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In the Year 2025 - The Dilemma Posed by Alaska North Slope's Stranded Gas

Every day, crude oil producers on Alaska’s North Slope re-inject nearly 7.8 Bcf of natural gas into their wells, enough gas to supply the entire U.S. West Coast—California, Oregon and Washington State. If only there were some way to monetize that gas supply, to move it to market. The problem is that there isn’t, at least in today’s gas/LNG market, which is characterized by ample supply and relatively low prices. This same market also favors infrastructure projects that are simple and low-cost; no one wants to make multibillion-dollar commitments when natural gas prices and margins are so low. Today we conclude our series on the tough times ahead for Alaska’s energy sector with a look at the state’s vast natural gas reserves and the challenges associated with tapping them.

Alaskans and the energy companies that do business there would like nothing better than to reinvigorate the state’s once-vibrant energy production sector. As we said in Part 1 of this series, crude oil production in the Alaska North Slope region has fallen well below 500 Mb/d, less than one-quarter ANS’s peak output of more than 2 MMb/d in 1988. That’s left the 2.1-MMb/d Trans Alaska Pipeline System (TAPS) from the North Slope to Valdez, AK running at a fraction of its capacity, and that’s posing a problem of its own. As we said last time, as the volumes on TAPS ratchet down from 550 Mb/d to 350 Mb/d (ANS production averaged only 443 Mb/d as of August 2016), more and more mitigation will be needed to keep the oil flowing through the pipe (due to freezing, wax buildup and other problems that come with lower flows). Worse yet, if and when volumes on TAPS fall much below 350 Mb/d or so, all bets would be off on whether the pipeline could continue to operate without a major re-do.

And that’s just the beginning of Alaska’s woes. There’s also the natural gas side of things—the focus of today’s blog. According to Alaska’s Oil and Gas Conservation Commission, ANS crude oil producers in the first nine months of 2016 re-injected an average of nearly 7.8 Bcf/d of natural gas (volumes equivalent to more than half Pennsylvania’s daily gas production, or—as we said—the entire West Coast’s daily gas needs) into the Prudhoe Bay oil fields, in part to enhance oil recovery, but also because there’s no way to market the gas. It’s stranded. Literally stuck in the middle of nowhere. Also stuck is the years-long effort to develop a three-part, $45-billion-plus project that would 1) process 2.5 Bcf/d of North Slope natural gas, 2) transport it 800 miles through a new, 42-inch-diameter pipeline to Nikiski, AK (on Cook Inlet on the Kenai Peninsula south of Anchorage), and 3) super-cool the gas into liquefied natural gas (LNG) at a new three-train, 17.4-million-metric-ton-per-annum (MPTA) liquefaction complex (see rendering below) that would be built near ConocoPhillips’ existing Kenai LNG export facility (which was built in the late 1960s to liquefy and export North Cook Inlet gas; more on that in a bit). The LNG then would be shipped to Asian buyers; the Kenai Peninsula is closer to most Asian markets than any western Canadian LNG exporter would be.

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