Commentary and News: ANS Propane Could Be the Biggest Story of 2009!

by

Dave Harbour, NGP Publisher

If there is an opportunity, I will invest some of my retirement savings on a state agency's impressive orchestration of a solid, public-private partnership designed to make North Slope Liquid Propane Gas Available to Alaska consumers at reasonable but not subsidized prices.  

Mary Ann Pease, (NGP Photo), an Alaska Natural Gas Development Authority (ANGDA) consultant, said yesterday that a large, two-day business meeting in the ANGDA offices last Thursday and Friday resulted in her conclusion that a statewide propane distribution project could be operational in two years.  Pease was responding to NGP's query for a status report on ANGDA's progress toward an Alaska North Slope (ANS) propane project.  

Attending the meeting last Thursday and Friday were some 30 executives from a diverse array of disciplines in addition to Pease and Harold Heinze (NGP Photo) CEO of ANGDA whose fine hand has been behind the Propane initiative.  Parties included: NANA, Goldman Sachs, Amerigas, Alaska Journal of Commerce, Crowley, Public Works, RW Beck, State officials, JP Morgan, First Southwest, Northstar Trucking, KaKivik Asset Management, National Propane Gas Association, Macquarie, Mas Energy, Lynden, Enerflex, CH2M Hill, Wells Fargo, Propane Education & Research Council, Tower Hills Mines, NANA WorleyParsons, Suburban Propane, Scott Balice Strategies, LLC, Samaon Tug, UAA, NANA Crowley, Alaska Trucking Association, Golden Valley Electric Association, Red Dog Mine.

This concept seems destined to move very quickly because it may be a perfectly timed idea: 

• The ANS producers must continue--at great cost--to reinject about 8 Bcf of natural gas/day until it can be marketed via a pipeline.  Until then, some portion of that gas stream could be monetized by diverting it to a propane processing plant.  The propane liquids can be removed and the producer(s) paid for the loss of value in the gas stream that is returned for reinjection. 
• ANGDA has taken the initiative to actually contract with an as yet unnamed ANS producer to sell directly to ANGDA between 5-10,000 barrels per day.  The agreement can be renegotiated when and if a mainline gas pipeline is built, taking the entire gas stream--including the gas liquids--closer to the market place.
• The high price of diesel in rural Alaska and even in Fairbanks make a portable, alternative, cleaner fuel more attractive than ever, particularly if the delivered price can be competitive.
• The shortage of natural gas in Southcentral Alaska could be ameliorated by injection of propane into the gas streams used to heat homes and produce electric power.
• Finally, the propane project has a better chance than many projects because it seems to not have visible private or political opposition.

Pease said that the process began to reach a high pitch last June 17, with a meeting in Fairbanks which included ANGDA and Enerflex, Suburban Propane and Amerigas representatives, gathered in an effort to form a new, "Alaska Propane Marketing Association"... which could contribute momentum and industry knowledge to the marketing of the resource.

Enerflex, a Calgary based energy company, had a prior interest in Alaska with acquisition two years ago of a Waukesha generator and engine distributorship.  The generators and engines can be dual use, including propane, and provide attractive alternatives to refinery, mining and oil field operations now dependent on diesel, according to company representatives Jim Forsyth and Brad Barros still in Alaska yesterday following last week's meetings. 

How the project would work.

ANGDA would purchase 5,000-10,000 bbl/d from an ANS producer(s).  Think of a fence separating the Producer and ANGDA and the propane purchase from all other activity.  Think of the producer(s) and ANGDA being 'north' of the fence and owning a gas meter at the fence crossing.  

Then, ANGDA sells the gas to someone on the south side of the fence: a statewide propane distributor/marketer; an Interior Alaska utility and other industrial consumers that now burn coal, naptha, diesel to produce electricity; or, a consortium of buyers; or to the owners of the propane conditioning plant.  Last week's business meeting was, in part, to determine who wanted what part of the design, financing, infrastructure, transportation and marketing chain.  

In any case, the gas stream moves through the fence meter to the propane plant where propane is removed and the remaining gas stream is sent back north to cross the 'fence' again, returning via another meter which helps determine how much of the gas stream was removed south of the fence.  Knowing this enables ANGDA and the producer(s) to calculate the value of the gas taken under their contract.

After the propane leaves the plant, carbon dioxide is removed and the propane is stored on site.  When the market calls for the propane, it moves to a transportation/landing area where it can be loaded onto trucks, large propane tanks or barges.  

Propane uses, marketing options and many questions.

