Alaska gas pipeline faces new hurdles as summer field work continues

By Margaret Kriz Hobson | 06/29/2015 08:21 AM EDT

NIKISKI, Alaska — On a sunny summer day on the Kenai Peninsula, a group of Alaska state legislators pulled on yellow industrial safety vests and walked across the yard to a ridge above the Cook Inlet.

NIKISKI, Alaska — On a sunny summer day on the Kenai Peninsula, a group of Alaska state legislators pulled on yellow industrial safety vests and walked across the yard to a ridge above the Cook Inlet.

At the overlook, Jim Grant, a contractor with Fugro Pelagos Inc., described the high-tech equipment on board the research vessel Westerly, which was methodically crisscrossing the inlet waters like a lawn mower on a grassy field.

The Westerly is conducting advanced sea-floor mapping studies that will be used to assess where to locate a heavy pipeline that would carry 2.4 billion cubic feet of natural gas each day to a Nikiski gas liquefaction plant.


The pipeline and liquefied natural gas plant would be part of a colossal gas export project under development by Alaska LNG, an alliance formed last year by the state of Alaska, Exxon Mobil Corp., BP Alaska, ConocoPhillips and TransCanada Corp.

To commercialize the 32 trillion to 35 trillion cubic feet of natural gas available on Alaska’s North Slope, the group is proposing to pump the gas out of the ground, run it through a treatment plant in Prudhoe Bay and ship it south through an 800-mile pipeline.

The gasline would snake through interior Alaska and across the Cook Inlet to a liquefaction and export complex in the town of Nikiski, 65 miles southwest of Anchorage. Total estimated cost for the mega-project: $45 billion to $65 billion.

In anticipation of building the future LNG and export facilities, Alaska LNG has acquired 500 acres of land in Nikiski and is seeking an additional 300 acres. The group also is proposing to relocate the region’s main highway, North Kenai Road, which currently runs through the proposed site.

Agreements in limbo

But land acquisition is not the only obstacle facing the unprecedented LNG project. As the Alaska LNG partnership completes its first year of field work and begins fiscal negotiations, Alaska Gov. Bill Walker (I) is seeking to put his stamp on the natural gas project negotiated by his Republican predecessor, Sean Parnell.

In the past month, Walker has suggested that the state buy out TransCanada’s stake in the pipeline venture, a step that he estimates would cost $108 million (EnergyWire, June 17).

The governor is also pushing to increase the size of the proposed 42-inch diameter gas pipeline to 48 inches to handle any additional natural gas that could be discovered on the North Slope.

He advocates rerouting the gasline closer to the state’s population centers. And he wants the state and North Slope producers to sell Alaska’s LNG through a joint venture marketing structure, rather than have each partner sell its own gas on foreign markets.

At the same time, the governor insists that Alaska voters must pass a constitutional amendment before the state government can finalize a long-term gas tax agreement with Exxon, BP and ConocoPhillips.

Noting that the Alaska Constitution bars one legislature from enacting tax laws that constrain future legislatures, Walker said the only solution is to take the issue to the voters in Alaska’s next general election in November 2016.

In a June 15 letter to state legislators, the governor argued that "a constitutional amendment will provide the certainty that all parties would like."

Face of the LNG plan

The Alaska LNG project is being managed by Exxon Mobil engineer Steve Butt, a 30-year industry veteran who has worked on some of the world’s largest LNG and gas treatment projects.

Butt has held leadership posts at the company’s operations in Venezuela, Guinea, Angola and Cameroon. Before beginning work in Alaska in 2011, he handled company projects in Australia and West Texas, and served as vice present of production for Exxon Mobil Qatar Inc.

Now Butt has emerged as the face of the Alaska LNG proposal, the detail man who de-mystifies the multifaceted venture at federal, state and local government hearings.

A California native, Butt heads a staff of 135 workers and several hundred contractors located in Alaska, the lower 48 states and Canada. He focuses on aligning the major components of the multi-stage LNG project and securing a long list of state and federal permits, all while closely monitoring the financial bottom line.

When talking about the Alaska LNG venture, Butt is keenly aware of the cost overruns experienced by the state’s last big energy project, the Trans-Alaska Pipeline System. That massive oil pipeline project was initially projected to cost $1 billion. In the end, the price tag skyrocketed to $8 billion.

