Kenai closure reminder of fragile gas market

February 12, 2011 

The announcement last week by Conoco Phillips and Marathon Oil that they will close the Kenai natural gas liquefaction plant is another rude reminder of how fragile our petroleum economy has become.

I wasn't surprised about the decision except that I thought it would happen in 2013, when a federal LNG export license expires But what disturbed me was that the closure now is caused partly by the inability of the companies to get the right price in the Asian LNG market for the small volumes they would ship.

There is now a lot of LNG on the world market and prices are dropping, Conoco told me.

That is profoundly disturbing because it means that one of our options for developing North Slope gas, building a pipeline to a new LNG plant in Valdez or Cook Inlet, might be closed off by changes in the market.

There's more to the decision by the companies, of course. Declining production of natural gas from Cook Inlet wells that supply the plant also weighed in.

This is just one more of a spate of disturbing developments, which include Shell's delay in being able to explore the offshore Arctic, BP's delay of its new Liberty project and Conoco's inability to get access to new oil and gas discoveries in the National Petroleum Reserve-Alaska due to a permit dispute with a federal agency.

Let's add to this list the close call we had over the possible freezeup of the trans-Alaska oil pipeline last month, when the pipeline shut down for several days.

NEW DEVELOPMENTS

Not everything in the oil patch is looking so glum, though.

Eni Oil and Gas is about to bring its new Nikaitchuq field in the Beaufort Sea into production, which will put new oil into the pipeline. Also on the Slope, Exxon Mobil continues development of the Point Thomson gas and condensate field east of Prudhoe Bay.

BP eventually will develop Liberty -- it's just a delay -- and I believe Shell and Conoco, with patience and perseverance, eventually will get access to promising areas these companies are interested in.

In Cook Inlet, new state exploration incentives are resulting in new exploration wells being drilled for gas and for a jack-up rig to be brought in to explore promising areas. And, there's a new company acquiring acreage in Cook Inlet, with plans to drill: Apache Oil and Gas.

So the game isn't over.

VALUE-ADDED INDUSTRY

Still, the early loss of the LNG plant should be a wakeup call for Alaskans because that plant, and the Kenai fertilizer plant that closed a few years ago, not only were industrial anchors of the Kenai Peninsula economy, they were shining examples of industry making value-added products from Alaska resources.

Let's reflect on this: The LNG plant and fertilizer plants were creative and innovative, and hugely successful, ventures by industry to take large gas reserves discovered in Cook Inlet in the 1960s, for which there was no market except for then-small local utilities, and make new products (fertilizer) or to put the gas into a form where it could be shipped to market (LNG).

The LNG venture was particularly daring because very long-distance international shipments of liquefied gas were rare. The Kenai-to-Japan shipments were the nation's first to Asia.

Looking for markets for their stranded gas, Phillips Petroleum (now Conoco Phillips) and Marathon Oil convinced major Japanese utilities that importing LNG from Alaska would work. The Japanese had never imported LNG, so this was a radical idea. They were attracted to the idea of using clean-burning gas for power generation rather than oil or coal.

Technology innovations were also involved. Phillips had developed a new design for manufacturing LNG, which was used for the first time in the Kenai plant. However, no LNG ships of the size and type needed existed. These had to be designed and built.

Kenai LNG was Phillips' biggest single investment at the time, and it was a gamble. It paid off, though. Once the Alaska plant set the example, other companies followed. Shell soon signed contracts to develop and sell LNG from gas fields in Brunei, in Southeast Asia, and the development of the world LNG industry followed.

Meanwhile, LNG ships have sailed regularly from Kenai to Japan from 1969 until now.

NEW OPPORTUNITIES

The history of this is worth pondering now because it shows what even relatively small companies (as Phillips and Marathon were then) can do when presented with challenges.

Today we have companies trying to figure out what to do with large North Slope gas reserves that are also stranded. There are big challenges with new competition from Lower 48 shale gas and now a flood on LNG on world markets.

Maybe the idea of building pipelines to move this gas is becoming obsolete. Perhaps we need to make something more valuable from the gas, a different kind of product.

A role for the state might be to encourage new thinking and new ideas for commercializing North Slope gas. Maybe we're too focused on old ideas.

It was a different time, but the innovation of Phillips and Marathon more than 40 years ago showed the power of new ideas.

Let's do it again.


Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Anchorage Daily News.

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