At this point, one simply has to marvel at human ingenuity and that 'silent hand' Adam Smith described.  Will all of rural Alaska one day purchase propane rather than diesel for electricity and home heating?  Is Fairbanks Natural Gas relying on declining Cook Inlet/Enstar reserves for its Interior LNG experiment, or will it use this propane opportunity to secure long term supply for customers at what may be a better price?   Has Fairbanks Natural Gas' Dan Britton organized an ANS LNG project?  Or, will he and the Mayor Jim Whitaker's Alaska Gasline Port Authority team up to promote an ANS LNG scheme?  If so, how could an inefficient, expensive LNG process produce for FNG ratepayers a more economic alternative than propane under the ANGDA concept?  Are FNG/AGPA carefully considering the two alternatives, crunching the numbers?  Will village wind farms be able to use propane as a relatively flexible fuel to help drive generators feeding battery banks when the wind is not blowing?  Will ANS propane transport be restricted to truck and barge...or, will a way be found to load 50,000 lb. propane payloads onto STOL Hercules aircraft for direct delivery to many villages, winter and summer, without the need for expensive ground and water transportation and the need for year-around inventory and storage?  Is Enstar too involved in bullet line study and TransCanada storage projects to become vested in this alternative for boosting pipeline BTUs and volumes?  When an ANS gas mainline finally reaches Fairbanks, can the entire propane production plant on the Slope be 'skidded' onto flatbeds and relocated to Interior Alaska, as the ANGDA-producer agreement is reported to accommodate?  Can propane become the space heating and power generating fuel of choice among the producing and oil field service camps on the Slope?

While Pease's coordination work appears to have activated a good diversity of players, the deal(s) is not done until it's done.  As she noted candidly, "The trick now is to finalize the terms of engagement."  Meanwhile, as above, questions and fantasies will fly in every direction.

Conclusion.

Pease said that the contract price for propane removed from the ANS gas stream to be 30 cents per gallon.  Saturday, I topped off my little BBQ propane bottle with a gallon for $4.  Now, in the Lower 48 that might be $ 2.50 and it might be a lot more in an Interior Alaska village.  Dennis Hebner (NGP Photo) at the Arctic/International Airport Road Tesoro performed the service and as he cleaned my greasy bottle and handed me a bag of popcorn I realized that those costs, along with the cost of the resource, production, conditioning, storage, transportation and marketing were all included in that $4.  Also, those who buy in bulk will of course have access to better pricing.  So, another "trick" Pease and her colleagues will face is that of creating a 'wellhead to the burner tip' economic chain that can successfully compete with existing propane supplies around Alaska.  But a 30 cent acquisition cost should entice players to the final stages of project feasibility, at least. 

ANGDA stands a chance of facilitating completion of part of its instate gas supply mission by executing this propane deal.  If it succeeds, I predict we'll all stand up spontaneously to cheer Harold, Mary Ann and their colleagues for a job well done!  And if that happens, we'll look back on it as the most important Alaska energy development of 2009!

I can't wait for the next ANGDA press conference!

We'll Have An Exclusive North Slope Gas Story For Readers Tomorrow!

Federal Energy Regulatory Commissioner (FERC) Phil Moeller (NGP Photo) visited Alaska last week and told a Commonwealth North gathering Friday night that he thought of himself as "Alaska's FERC Commissioner" because of his work in a Southeast Alaska cannery during his college years.  "Because of my time here," he said, "I probably have a good idea of how Alaskans react to issues."  In other extemporaneous remarks Friday evening, Moeller downplayed the domestic gas competition for Alaska North Slope (ANS) gas saying, "the country is becoming more dependent -- day by day -- on natural gas and that is good for Alaska."  He pointed out that, "In the last 12 months the natural gas power generation pie slice has grown from 17% to 18.5%.  We're becoming more dependent on renewables and I support that," he said, "particularly wind--but we need natural gas to fill inl.  I hope," he concluded, "that part of the answer to our growing natural gas dependence is the Alaska gas pipeline."   (Here is Rena Delbridge's (NGP Photo) excellent article in theStandard.)        *    ADN by Tim Bradner.  It is dawning on people, finally, that we have an energy problem in Southcentral Alaska. Natural gas heats our homes and buildings and fuels 90 percent of our electricity production, but the gas fields are running down. We need to get more from somewhere.     *     APRN Audio re: ENSTAR seeking more gas contracts.     *     Green Theme knows no borders.  On behalf of birds, Greens would kill Mackenze project.    *      The Hill Times by Ken Rubin.  The millions of dollars in expenses charged by Transport Canada employees against the not-as-yet-happening Mackenzie Valley gas pipeline is a story that I helped bring to the public's attention. But it wasn't easy. 

Commentary:  On Friday I joined a good crowd at Anchorage's Loussac Library where representatives of the Environmental Protection Agency heard testimony from about 20 local citizens supporting the EPA's approval of a Clean Air Act Permit for Shell Oil's 2010 Chukchi See exploration program.  Here is our Friday story.  Below is the testimony I offered:

(...continued tomorrow morning....)

OCS Alarm Bells Are Ringing Today - Please Go To the Library To
Support our Nation and to Save Alaska's Economy!  Our Readers Around the Country Should Send Written Comment.  Scroll to the bottom for instructions.

• On OCS leasing.  Last February, Secretary Ken Salazar (NGP Photo) postponed the comment period on the MMS 2010-2015 draft lease sale program to last Monday, September 21.  That was a delay.  But get comment he did and when Governor Sean Parnell visited him a few days ago the Secretary did not commit to timely deciding now that the comments are in.  By the way, most comments favored moving ahead with leasing of OCS areas around the country.  I testified with many NGP readers at the Secretary’s hearing last April. 

