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Alaska, Kenai Peninsula LNG Owners Strike License Agreement

The State of Alaska has agreed to support a two-year extension of the federal export license for the liquefied natural gas (LNG) plant on the Kenai Peninsula. The agreement includes provisions that address the need for additional gas supplies for Southcentral Alaska.

LNG plant co-owners Marathon Oil Corp. and ConocoPhillips filed for the license extension last January (see NGI, Jan. 22, 2007). The present export license expires in 2009.

The agreement ensures that there will be adequate supplies of gas for local utilities, said Gov. Sarah Palin's office. The agreement also requires the owners to develop additional natural gas reserves in Cook Inlet and allow third parties the opportunity to monetize their gas production through the LNG plant. Marathon and ConocoPhillips have also agreed to sell Cook Inlet seismic and well data to third parties.

"It is our hope that, by reaching this agreement, the U.S. Department of Energy will have the assurances necessary to approve their request," said Palin. "We understand that the export approval is just one step in the process of securing a future for the LNG operation and look forward to working with all stakeholders in achieving the goal of improved gas supply security for Southcentral [Alaska]."

In May 2005 ENSTAR Natural Gas Co., which delivers natural gas to about 327,000 customers in Alaska, warned that it may have to begin importing LNG to meet demand because of declining gas output from the Cook Inlet Fields.

"It is important that the producers and the state can work together," said Gene Dubay, senior vice president of operations for Semco, the parent company of ENSTAR. "In this case the state intervention was the catalyst to reaching agreement on our near-term supply needs."

As part of the agreement with the state, Marathon and ConocoPhillips agreed to continue negotiations with ENSTAR and Chugach Electric Association Inc. on gas supply agreements to satisfy local gas supply needs. If certain gas supply milestones are not met, the companies agreed to reduce gas exports below the LNG export quantities requested in their application.

Additionally, ConocoPhillips agreed to approve 2008 drilling plans for at least two wells, and Marathon agreed to approve five wells, according to an executive summary of the agreement.

Local gas distribution utility ENSTAR has been looking at ways to get additional gas supplies into Cook Inlet, spokesman Curtis Thayer told NGI last year (see NGI, Oct. 1, 2007). One option would be to encourage more development of local reserves. A second would be a spur pipeline off of a larger Lower 48-bound pipeline from Fairbanks to Cook Inlet. And the third option would be a bullet line to bring gas from Alaska's North Slope to Cook Inlet. The state is reviewing an application from TransCanada Alaska Co. and Foothills Pipelines Ltd. to commercialize its North Slope reserves (see related story).

The Kenai LNG facility, located in Nikiski, is the only LNG export plant in North America. The facility began operations in 1969 and today employs 58 people; the plant also supports 128 other jobs in the Kenai community. Operations of the plant contribute approximately $50 million in royalties and taxes to the state and local economies.

"This agreement improves the prospects for future drilling in the Cook Inlet and supports continued operation of the Kenai plant," said Jim Bowles, president of ConocoPhillips Alaska. "This new level of cooperation is a very positive outcome and is essential for a solution to the natural gas development issues facing Southcentral and the state as a whole."

"Extending the life of the Kenai LNG facility will help manage gas deliveries during peak winter demand and encourage new development," said Steven B. Hinchman, senior vice president of worldwide production, Marathon Oil.

The agreement and a summary can be found at www.dog.dnr.state.ak.us/oil/.

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