NOT PART OF WALKER GASLINE PLAN
Last month, Andeavor (the company formerly known as Tesoro) purchased the Kenai Liquefied Natural Gas facility from ConocoPhillips.
The Nikiski plant, which had previously operated as an LNG export facility since the late 1960s, came at an attractive price: $10 million. This is the believed transaction price for what is a massive waterfront property with potential to make substantial sums of money — an enterprise with a view. Andeavor said it would strengthen the “integrated value chain” and “provide low-cost fuel for our refinery to produce the fuels that consumers in Alaska need to keep their lives moving.”
Where would Andeavor be getting this low-cost fuel?
One hint is that the company allowed an important export license to expire, because Cook Inlet natural gas is not competitive for export. That can only mean one thing: Andeavor plans to import LNG to bring down the cost of its refinery operations, not export it as the plant has traditionally done.
At a time when Gov. Bill Walker has pinned his legacy on building the largest infrastructure project in North American history, the AK-LNG project, Andeavor has quietly done what the private sector does best: optimize. Andeavor found a way to lower the cost of operations at its refinery by responding to market conditions. Clearly, they see it as a risk worth taking.
WHY DID CONOCOPHILLIPS SELL?
ConocoPhillips scaled back operations in 2015 and started looking for a buyer for the Kenai LNG plant in 2016. The operation was transferred to Andeavor on Jan. 31, 2018, allowing ConocoPhillips to exit its footprint in Cook Inlet and direct all of its efforts to the more profitable North Slope oil fields, where it has been investing heavily.
The Kenai LNG plant began operations in 1969 but has been in “warm shutdown” mode since 2015. It can liquefy 0.2 bcc per day of gas, or 1.5 million m/t per year of LNG.
WHAT WILL ANDEAVOR DO WITH IT?
That 1.5 million m/t of gas can be used to operate Andeavor’s refinery, which produces 62,700 barrels of product a day — jet fuel, diesel, gas, butane, and propane, for example.
In fact, Andeavor makes nearly all of the fuel used in Alaska except in Southeast.
The natural gas likely will be purchased on the international spot market and stored in tanks at Nikiski. The company will also have the ability to sell imported natural gas to customers from the Kenai to Fairbanks.
It would be a small operation in the global scheme of things, but in fact Andeavor could make a tidy profit selling gas on the side.
“We are still considering our options,” a spokesman for Andeavor told Platts, an energy publication.
WHAT ABOUT WALKER’S AK-LNG PROJECT?
The AK-LNG project envisioned by Gov. Bill Walker is, many experts agree, at least a decade away. That project has three major components:
- A gas treatment plant on the North Slope
- An 800-mile gas pipeline
- A liquefaction facility in Nikiski on the Kenai Peninsula, along with docks and an export facility for shipping to Asian markets.
The AK-LNG project filed with the Federal Energy Regulatory Commission to start the permitting process last April, but has been rebuffed by FERC, which sent a scolding letter in January to AGDC, Alaska’s publicly owned corporation, saying its application falls well short of acceptable. In effect, FERC gave it a classroom grade of “Incomplete”.
AGDC wants to be on a schedule to get gas to the market by 2025 and would like to start construction next year. But things are dicey now with FERC. The governor and AGDC President Keith Meyer have been conspicuously silent since receiving the letter from FERC.
All last year, Walker and Meyer worked to establish a relationship with China. They desperately need a buyer for the large of Alaska North Slope natural gas, and even more urgently they need money to build the project.
The AK-LNG project is the platform Gov. Walker ran on in his bid for governor in 2010 and was again the center of his platform in 2014 when he won office. He felt the companies were going too slowly. He sold himself as the leader who would get the AK-LNG project done soonest and most certainly.
“The State needs to ensure completion of a large volume gas line to tidewater at Cook Inlet for shipment of LNG to Asia. No company should be able to halt progress while demanding concessions from the state,” he wrote in 2014.
Once he actually took office, Walker pushed the private sector out and made it a State-owned and State-managed enterprise that has since spent hundreds of millions of dollars to develop the $45+ billion project. Since the private sector partners exited, AK-LNG has struggled to gain traction on any front, ranging from markets to permit applications.
Gov. Walker, with support from his well stacked AGDC board, recently made agreements in principle with China to take over major components of the project, and last month, Walker’s supplemental budget included language to cut out the Legislature as the appropriator for the project, consolidating his authority over it as he goes to his new funding source: China.
However, these agreements with Chinese state enterprises are not binding and are most accurately seen as a willingness to discuss certain ideas further.
COMPETITION FOR THE WALKER GASLINE?
Long-term state project aspirations aside, a company like Andeavor is stuck in the present with Cook Inlet prices for natural gas, and those are just not competitive due to the high cost of operating in Cook Inlet.
While Andeavor may not want to upset the Walker Administration’s gasline efforts by importing gas to Alaska, it’s simply cheaper to get it from elsewhere, and the Kenai plant can be up and running in just two years.
That would mean Andeavor could provide more affordable fuel to Alaskans and also to the air carriers that stop over at Ted Stevens International Airport to refuel. The cargo jet refueling capacity at Ted Stevens represents a major part of the Alaska economy that must remain competitive, and Andeavor is likely aware that it needs to be nimble with its jet fuel prices, or air carriers will look elsewhere.
LNG coming into Alaska could also allow the fertilizer plant in Nikiski to restart and bring back dozens of jobs on the Peninsula, which urgently needs them.
Agrium, the fertilizer company that is now called Nutrien, cannot manufacture fertilizer without economical access to the raw material — natural gas. It’s been in shutdown mode for years, as a result.
And then there’s Fairbanks: A source of natural gas coming on line in the next two years is going to be of great interest to the Interior Energy Project (IEP), where tens of miles of gas delivery lines have been laid around the Fairbanks business core but, as of yet, stand devoid of actual gas. They built it, but the gas has yet to come. But with Andeavor’s LNG plant acquisition and apparent business plans, that could conceivably change.
Construction of the new LNG storage tanks in Fairbanks could be fast-tracked and come online by 2020, which would allow the IEP to get $15 million in state tax credits that would help cover some of the facility’s cost.
With its own storage capacity, Andeavor will likely be able to sell its excess natural gas to these and other projects. All it has to do is bid on cargo that is floating around the Pacific looking for a home. The recently growing spot market for LNG has given Andeavor a new possible line of business and a leg up as an energy provider in Alaska. Hilcorp, you’ve got company.
SPOT MARKET CHANGE EVERYTHING
The LNG spot market started originally in the late 1990s as new projects came online and old contracts expired. LNG began to be sold on an as-needed/as-available basis. If winter was less severe somewhere, for example, the excess LNG is sold at a cheaper price elsewhere. That market has grown exponentially in recent years with the emergence of a gas glut in the Pacific Basin.
As a result, long-term contracts are not in fashion in the LNG market in this era, with so many competing LNG projects coming online.