Alaska North Slope Oil and Gas Project, USA

In August 2000, the sponsors of the Alaska North Slope LNG group announced that they were set to continue efforts to economically produce Liquefied Natural Gas (LNG) from the North Slope area of Alaska, having successfully completed the first stage of their studies.

The sponsors for the project are Phillips Alaska Inc.(a subsidiary of Conoco Philips), BP Exploration (Alaska) Inc and Foothills Pipe Line Ltd.

Foothills Pipelines is a joint-venture formed by TransCanada Pipelines Limited and Westcoast Energy (Trans Canada is now promoting a competing gas recovery project to Conoco Philips and BP).

The North Slope region of Canada is believed to hold over 37 trillion cubic feet of natural gas, most of which is as yet untapped (undiscovered gas assets could be as much 100 trillion cubic feet).

The North Slope project (now revived as the Denali project – promoted by BP and Conoco Philips) aims to construct a pipeline to transport natural gas from the northern parts of Alaska to Canada and the rest of the USA via a treatment facility near the north slope. A competing project by Trans Canada is also being considered by the state of Alaska. Currently gas from the North Slope is used for reinjection into oil wells to maintain reservoir pressure.

NORTH SLOPE STAGE 1

Stage 1 of the process cut the project size by half to seven million tons a year, because of the economics of the natural gas market the project has now been scaled back up to recover as much gas as possible and a full-sized pipeline is being planned.

Foothills Pipe Line (TransCanada) had said previously that this reduction enabled the project to become 'small enough to gain a toehold in the East Asian market place and yet large enough to make economic sense'. Gas is now in very great demand to supply the North American market, which is currently at a demanding level of 26 trillion cubic feet a year. The investment is likely to be around $30bn.

NORTH SLOPE STAGE 2

The stage 2 effort will be led by Conoco Phillips and BP, located in Anchorage. 150 employees will work over the next three years from 2008-2011 so that construction of the pipeline and processing facility can begin. In parallel TransCanada are developing the competing project (the two projects may yet still merge again so that ultimately only one pipeline will be constructed).

Currently, key activities are conceptual design, project costing, permitting considerations, commercial structure and overall viability (there is much negotiation with the new Governor of Alaska, Sarah Palin).

The evaluation of the second stage of projected activity was scheduled to take 15 months; implying that actual work could begin early in 2002 (negotiations are still underway in 2008).

This stage will concentrate on improving the competitiveness of the LNG project as further reductions in cost and competitiveness are necessary. Foothills believe that the opportunities for those improvements lie in commercial areas, such as marketing, financing, government fiscal and regulatory policy, and possibly synergies with other gas commercialisation options such as pipeline gas to the other 48 states of mainland America or gas-to-liquids.

A project is beginning (the Denali project) regarding a pipeline to transport the gas from the production site to Canada and the USA. The costs and scope are being developed and will primarily be a function of the level of activity associated with the route options. At this point, the initial work programme is expected to cost between $600m and $625m.

ALASKA GAS LINE INDUCEMENT ACT

Because of the delay in providing a gas pipeline from the North Slope to the population centres of Alaska,in June 2007 the Alaska Gas Line Inducement Act was signed into law by Governor Sarah Palin. This is promoting the construction of a much smaller bullet line so that North Slope gas can be used to restore depleting gas reserves in Alaska itself.

The Alaska Gasline Port Authority is now planning an 800-mile pipeline from Prudhoe Bay to Valdez and also liquefaction and liquids extraction facilities in Valdez and a gas conditioning plant in Prudhoe Bay. There will also be a spur line to Glennallen to connect to the Southcentral gas grid and ensure a gas supply for in-state consumption. The pipeline will follow the route of the Trans Alaskan Pipeline for crude oil.

GAS-TO-LIQUIDS (GTL) TEST FACILITY

As part of the project, BP is constructing a Gas-To-Liquids (GTL) facility at Nikiski. The plant, which is costed at $86m, is a test facility designed to probe the method's suitability.

Gas to liquids could be a suitable outlet for some of the gas from the North Slope but this will require additional investment over and above that required for a pipeline and the exact amount of recoverable gas in these reserves needs to be known.

SUPPLY CONTRACT

Fairbanks Natural Gas LLC (FNG) announced a long-term contract in February 2008 to supply Alaska North Slope gas to FNG customers in Interior Alaska. ExxonMobil Gas & Power Marketing Company (one of the major owners of North Slope reserves with the largest working interest (36.4%) at Prudhoe Bay and the largest lease holder of discovered gas resources in Alaska) will supply natural gas to a new liquefaction plant at Prudhoe Bay to be built and owned by Polar LNG, LLC an affiliate of Fairbanks Natural Gas.

FNG will truck the LNG nearly 500 miles from the North Slope to its Fairbanks distribution system. FNG owns and operates two LNG storage and regasification facilities in Fairbanks. The supply contract calls for FNG to receive up to ten billion cubic feet of natural gas a year for a ten-year period beginning in mid-2009 when the necessary facilities are expected to be completed. The contract also allows for annual renewal after the initial ten years.

LNG MARKETS AND THE NORTH SLOPE ALASKA PROJECT

The LNG project has gone ahead despite the deflationary pressures evident in the LNG market, and the market's increasing move to short-term contracts. The North Slope sponsors have decided to go ahead because there is an expectation that the growing demand for LNG will outstrip known sources of supply. This is especially true of North America, although a supply crunch is also expected, albeit on a lesser scale, in East Asia.

OIL AND GAS MARKETS

There are over 35 trillion cubic feet of gas reserves within the Prudhoe Oil Pool and the Point Thomson gas condensate reservoir (both of these are very much in decline). However, hundreds of millions of barrels of oil and condensate could be lost if gas offtake from these fields is not correctly managed.

Maintaining reservoir pressure enhances oil recovery, but on the other hand producing gas depletes the reservoir pressure. Gas reserves in most fields are usually sold only after the liquid hydrocarbon reserves have been depleted. Until then, the gas that is produced is used to promote liquid production in various ways – including being reinjected so that it can provide the energy needed to get the liquid hydrocarbons to the surface and provide a source of gas for miscible injectant used in enhanced oil recovery operations.

The North Slope gas project will ultimately involve trade-offs between oil and gas recovery.