ExxonMobil Corp. and Fairbanks Natural Gas LLC (FNG) have struck a long-term contract to supply Alaska North Slope gas to FNG customers in interior Alaska, the companies said last week. The deal could indirectly help head off a shortage of natural gas in the Cook Inlet area, and it is seen by lawmakers as a crack in the ice in the state's relationship with North Slope natural gas leaseholders.

ExxonMobil Gas & Power Marketing Co. will supply gas to a new gas liquefaction plant at Prudhoe Bay to be built and owned by Polar LNG LLC, an affiliate of FNG. FNG will truck the LNG nearly 500 miles from the North Slope to its Fairbanks distribution system. FNG owns and operates two LNG storage and regasification facilities in Fairbanks.

"We are pleased to be able to provide a reliable supply of natural gas to Fairbanks from the North Slope," said Craig A. Haymes, ExxonMobil Alaska production manager. "We continue to look for viable projects to demonstrate ExxonMobil's commitment to commercializing North Slope gas."

Gov. Sarah Palin and several Alaska lawmakers heralded the deal as a breakthrough as it marks the first time a major natural gas holder has agreed to sell gas from the North Slope. Alaska is currently engaged in the review of a proposal to commercialize North Slope reserves with a pipeline project to the Lower 48 (see NGI, Feb. 4). "It's a breakthrough on getting gas off the North Slope," Sen. Charlie Huggins (R-Wasilla) told the Anchorage Daily News. Palin has had a rocky relationship with North Slope producers, ExxonMobil among them as well as BP and ConocoPhillips (see NGI, Jan. 14).

The supply contract calls for FNG to receive up to 10 Bcf/year for a 10-year period beginning in mid-2009 when the necessary facilities are expected to be completed. The contract also allows for annual renewal after the initial 10 years.

"Once we have finalized on a tapping location that is acceptable, we're looking at a 16 to 24 month timeline to have that facility be constructed," FNG President Daniel W. Britton told NGI. "We're finalizing on the capacity of the plant now, but it will be on the order of magnitude of 10 to 20 MMcf/d of liquefaction capacity, possibly a little bit bigger."

The liquefaction plant is expected to cost $20-40 million, and trailers to carry the LNG will cost another $3-10 million. Britton said FNG had been in discussions with ExxonMobil for almost a year and had talked with other North Slope gas producers as well. The primary driver of the project is to ensure security of gas supply, particularly since supplies are tight in the Cook Inlet area, where FNG currently gets its gas. Britton said a pipeline to serve FNG would be too costly for the size of its market.

FNG initiated gas service to its first customer during the spring of 1998 and now serves more than 1,100 residential and commercial customers. FNG said it continues to broaden its underground distribution system to serve the Fairbanks community. There still is no gas pipeline to bring supplies to the area. FNG trucks in LNG from the Cook Inlet area that it buys from the area's local distribution utility, Enstar Natural Gas Co. The LNG is stored at FNG's two Fairbanks LNG storage and vaporization facilities until gas is needed to serve FNG customers.

The Cook Inlet area has been struggling to boost its own supplies of natural gas. A recent agreement between the state and the owners of an LNG liquefaction plant on the Kenai Peninsula specified that the owners, Marathon Oil Corp. and ConocoPhillips, develop additional gas reserves in Cook Inlet and allow third parties 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 (see NGI, Jan. 7).

Last year saw the announcement of the closure of a fertilizer plant in Kenai, AK, due to a shortage of gas. In addition to the development of area reserves, other options that have been considered to bring more gas to the region are a spur pipeline off a larger Lower 48-bound pipeline from Fairbanks to Cook Inlet, as well as a bullet line to bring gas from the North Slope to Cook Inlet (see NGI, Oct. 1, 2007).

Enstar spokesman Curtis Thayer told NGI last week that discussions for a bullet line are ongoing with some of the smaller producers on the North Slope and there is a meeting this week, in fact. Thayer said it's a good thing FNG is lining up gas supply from ExxonMobil because it isn't clear that Enstar can continue providing it with gas beyond the end of this year.

ExxonMobil holds the largest working interest (36.4%) at Prudhoe Bay and is the largest leaseholder of discovered gas resources in Alaska.

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