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Vol. 21, No. 43 Week of October 23, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Establishing a viable gas resource

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IEP team still negotiating with gas supplier, LNG plant developer to establish an LNG supply with a workable gas price in Fairbanks

ALAN BAILEY

Petroleum News

In its latest quarterly report to the Alaska Legislature, the Alaska Industrial Development and Export Authority’s Interior Energy Project team says it is still negotiating with a Cook Inlet gas producer over the terms of a potential gas supply for the city of Fairbanks. The team is also working with Salix Inc. on the commercial terms and technical design for a liquefied natural gas plant, to liquefy gas for transportation to Fairbanks as LNG.

The objective is to establish an affordable energy supply for Fairbanks and the surrounding Interior, to replace the use of fuel oil for heating buildings and for electricity generation. Natural gas, at an appropriate price, is seen as the vehicle for achieving the project objectives - the team has set a target price of about $15 per thousand cubic feet “at the burner tip” for project viability.

Lengthy negotiations

The new report says negotiations with a gas producer are taking longer than anticipated. The idea is to sign a deal for a long-term gas supply, starting in 2018. But the need for a low price, coupled with flexibility over supply volumes, is complicating securing an agreement, the new report says. Presumably flexibility is needed because of uncertainty over future levels of gas demand in Fairbanks, with demand dependent on how many people convert their houses to the use of gas once a supply becomes available.

At the beginning of March the IEP team selected Salix as the vendor for construction and operation of the LNG plant, to be sited somewhere close to Cook Inlet. Since making that selection, the IEP team, including representatives from Fairbanks Natural Gas and the Interior Gas Utility, the two Fairbanks gas utilities, have been working with Salix to advance the LNG plant project to a point where the AIDEA board can decide whether to proceed to the front end engineering and design for the plant.

“All parties are focused on developing and financing the LNG plant in a manner that provides the lowest cost and risk to Interior natural gas customers,” the new report says.

Expand the LNG supply

FNG, one of the Fairbanks utilities, already supplies natural gas to some customers in the central part of Fairbanks by trucking LNG from a small LNG plant at Port MacKenzie on Cook Inlet. The idea behind the IEP is to greatly expand that supply and reduce the cost of the gas.

In 2015 AIDEA purchased Pentex Alaska Natural Gas Co., the owner company of FNG, and of Titan, the company that owns and operates the existing Port MacKenzie LNG plant. As a government agency and through its ownership of FNG, AIDEA has been able to reduce the price of gas for FNG’s existing customers, although that price remains substantially above the $15 target level.

AIDEA’s strategy has been to engineer a consolidation of the two Fairbanks utilities, enabling the gas distribution network in Fairbanks to be optimized as that network is built out. The agency plans to achieve this consolidation by selling FNG to IGU. The hope had been to achieve that sale in June of this year, but, given the various uncertainties associated with the IEP, AIDEA has extended the target date for the transition to the end of the year.

Supply chain

The planned supply chain for the delivery of gas to Fairbanks consumers involves several steps. In addition to a supply of gas from the Cook Inlet basin and the liquefaction of the gas in a suitable plant, the produced LNG must be transported to Fairbanks, and then stored, gasified and distributed in the Fairbanks region.

The IEP team is considering two LNG transportation options: shipment by rail, using the Alaska Railroad, and trucking on the Alaska highway system.

The Alaska Railroad Corp. is currently evaluating the rail transportation option by trying out the shipment of LNG between Anchorage and Fairbanks using two 40-foot LNG containers that the railroad has borrowed for test purposes. To enable the testing, LNG is being trucked from Port MacKenzie to the Anchorage railroad depot and in Fairbanks from the railroad terminal to FNG’s LNG storage facility.

To evaluate the practicalities of the trucking option, in 2015 AIDEA took delivery of a prototype LNG trailer with an Alaska carrying capacity of about 12,300 gallons. That compares with the 10,500-gallon capacity of the trailers that are currently in use. Following successful test runs with the new trailer, Titan has purchased the prototype trailer and ordered three additional similar trailers, to replace the aging trailers in its fleet, the report says. The additional trailers are expected in mid-2017, the report says. Apparently Titan has requested the new trailers to be configured, if possible, to be able to tow “pup” trailers, to increase carrying capacity.

Distribution network

In 2015 FNG and IGU began building out their gas distribution pipeline networks in Fairbanks, in anticipation of an increased gas supply for the city. However, the expansion of the distribution system has been on hold since October 2015. In the meantime FNG has been coordinating any pipeline installations that can usefully be accomplished in conjunction with major road works that are being carried out.

AIDEA and IGU are continuing to advance a plan for the physical integration of the FNG and IGU gas distribution systems, including the expansion of the LNG storage and re-gasification facilities in Fairbanks. And, in anticipation of the merger of the two utilities, AIDEA and IGU have been exchanging term sheets and have substantially completed a financial plan, the new report says.

Conversion incentives

With the need for a sufficient number of Fairbanks residents to convert to the use of natural gas for home heating being a key factor in the economics of the IEP, the recent decline in the price of home heating fuel oil has been driving an interest in finding ways to incentivize residents to make the conversion. The report says that consultancy firm Cardno Entrix has revised the estimates for conversions, using the lower oil price. However, the report also points out that the future price of oil is uncertain.

Potential conversion incentives include low cost financing and the possibility of transferring the loan repayment obligation to a new building owner following the sale of a building. Property Assessed Clean Energy, or PACE, legislation that has been proposed for Alaska could provide a mechanism for low interest, relatively long-term loans to assist energy efficiency projects.

Project funding

Funding for the Interior Energy Project comes from three sources: a $57.5 million state capital appropriation; $125 million in loans through AIDEA’s Sustainable Energy Transmission and Supply, or SETS, program; and $150 million in state bonds. So far AIDEA has spent $14.6 million of the capital appropriation, including $14.1 million for an earlier initiative to build an LNG plant on the North Slope. AIDEA has issued $52.7 million in SETS loans for the buildout of the storage and gas distribution system in Fairbanks. No state bonds have yet been issued for the project.

Funding for the purchase of Pentex came from a separate AIDEA revolving fund - AIDEA anticipates recovering that cost from the subsequent sale of the business.



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