To prevent that from happening to the far more complicated Alaska LNG project, Butt’s team is proposing to use tried-and-true gas processing, pipeline and liquefaction technologies that have been vetted at other natural gas projects.

"All of the pipeline materials, compressors and everything are exactly the same as we’ve used successfully elsewhere," he explained. "The industry has done these things somewhere. We’ve just never done them all at once as one integrated whole."

By next summer, Alaska LNG is scheduled to complete its preliminary front-end engineering and design work, known as pre-FEED. Those reports, which are expected to cost $450 million to $500 million, will include a more detailed construction plan for the venture and an updated cost estimate.

After that, the state and industry partners face the critical decision of whether to invest an additional $1.5 billion to $2 billion on advanced engineering and design work for the project.

Under the current schedule, the final investment decision would come two to three years later, with the project producing its first gas by 2023-25.

Enough LNG to fuel Canada

The Alaska LNG alliance hopes to pump 3.3 billion cubic feet of gas each day from the producers’ gas fields at Prudhoe Bay and Point Thomson.

Roughly 2.4 billion cubic feet of gas would be liquefied and exported. "It’s about enough energy to fuel an industrialized economy the size of Germany or Canada," Butt told Alaska legislators at a recent Nikiski field hearing.

The rest would be sold to Alaska communities along the pipeline route and used as fuel for the project.

Since the Alaska Legislature approved the state’s contracts with the four energy giants in April 2014, the Alaska LNG project has reached two critical milestones.

In March, the Federal Energy Regulatory Commission formally announced plans to begin work on a draft environmental impact statement for the multi-stage project (EnergyWire, March 9).

Two months later, the U.S. Energy Department opened the door for Alaska LNG to export liquefied natural gas to countries that do not have a free-trade agreement. DOE’s conditional approval would allow the partnership to sell gas to energy-hungry Japanese markets (E&ENews PM, May 28).

"The headline here is that we can export LNG anywhere in the world," Butt said. "That’s a big milestone for us."

Constitutional amendment called ‘a big deal’

As field work continues on the Alaska LNG project, the state and industry partners are hammering out a series of critical tax, royalty and fiscal agreements that would solidify the financial underpinnings of the pricey business venture.

Walker wants the Legislature to hold a special session in October to consider those agreements.

At that time, he also wants the lawmakers to pass a constitutional amendment giving state leaders the authority to sign off on a multi-year gas tax agreement with Exxon, BP and ConocoPhillips. If signed by the governor, the amendment would go to the voters late next year.

Walker is floating a proposed amendment that would give state leaders until Dec. 31, 2017, to negotiate the "fiscal terms for a liquefied natural gas project." By that time, the Alaska LNG project is scheduled to be near the end of the second phase of engineering and design work.

Despite Walker’s insistence that a constitutional amendment is mandatory, state Republican leaders and the North Slope producers argue that the partners could draft a legal tax agreement without a lengthy constitutional vote.

At the Nikiski hearing, state Sen. Lesil McGuire (R), chairwoman of the Senate Judiciary Committee, warned that an amendment vote could delay the Alaska LNG project timeline "quite dramatically."

"When you think about trying to get a constitutional amendment through both bodies of the Legislature, signed by the governor and go to a vote of the people — it’s a big deal," she noted.

State Sen. Peter Micciche (R) cautioned against relying on the Alaska voters to pave the way for gas commercialization.

"Alaska voters have demonstrated a couple of characteristics — one is that we are resistant to revising our Constitution," Micciche said at the hearing. "The other is that we’ve proven over time to be somewhat less than predictable."

Dave Van Tuyl, BP’s senior manager on the gas project, questioned whether the constitution needs to be altered to approve a gas tax agreement. "BP has looked carefully at the constitution," Dave Van Tuyl said, "and we’re sufficiently confident that the language is sufficient as it is."

Bill McMahon, senior commercial adviser to Exxon Mobil, agreed. But he also noted that the North Slope producers are reluctant to rock the boat with with Gov. Walker.

"Our view is that the constitution, as it is, is sufficient," he said. "But what the administration thinks is very important to us as well because we need something that all parties can support."

McMahon assured lawmakers that the process of passing a constitutional amendment would probably not delay completion of the gas export project, as long as FERC continued to move forward with the environmental impact statement for the project.

The industry’s biggest worry, however, is how the project would proceed if voters rejected the constitutional amendment. "If the people say no," McMahon said, "it’s difficult to think of what the company would do then on providing an alternative."