Alaska governor eyes tax breaks to spur Alaska-Lower 48 gas pipeline

Oct. 9, 2000
Alaska Gov. Tony Knowles has pledged to spend the rest of his term in office working to break ground on a natural gas pipeline in the next 2 years to move gas from Alaska's North Slope to US Lower 48 markets.
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Alaska Gov. Tony Knowles has pledged to spend the rest of his term in office working to break ground on a natural gas pipeline in the next 2 years to move gas from Alaska's North Slope to US Lower 48 markets.

Knowles said in August he intends to introduce legislation to lower tax barriers for potential stranded gas projects such as a pipeline to the US Lower 48 and gas-to-liquids (GTL) facilities.

Getting Alaska's natural gas to market with such a project, Knowles said, could create thousands of jobs for Alaskans, new industries for the state's economy, and hundreds of millions of dollars for state services and for the state's Permanent Fund.

20-year effort

For the past 20 years, Alaska has sought ways to bring to market the natural gas on Alaska's North Slope, where potential reserves could be three times the proven 35 tcf.

Efforts have been stymied, however, by the project's cost and lack of markets. While some industry players have proposed shipping the reserves as LNG to Asia, the LNG markets in Southeast Asia are already well fed: "Right now, six countries, including Qatar, Abu Dhabi, Malaysia, Indonesia, Brunei, and Australia, already supply Asia with all the gas it needs," said Knowles.

Those countries collectively have proven reserves of gas totaling 640 tcf, enough to meet the Far East's energy needs for 170 years.

With strong demand and prices for natural gas in the US Lower 48, Alaska's drive to find markets for North Slope gas comes at an opportune moment for the state.

The "skyrocketing demand" for gas in the US Lower 48 is caused by rising environmental pressures for cleaner-burning fuels and tight supplies that are pushing gas prices in the US to record highs.

Preparation for development

Knowles outlined tasks facing Alaska in breaking ground on a pipeline project, including acquiring state and federal rights of way, along with other permits. Updating the federal environmental impact statements on any of the permits and updating state right-of-way could take 18-24 months, he said.

Securing the needed construction, financing, and marketing agreements and changing Alaska's tax system to ensure it doesn't discourage gas development also must be done.

Knowles said he introduced a bill 2 years ago to allow the sponsor of an LNG project to negotiate with Alaska for payments in lieu of taxes.

"The idea is to lessen the tax burden during construction and the early years of production, before the project produces a healthy cash flow," said Knowles.

The bill would create a more efficient system of taxation and provide economic stability for investors without cutting the state's share of revenues.

Knowles' proposed legislation covering a stranded-gas or GTL project will also likely allow companies to make payments in lieu of taxes to cut down on the initial costs of developing such a project.

Tax revenues would be collected once development was completed and gas was flowing, said Bob King, press secretary for the governor's office.

While recent rumors say that Pres. Bill Clinton will give national monument status to the Arctic National Wildlife Refuge-including the highly prospective ANWR Coastal Plain, effectively putting that area off-limits to oil and gas drilling-King said that the White House hasn't indicated to Alaska state officials that this will happen.

The state opposes such a move (OGJ, July 17, 2000, p. 28). But King said the pipeline project wouldn't be affected because the 35 tcf of proven reserves underlie the greater Prudhoe Bay area-on state lands.

A gas pipeline is one option BP is exploring to produce the gas reserves in its Alaskan acreage. BP has considered a pipeline that would stretch from Prudhoe Bay to Nikiski, south of Anchorage. After being processed into LNG, the gas would be shipped west to markets in Asia.

A stronger candidate for bringing North Slope gas to market, however, is building a pipeline from Alaska to Alberta, where gas would then be shipped from the AECO Alberta Hub via an existing or new pipeline into the central US.

Several projects have been proposed along these lines in the past 20 years, and a string of major gas discoveries in Canada's remote Northwest Territories has revived interest in a pipeline that could bring these reserves to market, while tying in ANS gas and Canadian Mackenzie Delta-Beaufort Sea gas reserves (OGJ, Aug. 7, 2000, p. 68).

BP's GTL project

Last summer, BP unveiled plans to begin testing its own GTL technology at Nikiski, south of Anchorage on the Kenai Peninsula in south-central Alaska. BP has also begun clearing trees from the site where it will build a GTL facility capable of converting 3 MMcfd of natural gas to 300 b/d of synthetic crude oil.

As part of the site preparation, BP has begun hauling gravel to the area and will continue this effort until Nov. 1. A BP spokesman said the company expects to have the necessary permits in hand by January 2001, after which BP will begin construction.

One advantage of GTL is that it would not require a large investment for a new pipeline, as the syncrude could be moved through the existing Trans-Alaska Pipeline System. That approach has the added benefit of easing concerns of TAPS owners over the continuing economic viability of the giant pipeline system as conventional ANS crude production continues its decline.

As a cleaner-burning fuel, BP said, the syncrude could be sold all over the world at a premium price and could be brought on gradually in increments in response to growing market demand.

BP will use compact reformer synthesis gas (syngas) technology it has developed to run the facility. BP will test the initial stage, in which methane will be broken apart when mixed with heat and steam.

The company said it believes it can reduce the cost of this process by 40%, lowering the overall project cost as well. About two-thirds of the fuel for the Nikiski plant will come from produced hydrogen and the remaining third from natural gas.

The basic process involves first making syngas, a mixture of hydrogen and carbon monoxide from gas, and in a second stage, making a hydrocarbon product, waxy paraffins, from this syngas. From these paraffins, a variety of clean-fuel products can be made, including high-quality syncrude, lube oils, and diesel.

About half the capital cost of an existing-technology GTL plant is in the reformer needed to make syngas. This costly first stage involves getting methane, the main component of gas, to react with oxygen or steam to produce carbon monoxide and hydrogen. Most GTL processes require construction of a large oxygen plant to complete this process.

Instead of focusing on the Fischer-Tropsch portion of the GTL process, BP aims to produce syngas at a significant reduction in capital cost with reformer technology, which focuses on steam as a key component to generate oxygen.

Rather than building an oxygen plant, BP uses proprietary steam reformer technology that, during the first stage, takes oxygen from water. The oxygen and hydrogen react with the methane and form carbon monoxide. After completing the second stage, the gas is then put through a hydrocracker to split the paraffins into chains.

Over the past few years, BP and Kvaerner Process Technology Ltd. have collaborated at BP's research centers in Warrensville, Ohio, and Sunbury, UK, to develop compact reformer GTL technology.

David Calvin, project manager for the Nikiski facility, said BP's reformer will occupy only 25% of the space currently needed and will reduce the machinery's total tonnage.

The ability to use smaller-sized equipment should substantially reduce the initial capital-intensive costs of building a GTL plant while improving the overall energy efficiency of the process.