Cook inlet economic impact: Kenai Peninsula ready for industry revival.

• Author: Bradner, Mike
• Position: GAS & OIL

The closure of the Kenai liquefied natural gas plant this spring deals another blow to what remains of the Kenai Peninsula's once-vibrant industrial sector. The LNG plant is following in the wake of the closure of the Agrium Corp. fertilizer plant a few years ago. Both plants were sources of good-paying jobs for the north peninsula region.

Now, only the Tesoro refinery remains at Nikiski, the industrial zone on the North Kenai Road north of the city of Kenai.

VICTIMS OF CIRCUMSTANCE

The LNG and fertilizer plants, built 50 years ago, were victims of changing circumstances. Both plants rely on the natural gas-producing fields that once enjoyed high production rates. As gas supplies dwindled, the price of gas increased in recent years to the point that the fertilizer plant could not get gas it could afford, nor could it even get commitments from producing companies to supply gas.

The LNG plant was a victim of circumstances, too, of tightening gas supplies to the plant and changes in a complex Asian natural gas market. The plant's owners, ConocoPhillips and Marathon Oil, said they could not get the desired price from buyers for the relatively small volume of LNG the plant would ship.

ConocoPhillips and Marathon say they will maintain and keep the plant intact against the possibility it can be used in some other way, perhaps as a part of a program to import LNG for supplemental gas supplied for the regional utilities.

REFINERY SAFE FOR NOW

The Tesoro refinery seems secure, at least for now. Tesoro recently completed a significant investment in the plant to reduce the benzene content of its fuels, and is planning another investment to further reduce benzene.

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A few years ago Tesoro also made a large investment in a unit for the plant to produce ultra-low sulfur diesel. This is now required by the U.S. Environmental Protection Agency for use in trucks operating on highways and mobile off-road equipment.

Putting this kind of money into the plant would seem to be a signal the company doesn't intend to close the refinery. However, this plant faces its own set of challenges. Tesoro once considered closing it and supplying its Alaska retail outlets from the company's refineries in Washington state and Hawaii. If circumstances change or problems develop the company may revisit the idea.

GRADUAL INDUSTRY DECLINE

The Kenai Peninsula will likely always be home to the gas production industry that previously supplied the plants but will now continue to serve Southcentral electric utilities and Enstar Natural Gas Co., which supplies gas for space heating.

Gas reserves in the older fields are running down, which concerns the utilities, but...