Future of Nikiski LNG plant in limbo over gas supplies

Conoco runs the liquefied natural gas plant and co-owns it with Marathon Oil Co.

Originally built in the heyday of Cook Inlet oil and gas development to provide a market for excess natural gas discovered during oil exploration, the plant started up in 1969 and has exported LNG to Japan since.

During its recent renewal of the federal export license, the plant owners faced a barrage of questions regarding whether the Cook Inlet area still had a big enough storehouse of natural gas to supply both the Nikiski plant and regional gas and power utilities. Amid that discussion, the plant owners committed to the state to drill new Cook Inlet gas wells and to make some exploration and well data available to potential Cook Inlet oil and gas explorers.

But, with gas supplies from the Cook Inlet basin continuing to decline, what are the chances of LNG exports from Nikiski continuing beyond 2011?

"We haven't come to any conclusion yet as to whether to pursue more exports beyond March 2011," Clark said. "We think we still have time to get that (evaluation) done. So we still think it's very possible that it could happen."

Critical factors in deciding whether to try to continue LNG production will be how much gas will be flowing from the Cook Inlet gas wells, and whether that gas production will exceed the critical mass required to support the cost of renewing the export license and continuing to operate the plant, he said.

"It's not just dependent on Conoco Phillips and Marathon and what we're doing," Clark said. "It's dependent on other things that are happening in the basin."

The plant performs a central role in the economics of the Southcentral gas industry. In times of need, such as during the most extreme cold weather, gas can be diverted from the plant to the regional utilities.

In addition, Enstar Natural Gas Co., the main Southcentral gas utility, has been discussing with the LNG plant owners the possibility of installing equipment at the plant that converts liquefied natural gas stored at Nikiski back into a gaseous form to increase gas supply during peak demand. A proposal to use the plant in this way, in effect as a gas storage facility to support "needle peaking" supplies, was included in a gas supply contract between Conoco and Enstar that the Regulatory Commission of Alaska rejected last year, Clark said.

Because the LNG plant is such a big consumer of Cook Inlet gas, shutting down the plant after March 2011 could have the ironic consequence of cutting area gas production, too.

With demand from the gas and electric utilities falling at that time of year, some gas wells could have to be shut in, Clark said.

"That creates a lot of risk," Clark said. "You shut wells in and ... you have risk of water encroachment. When that water comes into the well you potentially lose the well altogether."

Then, when gas demand soars during the following winter, the extra gas from those shut-in wells would not be available immediately or perhaps not available at all.

Gas demand from the LNG plant also provides a reason to find more gas in the Cook Inlet area.

"We're only getting short-term extensions, like this last one which is two years. To justify spending the type of money that it takes to get wells on production here in the Cook Inlet, gas producers need some assurance that they're going to be able to flow their gas over a reasonable period of time," Clark said. "It's pretty difficult to justify spending a lot of capital to develop wells that might deliver gas (for only) one or two months a year."

One solution that people are considering to tackle a pending shortfall in Southcentral utility gas is the possibility of converting the Nikiski LNG-export plant to an LNG-import terminal, to bring liquefied natural gas from overseas into Alaska.

Converting the plant in this way would require some investment but should be quite straightforward, Clark said.

"We've got a facility that's there," Clark said. "It's got a marine dock, tanks, equipment and piping, all in good condition."

Modifications would likely include alterations to the dock, to accommodate a variety of sizes of LNG carrier, he said.

The other source being considered for future Southcentral utility gas is the North Slope, with gas delivered either through a "bullet line" direct from the Slope, or from a spur line off a main North Slope gas export line. Both of these options would need demand for large quantities of gas by big industrial users in Southcentral, such as the Nikiski LNG plant. The big users allow enough gas to be shipped to the region to lower the transportation price of the gas.

"The LNG plant is an obvious candidate that could do that," Clark said.

If the plant were to cease its exports before North Slope gas can be delivered into the region, the plant could be mothballed or used for alternative purposes such as importing LNG, Clark said.