Printer Friendly

Cook inlet economic impact: Kenai Peninsula ready for industry revival.

The closure of the Kenai liquefied natural gas plant this spring deals another blow to what remains of the Kenai Peninsula's once-vibrant industrial sector. The LNG plant is following in the wake of the closure of the Agrium Corp. fertilizer plant a few years ago. Both plants were sources of good-paying jobs for the north peninsula region.

Now, only the Tesoro refinery remains at Nikiski, the industrial zone on the North Kenai Road north of the city of Kenai.


The LNG and fertilizer plants, built 50 years ago, were victims of changing circumstances. Both plants rely on the natural gas-producing fields that once enjoyed high production rates. As gas supplies dwindled, the price of gas increased in recent years to the point that the fertilizer plant could not get gas it could afford, nor could it even get commitments from producing companies to supply gas.

The LNG plant was a victim of circumstances, too, of tightening gas supplies to the plant and changes in a complex Asian natural gas market. The plant's owners, ConocoPhillips and Marathon Oil, said they could not get the desired price from buyers for the relatively small volume of LNG the plant would ship.

ConocoPhillips and Marathon say they will maintain and keep the plant intact against the possibility it can be used in some other way, perhaps as a part of a program to import LNG for supplemental gas supplied for the regional utilities.


The Tesoro refinery seems secure, at least for now. Tesoro recently completed a significant investment in the plant to reduce the benzene content of its fuels, and is planning another investment to further reduce benzene.


A few years ago Tesoro also made a large investment in a unit for the plant to produce ultra-low sulfur diesel. This is now required by the U.S. Environmental Protection Agency for use in trucks operating on highways and mobile off-road equipment.

Putting this kind of money into the plant would seem to be a signal the company doesn't intend to close the refinery. However, this plant faces its own set of challenges. Tesoro once considered closing it and supplying its Alaska retail outlets from the company's refineries in Washington state and Hawaii. If circumstances change or problems develop the company may revisit the idea.


The Kenai Peninsula will likely always be home to the gas production industry that previously supplied the plants but will now continue to serve Southcentral electric utilities and Enstar Natural Gas Co., which supplies gas for space heating.

Gas reserves in the older fields are running down, which concerns the utilities, but there is also new gas exploration under way.

The closure of the plants seems symbolic, however, of a long and gradual decline in the regional petroleum industry. Oil production peaked in Cook Inlet at about 140,000 barrels per day in the 1970s, but has now declined to about 12,000 barrels per day. Employment in production operations has dropped, too. The Alaska Department of Labor and Workforce Development said oil production jobs accounted for about 6 percent of the jobs in the Kenai Peninsula Borough, but about 16 percent of the wages paid in the borough in 2008. Industry jobs are high-paying, averaging $86,700 per year in 2008. That's far above the average pay of all workers in the borough, which was $38,850 per year in 2008. These figures actually understate the economic contribution because the job and payroll totals do not include workers in the refinery or the LNG plant, which are classified as manufacturing jobs by the Labor Department.


What seems ironic is the LNG plant closure is happening just as the Cook Inlet oil and gas industry, which provides the foundation for the industrial plants, is seeing the start of a rejuvenation. New companies are on the scene, including large and small independents making investments and exploring. The discoveries are still small in scale, and in some cases companies are developing, or redeveloping, discoveries made earlier that were thought to be marginal or uneconomic. If these continue, and if there is enough of them, they could set the stage for a rebound of the peninsula's petroleum-based manufacturing, but probably in some form that can't be foreseen now.

Some examples of new developments include the work by Armstrong Oil and Gas, a Colorado company, in developing new gas wells at the small North Fork gas field east of Homer, on the peninsula. Armstrong has completed a new pipeline to connect with new pipeline built by Enstar Natural Gas Co. from Ninilchik to Anchor Point, north of Homer. The North Fork field won't be a big gas producer, at least now, but having gotten the wells into production Armstrong is very bullish about expanding the field with new drilling. There is more potential for gas in the area, the company believes.

Two Australian companies are also exploring. Linc Energy has drilled a gas exploration well in the Matanuska-Susitna Borough that encountered gas, although the well is still being tested for commercial production. Although this is in the Southcentral region rather than the Kenai Peninsula, Linc Energy's success will motivate others to explore, including on the peninsula. Linc is planning more exploration of Cook Inlet's west side near Trading Bay.

Service companies based in Kenai support the west Inlet activity, so projects there benefit the entire region. Another Australian company, Buccaneer Energy, is exploring for gas on the peninsula itself near the long-established Cannery Loop gas field south of the city of Kenai. Also, NordAq Energy Inc., an Alaska firm, has drilled to test gas prospects in the Kenai National Wildlife Refuge on a lease with Cook Inlet Region Inc., CIRI, the Alaska Native corporation for Southcentral Alaska that owns subsurface rights in some locations in the refuge.


In another development that is important, Buccaneer and Escopeta Oil and Gas, another independent, plan to bring jack-up rigs to Cook Inlet this summer to drill test wells in deeper waters of the Inlet. These efforts have the potential for discovering significant new oil and gas accumulations, many geologists believe, in prospects located in waters beyond the reach of wells drilled from on-shore or on one of the offshore platforms. Floating drill-ships and jack-up rigs have previously been used to explore in Cook Inlet, but not for 25 years or more. In the meantime, companies have re-looked at offshore areas previously explored using new exploration tools, such as three-dimensional seismic. With these newer techniques geologists believe they have found possible deposits of oil and gas previously undetected, when older seismic technology was used.

