Tuesday, November 25, 2014

Trade with Alaska and Hawaii

By Michael A. Moore

If project cargo and consumer goods shipments are any indicators of economic health, Alaska and Hawaii are in much better shape this year than any time since the recession hit.

"We're optimistic in both states,"said Mark Tabbutt, Chairman of Saltchuk, the Seattle-based holding company that owns a family of companies that serve the shipping, logistics and petroleum storage and transport needs of the two states. "They have different drivers but many things in common as well."

Mark Tabbutt is bullish on the economic futures of both states. Saltchuk has invested hundreds of millions in the last several years upgrading its Totem Ocean ships which serve the Alaska trade as well as buying and investing in Hawaiian transport companies.

"The two principal indicators of Alaska's economic health are big projects and consumer confidence," said Tabbutt. "There has always been a big project supporting Alaska's economy, right now there five big projects either underway or in the planning stages, pumping money and jobs into the economy.

"Alaska is about responsible resource development, and there is a lot more of that waiting to be done."

Big Projects in the Pipeline
Alaska's big projects are part of a major resurgence of petroleum industry activity. Changes in the tax code that weathered a recent ballot initiative have given a boost to exploration and development – a boost that came just in time to help keep the Alaska Pipeline's flow of oil from dropping below a critical threshold of 25 percent of capacity.

Those projects include several by Conoco Philips, which started moving forward in 2014 with the CD-5 project in the National Petroleum Reserve-Alaska (NPR-A). CD-5 is expected to produce up to 16,000 barrels of oil a day beginning in late 2015 as an extension of the Alpine field and will be the first oil development in the NPR-A.

Conoco-Philips' other projects include two additional rigs already producing additional oil at Kuparuk, a new-build rotary rig, Doyon 142, a new drill site at Kuparuk (Drill Site 2S), a new satellite development at Alpine (GMT1) and a new viscous oil development at Kuparuk called 1H NEWS. Drill Site 2S, GMT1 and 1H NEWS could add an additional 40,000 barrels a day to North Slope production in 2018. These new projects amount to more than $2 billion worth of new investment, and will create hundreds of new jobs during construction.

British Petroleum is also making new big moves in Alaska, moves which are attributed to the change in the oil tax regime.

BP announced in April that it agreed to sell interests in four BP-operated oilfields on the North Slope of Alaska to Texas independent Hilcorp. The sale agreement includes all of BP's interests in the Endicott and Northstar oilfields and a 50 percent interest in each of the Liberty and the Milne Point fields. The sale also includes BP's interests in the oil and gas pipelines associated with these fields.

"This agreement will help build a more competitive and sustainable business for BP in Alaska" said BP Upstream Chief Executive Lamar McKay. "It will allow us to play to two of our great strengths, managing giant fields and gas value chains. We will now concentrate on continuing development and production from the giant Prudhoe Bay field and working to advance the future opportunity of Alaska LNG."

The agreement does not affect BP's position as operator and co-owner of the Prudhoe Bay oilfield nor its other interests in Alaska. BP also expects to submit a development plan for Liberty by the end of 2014. As a result of the sale and subject to approval, Hilcorp is expected to become the operator of the Endicott, Northstar and Milne Point oilfields and their associated pipelines and infrastructure.

"There are some big benefits from this transaction," said Janet Weiss, President of BP's Alaska Region. "BP will be able to focus on maximizing production from Prudhoe Bay and advancing the Alaska LNG opportunity. Hilcorp takes ownership of two mature oil fields ready for new investment and activity, and it will operate a third field that is primed for accelerated production. And, the state gets another accomplished operator working the North Slope. Thanks to tax reform, Alaska is now on course for increased investment and production and even the possibility of LNG."

BP remains committed to its plans for increased investment at Prudhoe Bay, which have resulted from recent oil tax reform by the State of Alaska. The plans include adding two drilling rigs, one in 2015 and a second in 2016, for a total incremental $1 billion investment over five years. These activities are expected to account for 200 Alaska jobs and 30 to 40 additional wells being drilled each year, bringing a boost to both the company's operations and the state's economy.

The sale, subject to state and federal regulatory approval, is anticipated to be complete by the end of the year. Financial details of the transaction are not being disclosed.

Shell is expected to return to its Chukchi Sea deepwater exploration in 2015 if the Bureau of Ocean Energy Management (BOEM) can produce a revised Environmental Impact Statement (EIS) that satisfies a the Ninth Circuit Court of Appeals in time. The Court ruled last January that the original BOEM EIS underestimated the potential oil reserves in the Chukchi – the original estimate was an educated guess of one billion barrels. The estimate of reserves has since been raised to more than ten billion barrels of oil. An Alaska tribal group and several environmental organizations sued to stop the drilling pending revision of the EIS, since the estimated reserves determine the size of clean-up that may be required in case of a blow-out or other accident. The BOEM has stated it will publish a review draft of the revised EIS late this fall and expects to have the new EIS approved by April of 2015. If that schedule holds, Shell would be able to embark on an expanded drilling program with a drill ship and a floating offshore platform in July of 2015.