• On Oceans Policy.  A White House Ocean Policy Task Force met here in August charged with recommending to the President an ‘Oceans Policy’--in less than a year!  This presidential assignment is either simply bizarre or it could be a pre-engineered strategy.  Obviously, the anti-domestic energy crowd was out in force to testify but many ordinary folks were there as well, supporting reasonable energy exploration and production.  I testified.… The Task Force is flying to Hawaii for a similar 'meeting' next Tuesday and by then the White House should have 'call in' instructions available.

• OCS Permitting.  Now comes the EPA to Anchorage to ask the 'public' about a company that has done more to cooperate with Alaska, Alaskans and a demanding federal permitting system than any company in my memory.  The EPA will be inviting us to comment on whether we think Shell’s vessels’ air quality permit should be approved.  After spending over $2 billion on Chukchi and Beaufort leases and over a dozen million on the air quality permit alone, the least the company should expect is timely and reasonable regulatory decisions.  Shell submitted an air quality permit application late last year and had it rejected, then reapplied, then was rejected again ... and again.  If that critical permit is not in hand by early 2010, will Shell abandon ship, or simply acquiesce to the reality that it has lost yet another year? 

• The Cruise Ship Front.  A federal ruling that imposes strict air emission standards on marine traffic in much of Alaska would drive up the cost of living for 90 percent of Alaskans and add another $100 million to the cost of operating cruise ships in the state.  If Alaskans dont speak out, this rule will dearly cost all Alaskans as 90 percent of all consumer goods come through the Port of Anchorage, said John Binkley, president of the Alaska Cruise Association (ACA).

• The Congressional Front.  Yesterday the Senate democrats blocked consideration of Senator Murkowski's amendment limiting--for a year--EPA's regulation of CO2.  This amendment addressed an Administration process whereby the EPA is preparing to federally regulate emissions following an April 2007 Supreme Court ruling that carbon dioxide is a pollutant to be regulated under the Clean Air Act. Part of the EPA's draft rulemaking involves regulation of 'mobile source emissions'.  The Administration and Congressional majority are, in effect, blackmailing holdouts that if they don't vote on climate change (i.e. 'tax and trade') regulation that might treat emissions one way, the EPA big guns will be cocked and ready to fire on all significant carbon emitters from refineries to pipelines to ships and vehicles to farm animals, possibly. Either way, consumers lose.  Kudos to Senator Murkowski for trying to keep anti-consumer, energy legislation at bay! See Alaska Standard story by Alex Gimarc and ADN story

• Other.  Note that I've tried to simplify this by not mentioning how many industries, including oil and gas, could be affected by Administration endangered species initiatives dealing with the Cook Inlet Beluga whales and Arctic polar bears.

The sheer magnitude of regulatory and other requirements will take a toll on the country's economy and affect the domestic energy industry's ability and desire to invest in the U.S. OCS.  Unless we fulfill our domestic energy potential, America's consumers will suffer and should wake up while there is still time.  In the draft testimony I'm working on for later this morning, I discuss EPA's rejection of Shell's air quality permit application: 

• …because Shell didn’t provide you with the duration, frequency, hourly emission rates, and potential air quality impacts of an emergency generator on board, “FD-8”. [1]    

• …because Shell wasn’t more specific about the number of “ice management vessels”, their direct impact on the modeling analysis, and, “because there is no guarantee by Shell that the same vessels will be used for ice management and oil spill response, what assurances are available that the vessels will have similar stack parameters and emission rates so as not to contribute or violate National Ambient Air Quality Standards (NAAQS), air quality increments, and permit conditions.”
• …because Shell Oil didn’t tell you exactly how many 37-foot long boats would be aboard a management vessel within the Spill Response (OSR) fleet, the number, duration and frequency of the water drill exercises for these boats, and quantifying the emission rates of each boat during each exercise.

Daily Planet, by Jeremiah Scoby.  The administration of Anchorage Mayor Dan Sullivan (NGP Photo, 9-21-09) and city utilities are preparing to roll out a plan to educate local residents about energy conservation.  City Manager George Vakalis said during a meeting of Anchorage's Energy Task Force the plan would be showcased next month to put the spotlight on the possibility that the city could face brownouts or blackouts during periods of high natural gas demand during a cold snap this winter.  “The energy system came close to failure the last two of three years,” Sullivan said. “We don’t want to risk rolling blackouts or the heat going out in homes across the city.  ”To help deal with a potential energy crisis, the city is partnering with local utilities to educate local residents.  “Local utilities have provided $150,000 for conservation education,” Vakalis said.  The mayor’s communications director, along with the local utilities’ public relation representatives will work to implement a visual plan, including posters and brochures.  “The plan will be rolled out around mid-October as it starts to get colder,” said Sarah Erkmann (NGP Photo, 9-22-09), the mayor’s communication director.