Alaska's Knowles aims for stranded gas development

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 bring gas from Alaska's North Slope to the US Lower 48 market. Alaska intends to create incentives for companies to develop the stranded gas reserves of the state and market them. Among other activity, BP is building a pilot plant to operate on its proprietary gas-to-liquids technology.

Aug 25th, 2000

Karen Broyles
OGJ Online

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 bring gas from Alaska's North Slope to the US Lower 48 market.

Knowles said Tuesday 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 "would be great for Alaskans," Knowles said, noting that such a project could create thousands of jobs for Alaskans, new industries for the state's economy, and hundreds of millions of dollars for state services and the state's Permanent Fund.

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

Efforts have been stifled, however, by the cost of such a project and lack of markets. While some industry players have proposed shipping the reserves in the form of liquefied natural gas (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 occurring 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 supply that's pushing gas prices in the US to record highs.

Preparation for gas 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, Knowles 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 instead 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 President Bill Clinton will give monument status to the Arctic National Wildlife Refuge, 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 is opposed to such a move (Oil & Gas Journal, July 17, 2000). But King said the pipeline project wouldn't be affected, since the 35 tcf of proven reserves lie under Prudhoe Bay�on state lands�and wouldn't be affected if the ANWR is declared a monument.

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

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

BP's GTL project
Earlier this summer, BP unveiled plans to begin testing its own GTL technology at Nikiski, which is located on Alaska's North Slope, south of Anchorage on the Kenai Peninsula in south-central Alaska. The company will begin constructing this fall a GTL facility capable of converting 3 MMcf of methane natural gas to 300 bbl of synthetic crude oil per day.

An advantage of GTL is that it would not require a large investment for a new pipeline, as products could be moved through the existing Trans-Alaska Pipeline. As a clean-burning fuel, BP said, the product 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's developed to run the facility. BP will test the initial stage, in which methane will be broken apart when mixed with heat and steam. BP said it believes it can reduce this cost 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 a present-technology GTL plant is in the reformer needed to make synthetic gas. 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 in the UK, to develop compact reformer GTL technology.

David Calvin, project manager for the Nikiski facility, said BP's reformer will only occupy 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.

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