An Expert Speaks: "Alaska's In-State LNG Project"

We Urge All Alaskans To Read The In State Natural Gas Opinion Piece Below; It Is Written By One of America's (and Alaska's) Most Experienced Community LNG Operators.  (Normally, we are addressing Alaska's gas export project: Ak-LNG.  Today, we look at an Alaska intrastate project.) 

Vancouver Sun by Vaughn Palmer.  Louisiana beats British Columbia and Alaska on LNG Export Projects

We do not support a government subsidized natural gas utility and believe the model being employed by Alaska to serve Fairbanks is deeply flawed (See archived history by entering into right column "search", "Commentary, Fairbanks Natural Gas​".)  But we also believe that if there is to be a subsidized project, it should minimize making critical mistakes.  And, its formation should not grow from political influence and decision-making.  Furthermore, influence leaders should not be dissolving the independence of the Alaska Industrial Development and Export Authority (AIDEA)​ by giving it political instructions (i.e. where to buy the gas, etc.).

If Alaska decision makers fail to listen to Latchem, some very poor decisions could harm electricity and natural gas consumers from Homer to Anchorage to Mat-Su to Fairbanks.

Lastly, would a prudent investor be considering a multi-hundred-million-dollar government investment at a time of stock market volatility, when the State's investment outlook is negative, when the State is not balancing its budget and when the government has no plan for balancing the budget? 

If it does decide to imprudently pursue the Fairbanks gas utility subsidy, it had better listen to experts like Latchem, then make the decision based on real numbers and sharp pencils…before choosing and pursuing the most economical path.

-dh

Ray Latchem, LNG, Alaska, IEP, Fairbanks, Point McKenzie, Oklahoma, Spectrum, Photo by Dave HarbourADN Op-Ed by Ray Latchem (NGP Photo) All Alaskans should pay attention now to a decision that is about to be made regarding the sources of energy for heating homes and businesses.

In 2013, Gov. Sean Parnell introduced and the Legislature passed SB 23, a measure that would provide a substantial subsidy ($57 million in grants and $200 million in low interest loans and bond funding) for the development of a natural gas liquefaction plant in Prudhoe Bay and a gas distribution system in Fairbanks. My company, Spectrum LNG, began developing a parallel LNG project the year before so we were disappointed that the state of Alaska would try to develop a competing LNG plant. A little over a year later we sold our development to the state's Alaska Industrial Development and Export Authority (AIDEA) and it adopted it as its own. AIDEA selected a different developer to finish the project.

For too many reasons to fit into this commentary, AIDEA terminated its agreement with the chosen developer in 2015. The Legislature also amended SB 23 to permit the funds to be used for an LNG plant in locations other than Prudhoe Bay. This allowed AIDEA to seek new proposals from potential developers that would include Cook Inlet operators.

This brings me to the point of this commentary: Only a small group of special interests will benefit from Fairbanks getting its natural gas from Cook Inlet. The result: Anchorage and Fairbanks will pay a very high price — too high a price — and here is why. 

Imagine that the Cook Inlet basin is a glass of iced tea. For years Anchorage, Japan (through the Kenai LNG plant), the fertilizer industry and a very small Fairbanks market, all had straws in this glass. As the level in the tea glass fell, the price began to rise. At some point the fertilizer plant couldn’t compete with other fertilizer plants in the world that were located next to cheaper gas, so it shut down. The next victim was the LNG plant that had been supplying Japan for close to 40 years. Only Southcentral Alaska and a small straw for Fairbanks remained. To its credit, Anchorage developed contingencies that included the importation of fuel for home heating and generation of electricity. The majority of Fairbanks citizens continued to suffer from the run-up in oil prices because they were and continue to be largely reliant on oil.

An expensive new straw

It takes relatively large companies to explore for natural gas in high-expense areas like Cook Inlet. So it costs a lot to develop the glass of iced tea in this analogy. But when the level in the glass nears the bottom, the big guys lose interest and sell their remaining interests to smaller companies. Today, even though Cook Inlet gas prices are two to three times as high as Lower 48 prices, there are no major oil and gas companies exploring or developing. The opposite is occurring. The big players are leaving. Marathon left after the RCA decided it would meddle in their affairs. ConocoPhillips just announced its remaining Cook Inlet assets are for sale. The departure of major Cook Inlet producers has to worry both Enstar and the Southcentral electric utilities responsible for heating and lighting the most populous part of Alaska.