On the other side of Cook Inlet another independent, Cook Inlet Energy, is redeveloping the small Redoubt Shoal and West MacArthur River oil fields. Both were shut down in the bankruptcy of Pacific Energy Resources, the previous owner.

Cook Inlet Energy is a new subsidiary of Miller Petroleum of Tennessee, formed to take over and operate the assets acquired in the Pacific Energy bankruptcy. The company has been producing about 1,000 barrels per day of oil from wells in the West MacArthur field and plans to repair and redfill wells on the Osprey platform that produced for a period from the Redoubt Shoal field. Cook Inlet Energy also has plans to drill for more oil, and gas, in the West MacArthur field. The company already has brought a small drill rig to the Inlet's west side to drill gas wells and hopes to bring a larger drill rig for drilling deeper wells aimed at finding oil.

It's worth noting these ventures are being aided by measured incentives put in place by the State. The redevelopment of Redoubt Shoal and the West MacArthur River fields is possible because of a temporary reduction of royalty extended to several marginal Cook Inlet fields some years ago, as well as a set of generous investment tax credits. The same tax credits are boosting exploration on the Kenai Peninsula and the effort to bring a jack-up rig to the Inlet.

A step at a time, these efforts could succeed in more oil and gas being produced, but if a larger company enters the scene, like Apache Oil, things will elevate to a new level.


Apache, a major independent company, has been acquiring leases in Cook Inlet over the last year with intentions to do exploration. The company has also indicated it is looking to acquire more properties. An obvious prospect is the Cook Inlet holdings of Chevron Corp., which are for sale. Included in this are the 10 offshore oil-producing platforms owned and operated by Chevron, and the majority of the Inlet's oil-producing fields. Whether Apache will purchase these depends on whether the company believes the production can be expanded. The fields are mature, many having produced for several decades, and the platforms and wells are aged.

In purchasing them, Apache would also be assuming large liabilities, mainly the cost of removing the platforms once production is terminated. However, having a company like Apache active in Cook Inlet will provide a big boost for others, an endorsement by a large and respected independent.

What is also often overlooked is that another once-independent company, now part of a much larger one, has been operating two mature Cook Inlet oil producing platforms for years. This is XTO Corp. which purchased the platforms from Shell years ago, invested in redevelopment, and has continued to operate them profitably. The fact that XTO can continue to operate aged facilities provides an example for others, like Apache, looking at Cook Inlet.


If there is to be another petroleum-based manufacturing industry for the Cook Inlet region, what might it look like? The two State gas corporations, the Alaska Natural Gas Development Authority, or ANGDA, and the Alaska Gas Development Authority, or AGD C, have both sponsored studies of possible industries. So has the State's main industrial development corporation, the Alaska Industrial Development and Export Authority, or AIDEA.

ANGDA commissioned a study of what it might take to rebuild and expand the existing LNG plant. It found that substantial amounts of money to upgrade the plant and meet new federal regulatory standards would be needed. AGDC commissioned studies of a gas-to-liquids project linked to a gas pipeline built from the North Slope. This might be possible if a pipeline is built.

AIDEA has considered a different idea, a coal-to-liquids project based on large coal resources at Beluga across Cook Inlet from Anchorage. Coal-to-liquids uses a process similar to that in gas-to-liquids, the Fischer-Tropsch process. Similar plants in South Africa, Qatar and Malaysia now make high-quality fuels and other products from feedstocks like coal and natural gas.

AIDEA found the coal-to-liquids idea to have possibilities. Tyonek Native Corp., a landowner in the Beluga area, is very interested in the idea. A Beluga coal-to-liquids plant would be within the Kenai Borough and part of its tax base. No doubt experienced service companies based in Kenai would play a major role in the development of such a plant.

The closure of the LNG plant ends at least this chapter of the Kenai Peninsula's history, but it's worth reflecting on the success of the fertilizer and LNG plants as innovative industrial ventures in their time. Large gas discoveries were made in the 1960s but they were found as companies searched for oil, a more valuable product. The gas was "stranded," much like North Slope gas is today, with no way to move it to market.

The idea that developed was that if the gas couldn't be shipped in gaseous form, as there was no pipeline, it could be converted into a different form, even a new product, that could be shipped.

Union Oil of California (now owned by Chevron) built a fertilizer plant to convert its gas into fertilizer, a solid, and ammonia, a liquid. These products could be shipped and sold readily.

ConocoPhillips and Marathon built a LNG plant to liquefy the gas at low temperatures and ship it in special tankers. This was the world's first long-distance shipping of LNG on a regular basis, and it pioneered the very large LNG business that exists today.

Both ventures demonstrated private sector entrepreneurship in converting a problem--stranded gas--into an opportunity. There is no reason why this can't happen again.
COPYRIGHT 2011 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2011 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:GAS & OIL
Comment:Cook inlet economic impact: Kenai Peninsula ready for industry revival.(GAS & OIL)
Author:Bradner, Mike
Publication:Alaska Business Monthly
Date:Apr 1, 2011
Previous Article:Elusive pipeline dreams: waiting for suitable demand.
Next Article:Impact of current oil-tax system forces Alaskans to make tough decisions.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters