Sunday, March 13, 2011

Japan Looking For Replacement Supplies Of Fuel Oil And LNG; Perhaps ConocoPhillips Will Delay Mothballing The Nikiski LNG Plant In Alaska To Supply Japan's Needs

The Economic Times is reporting that because of the need to replace nuclear electricity supplies put out of action following the nation's worst earthquake in recorded history, Japan will be looking to more liquefied natural gas (LNG) and low-sulphur fuels to generate power at thermal plants. It is estimated that the earthquake and tsunami caused the loss of an estimated 9,700 megawatts (MW) of nuclear, about a fifth of total capacity, as well as 10,831 MW of thermal power generation. Another 2,670 MW of nuclear power was already shut down at the time of the earthquake for regularly-scheduled inspection.

It appears that the Japanese would prefer to use fuel oil. "Given its flexibility, an oil fired power plant is the most suitable in replacing the shortfall of electricity generation, which means heavy crude will see an increase in use in the near term," said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo. However, a trader in Singapore warned that low-sulphur fuel oil (LSFO) supplies are tight. Furthermore, the top five Japanese utilities rely most on LNG for power generation, far surpassing the use of fuel oil and coal, even though some smaller utilities use more coal than LNG or fuel oils.

So that puts LNG back on the table, and that's of critical interest to us in Alaska. In February 2011, ConocoPhillips and Marathon Oil announced they would mothball their Nikiski LNG plant as soon as April, laying off about 60 company employees and contract workers. The plant had been an economic anchor in Nikiski for more than 40 years; at its peak, it shipped 64 billion cubic feet of gas a year to Asian markets, primarily Japan. But in recent years, shipments dwindled as other supplies of LNG flooded the Pacific Rim and the company has only been sending out a single ship. Conoco spokeswoman Natalie Lowman explained at the time that "LNG market conditions have deteriorated so continued operation of the facility for export was not economically feasible...There's a glut of LNG in Asia right now."

Well, guess what? There's no longer a "glut" in Japan. This means there could be a market incentive for ConocoPhillips to delay their decision to mothball the plant and instead keep it open. An additional incentive could be supplied if the Alaska State Government was to agree to give ConocoPhillips some special tax incentives to keep the plant open. Furthermore, ConocoPhillips could reap some public relations benefits and repair their bruised credibility by keeping it open. The Nikiski plant also serves as a storage site for surplus gas that we can draw upon during the winter when natural gas demand in South Central Alaska increases exponentially. We are constructing separate storage caverns, but they will not be ready for a couple of years, and the lack of another storage site could make us vulnerable to power shortfalls during the winter.

Key members of the Alaska State Legislature along with Governor Sean Parnell and our Congressional delegation need to begin working the phones right now, applying leverage to ConocoPhillips to delay mothballing the Nikiski plant. The justification to keep it open now exists. While I'm not exactly thrilled about the idea of us profiting from someone else's misery, the fact is that if we can benefit Alaska by helping Japan with its sudden LNG shortfall, that's a win-win situation for both of us.

Update March 14th: Alaska Dispatch reports that ConocoPhillips says that the tragedy in Japan has not changed the company's plan to shut down the Nikiski facility. They provided no explanation as to why the company would not want to consider filling Japan's shortfall. Perhaps their intransigence should be taken into consideration before changing Alaska's oil tax structure.

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