Absence of major producers creates opportunities for second-tier companies like Hilcorp that are proficient and efficient at squeezing more ice tea out of the glass at lower operating costs than the majors. And given the higher prices for gas now — along with exploration tax credit incentives — a few smaller, more nimble explorers have arrived. They are pursuing a chance to develop production from small potential reserves that the majors passed over, but which could pay up to three times what they sell gas for in the Lower 48. The majors know that if they developed more Cook Inlet production, it would cause the price to correct and more closely resemble Lower 48 pricing. The second-tier companies take the risk that the prices will remain high long enough for them to make a good return on their investment.

The second-tier companies are now hoping to prolong the high prices by shoring up the demand side of the price equation. If they are successful in getting another straw from Fairbanks into their glass of iced tea, they can continue to enjoy selling gas for two to three times the highest price in North America. The new straw from Fairbanks will be the LNG plant that the state itself is going to pay for.

Wake-up call

This is a wakeup call to the citizens of Southcentral Alaska and their legislative delegations. In the middle of the state’s largest budget deficit, you are considering spending millions of dollars that might lower Fairbanks’ energy price slightly, but will cost Anchorage many times that savings by shoring up already ridiculously high Cook Inlet prices.

There is an attractive alternative. Spend the state’s money tapping a new gas supply that doesn’t compete with Southcentral Alaska. In fact the new supply is not so new, but is proven and developed, and one of the largest reservoirs in the world. And there are no other straws in that huge glass. Even if other straws get added later, they likely will not cause an increase in price since they will have to compete in the world market.

Since before the trans-Alaska oil pipeline was built, many looked for the development of a gas line. While a lot of gas line proponents were looking for short-term construction opportunities, the long-term thinkers were looking for a way to monetize all that stranded gas. Alaska doesn’t have to build a pipeline to get at least some of that ocean of gas to market, for in-state use. The stage is already set for the construction of a small-scale LNG plant in Prudhoe Bay that will bring much cheaper energy to the Interior, as intended by SB 23 (i.e. cheaper than if it were purchased from Cook Inlet).

But there is an effort being made to shift this new straw from Prudhoe Bay to Cook Inlet. If consumers from Fairbanks to Southcentral do not become involved in this issue, special interests will profit at their expense for years to come. If the state had not subsidized this development, the private sector would be hard-pressed to build an LNG plant in Cook Inlet to supply the Interior against a Prudhoe Bay based supply. If Spectrum LNG didn’t believe this, we would have already built on our own Cook Inlet location. But since there is a lot of state money involved that requires no return, special interests only have to steer this investment toward Cook Inlet to accomplish their goal, without putting their own money at risk.

North to the future

By way of disclosure, our company Spectrum LNG is an LNG developer and producer. We are participating in AIDEA’s second effort to secure additional LNG supplies for the Interior energy project. Our principals and investors were the original developers of Fairbanks Natural Gas, LLC and its associated small scale LNG plant at Point Mackenzie. We own another LNG plant site adjacent to the existing plant and can develop a new larger plant at this site, but it would require a Cook Inlet based supply of gas. It would have lower construction and operating costs, as well as a cheaper truck transport to Fairbanks. Though we would benefit from our decades of Alaska LNG experience and ownership of our Cook Inlet site, we urge consumers to look carefully at what they will lose if the politicians and special interests succeed in omitting the North Slope gas option.

The bottom line is that Southcentral consumers would be better served by the state not building an LNG plant at all — especially in their own Cook Inlet supply area. The people of the Interior will be best served by the state subsidizing a plant being built in Prudhoe Bay where the gas supply is cheap and abundant, in spite of the higher construction and operating cost.

It’s difficult to consider an LNG project absent Golden Valley Electric Association as the largest potential customer. Golden Valley is in a position to expedite the arrival of more natural gas to Fairbanks by simply agreeing to use the fuel for power generation in North Pole. This is not an original idea. GVEA themselves negotiated a 15-year natural gas purchase agreement with BP Alaska contemplating such a plan. Should GVEA decide to implement its plan to take Prudhoe Bay gas south to North Pole, the rest of Alaska will benefit.

From a public policy standpoint, it’s difficult to pass on a project that can finally tap into Alaska’s largest gas reserves and do so in a manner that provides economic benefit to all Alaskans.

Ray Latchem is president of Spectrum LNG, a privately held liquid natural gas producer based in Tulsa, Okla., which has built projects in Alaska from Prudhoe Bay to Point Mackenzie.

PETROLEUM NEWS — SAExploration seismic programs approved – 08/16/2015 (Login to read Full story) SAExploration has received approval from the Alaska Department of Natural Resources, Division of Oil and Gas, for two seismic surveys, both on state land and waters in the Beaufort Sea, one in the vicinity of the Colville River Delta and one within the Prudhoe Bay area. The permits, both marine-base….