to fall.

One reason is that cargoes were being diverted to other countries where LNG commands substantially higher prices than the US was willing to pay. Demand rose rapidly in Japan, the world's largest LNG consumer, after an earthquake shut down the Kashiwazaki-Kariwa nuclear plant, forcing utilities to rely more heavily on LNG for electricity generation. Spain also increased LNG orders after a prolonged drought affected hydro-electric power production.

At the same time, in the US, a mild winter reduced gas demand just as successes in the Barnett shale and other unconventional gas plays pushed production to levels not seen since the late 1950s. As a result, LNG imports to the US are projected to total about 350bn cf in 2008, less than half the level of the previous year (PE 10/08 p10). Under these circumstances, many of the proposed LNG import terminals will probably be cancelled or put on hold.

Falling imports have also affected the profits of existing receiving terminals, which have been operating at a fraction of their capacity. Two facilities offshore Texas – one owned by Cheniere Energy and the other by a consortium that includes ConocoPhillips and Dow Chemical – are asking for federal authorisation to start re-exporting foreign-sourced LNG. If the requests are granted, the terminals would purchase up to 88bn cf of LNG at market prices during the next two years for re-export.

As well as keeping the facilities busy until market conditions improve, this would offer benefits to US gas consumers, the owners say. "It would foster the continuing operation of US energy infrastructure by enabling the applicant to economically import LNG ... during periods when market conditions may not otherwise favour deliveries to the US," Cheniere said in its application. It added: "To the extent imported LNG may be needed to meet US gas demand, the authorisation would help to ensure supply is available and ready for delivery."

 

 

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