The biggest projects of all have to do with North Slope natural gas, pipelines and LNG plants.

On March 30, 2012, the chief executives of ExxonMobil, ConocoPhillips and BP wrote to Alaska Gov. Sean Parnell, stating that their companies had started working with TransCanada to assess whether a project to export liquefied natural gas from Alaska to Asia made more sense than a pipeline to serve North America.

After uniting to pursue an LNG export project, the three North Slope producers and TransCanada worked in 2012 and 2013 to better define the project and start filling environmental data gaps along the route, in addition to beginning early-stage engineering and design work.

By 2014, the North Slope producers had formed a joint venture and named their project Alaska LNG, and the state had become an equity investor, partnering with TransCanada. The project entered the pre-front-end engineering and design stage, or pre-FEED, expected to last through 2015 and cost about $500 million. A decision to continue the project at that point would take the project to FEED, costing several billion dollars and lasting two to three years, when design and engineering would be refined and permits obtained. The FEED stage precedes a final investment decision to begin construction.

The companies' plan envisions a development costing $45 billion to more than $65 billion for a gas treatment plant on the North Slope to remove carbon dioxide and other impurities from the gas stream; roughly 800 miles of 42-inch-diameter, highly pressurized pipeline to tidewater; a gas liquefaction plant in Nikiski on the Kenai Peninsula; and LNG storage tanks and a tanker terminal at the Nikiski site. The project would be capable of exporting up to 20 million metric tons of LNG annually, the equivalent of 2.5 billion cubic feet a day of gas.

The pipeline concept will also provide at least five points from which spur lines could be built to provide gas to Alaskans. Utilities, private companies, the state or someone else would need to build spur lines or local distribution lines from the gas-takeoff points; that would not be part of the main-line work.

Alaska Gas May Change Hawaii Economy
One potential destination for Alaska LNG would be Hawaii. Hawaiian Electric Company issued a request for proposal (RFP) in March for the supply and delivery of up to 0.8 million tons per annum (mtpa) of Liquefied Natural Gas (LNG), to be supplied by ISO Containers ("Containerized LNG") for a term of up to 15 years, commencing in late 2016/early 2017. Hawaiian Electric intends to use the LNG as a replacement fuel for power generation on Oahu, Big Island, Maui, Molokai and Lanai in the State of Hawaii. "If Hawaii can switch to natural gas sources out of Alaska it will lower the electric rate substantially and help the state get away from its dependence on oil," said Mark Tabbutt. Saltchuk's Hawaii holdings include Foss Maritime which operates tug and liner barge operator Young Brothers. HECO's LNG strategy aims to reduce the prohibitively high cost of electricity on the islands. The average residential electricity rate in the HECO Oahu service territory in 2013 was $0.346 per kilowatt-hour. For context, the average US residential electricity price was $0.12 per kilowatt-hour.

One harbinger of LNG containers on the horizon of Hawaii's future may be Chevron's recent announcement it is putting its Hawaiian refinery up for sale.

Meanwhile, Hawaii's economy has improved dramatically over a year ago. More than two million private building construction permits had been issued for 2014 as of August compared to 1,746,000 for the same period in 2013.

"We're very optimistic about Hawaii construction as we've worked in the islands for nearly a decade," said Alan Rindlisbacher, Director of Corporate Marketing for Layton Construction. "We started with a hospitality project at Koloa Landing at Poipu Beach on Kauai, and have expanded to do work in hospitality, education, retail, finance and healthcare on several islands. Our forecast for future growth is good, and that bodes well for the shipping industry, too, as construction materials need to be delivered to the islands."

Increased construction activity for Layton and other Hawaiian builders affects Hawaiian shippers such as Pasha, Matson, Horizon and Aloha Marine Lines.

"The overall Hawaii economy is healthy with unemployment approaching 4 percent and the number of jobs nearing pre-recession levels," said Chuck Patton, Senior Vice President, Pasha Hawaii. "The rest of 2014 and next year are forecast for more steady growth based on current trends nationally, in tourism and in the labor market.

"In Pasha Hawaii's core markets of autos and oversize cargo, the trends are even more positive. The new vehicle market is forecast to increase almost 10 percent in 2014 versus 2013, which continues the trend of double digit growth the last few years. Private building permits are projected to increase more than 18 percent in 2014 versus 2013. There are several large construction projects underway, including the Honolulu Rail Transit Project and the Kakaako redevelopment, which will require the shipment of a wide array of cargo. In addition, there are numerous infrastructure projects on the horizon that have need for innovative logistics solutions."