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!