A former head of Arco Alaska Inc. said Alaskans should lay the foundations for a broad natural gas business, not push a single project.
There are 35 trillion cubic feet of known North Slope natural gas reserves, and experts say there could be as much as 100 trillion cubic feet. Producers are pondering how to bring that gas to market.
"I do believe the first project will be a pipeline to the Lower 48," said Ken Thompson, a former president of Arco Alaska Inc. who now is president of Pacific Rim Leader-ship Development, an Anchorage consulting firm.
But Alaskans must take a broader view, he said.
"If the state establishes a vision of a natural gas business, I think you'll have people working to make things happen," he said. "But if the pipeline is the vision, when it is built, it's done."
The industry is considering:
A pipeline to Nikiski or Valdez, where North Slope gas could be cooled to a liquid and loaded onto ships;
A pipeline to carry the gas to markets in the Lower 48; or
A plant to convert it to synthetic crude oil, which could be shipped through the existing oil pipeline from Prudhoe Bay to Valdez.
Thompson said he does not think the time is right for exporting liquefied natural gas. There is an abundance of gas around the world that can be delivered at much less cost than Alaska LNG.
U.S. demand is growing fast, he said, and a pipeline to the Lower 48 likely will be the first project. He said the first step should be a pipeline to a hub near Fairbanks with the valves and plumbing to provide access for additional projects. Once gas is flowing to the Lower 48, he said, negotiating access for additional projects will be much more difficult. By then, the mechanism for setting prices may be far from clear.
The Fairbanks hub could operate like the Henry Hub in Texas, which offers access to many pipelines and serves as a centralized trading point for natural gas futures.
A hub would provide a clear mechanism for setting prices, Thompson said. The state should own a share of the hub and the pipeline to it, he said, and it should take its 12.5-percent royalty share of the gas in-kind.
"If you own a 12.5-percent share in the hub and in the pipeline to the hub, you know the price, and you have a voice in setting the policies that determine the price," he said.
"One policy might be that if a producer signs a contract with a buyer in Chicago, the state has a right to know the contract terms and the transport costs to Chicago, so you know the price of the gas.
"If there is a hub and a clear pricing mechanism, that facilitates entrepreneurs plugging into the hub for residential gas or a power plant for Anchorage. Then, you could build a spur to Kenai. You could look at expanding the fertilizer plant or even extending the life of the LNG plant.
Is there the potential for a petrochemical industry?
That is more likely to happen if there is a hub and a pricing mechanism than if the question is whether the producers will let another project tap a pipeline to the Lower 48, he said.
Thompson said he has seen the results in Malaysia, Thailand and Indonesia, where numerous pipelines feed power, fertilizer and petrochemical plants and homes.
If the producers ship 2 billion cubic feet of natural gas per day to the Lower 48, the state's 12.5-percent royalty share will be 250 million cubic feet per day. By state figures, Cook Inlet consumption in 1998 was 589 million cubic feet per day.
Thompson said the price of gas may be better in Chicago than Alaska. Unlike producers, who must answer to stockholders, the state could sell its gas in Alaska to encourage economic development.
The industry is studying two pipeline routes to the Lower 48 -- one that crosses the Beaufort Sea and follows the MacKenzie River valley, and one that follows the Alaska Highway. Preliminary estimates suggest a pipeline on the northern route would cost less.
"With the northern route, Alaska is held hostage to one market, because most of the volume you need in Alaska -- for Fairbanks, Alaska power generation, fertilizer -- that volume can't justify a (separate) pipeline from the North Slope," Thompson said. "If you go the northern route, the vision becomes a pipeline to the Lower 48."
He said Alaska must provide value to producers to favor the Alaska Highway route. The state taxes pipelines as soon as they are laid -- before any gas is sold, he said. It could adjust the formula.
"But I wouldn't even think about it unless the industry establishes a trading hub and a clear pricing mechanism," he said.
Mike Navarre, a former Kenai Peninsula Borough Mayor and a member of a borough task force promoting Nikiski as the terminus for a pipeline to export LNG, said Thompson has good ideas.
However, the state must examine what options would most benefit Alaskans, he said.
"I think that's going to happen over the next couple of months," he said.
Gov. Tony Knowles backs a pipeline along the Alaska Highway route. On Thursday, Jeff Lowen-fels, president and chief executive of Yukon Pacific Corp., told legislators that a pipeline to export LNG from Valdez is more viable and would benefit Alaska more. Yukon Pacific has long held permits for the Valdez LNG project.
"Lowenfels has a particular angle he's pushing," Navarre said. "In the end, that may be the way it goes, but there's not enough information."
BP, Exxon Mobil and Phillips are spending $75 million to study the feasibility of a pipeline to the Lower 48, he said, and Phillips, BP, Foothills Pipe Line Ltd. and Marubeni Corp. are still exploring the feasibility of exporting LNG from Nikiski or Valdez.
Kasilof Sen. John Torgerson, chair of the Senate Resources Committee, said Knowles has hired Cambridge Energy Research Associates to investigate natural gas markets. Senate Resources will hear from Foothills and from the BP-Exxon-Phillips consortium this week and from Cambridge Energy later this month.
"The main message is education," Torgerson said.
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