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Vol 21, No. 31 Week of July 31, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

AIDEA reports on Interior Energy Project

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Agency’s initiative to bring affordable energy to the Fairbanks area has slowed but continues to move towards key decision points

ALAN BAILEY

Petroleum News

In its latest quarterly report to the Alaska Legislature, published in early July, the Alaska Industrial Development and Export Authority’s Interior Energy Project described continuing progress towards an expanded natural gas supply for Fairbanks and the surrounding area of the Alaska Interior. However, with a decision yet to be taken on whether to proceed with the development of a new liquefied natural gas plant to underpin the supply boost, and with no further expansion to the gas distribution network in Fairbanks this year, the pace of the project has clearly slowed.

The essential purpose of the project is to reduce the cost of energy for Interior residents, given the past high cost of heating oil and of oil-fueled power generation. And, by providing affordable natural gas, the project anticipates reducing the use of wood-burning stoves for heating houses, thus addressing the severe winter air pollution issues resulting from wood smoke in the Fairbanks area.

Competitive pricing

The recent drop in the price of oil impacts the motivation for Fairbanks residents to convert to natural gas, thus presumably creating a need for particularly competitive natural gas pricing. The project has been targeting a price of $15 per thousand cubic feet for gas delivered to houses in the Fairbanks area.

In 2015 AIDEA purchased Pentex Natural Gas Co., the owner of gas utility Fairbanks Natural Gas, of a small LNG plant at Point Mackenzie on the Cook Inlet and of a road transportation service for delivering LNG to Fairbanks. Through its ownership of Pentex, AIDEA has been able to reduce the cost of gas for Fairbanks Natural Gas customers. But, especially given the small scale of the gas supply operation, and given the pricing of the gas delivered to the LNG plant, the price of the gas in Fairbanks is well above that $15 target level. And the existing service only supports a relatively small number of customers in central Fairbanks.

AIDEA wants to greatly expand the gas supply while also merging Fairbanks Natural Gas with the Interior Gas Utility, the other gas utility for the Fairbanks area. The consolidated utility would be spun off as an independent entity.

In March the Interior Energy Project team recommended to the AIDEA board that a proposal by Salix Inc. to build a new LNG plant in the Cook Inlet region be selected as the basis for an enlarged and cheaper Fairbanks gas supply. However, the team has yet to put before the board a completed plan for the plant development, to enable the board to make a formal decision on whether to authorize the front-end engineering and design phase of the plant construction project.

Five-stage supply chain

The July report to the Legislature considers a five-stage supply chain for Fairbanks natural gas delivery: a supply of natural gas from the Cook Inlet basin; the liquefaction of the gas in the Cook Inlet region; the transportation of LNG to Fairbanks; the storage and re-gasification of the LNG, coupled with the distribution of gas in Fairbanks; and the conversion of buildings in Fairbanks to the use of natural gas for heating.

In terms of a Cook Inlet gas supply, the Interior Energy Project team is working to finalize a long-term supply contract with a Cook Inlet producer, starting in 2018, the report says. Currently Hilcorp Alaska supplies gas to the existing LNG plant through a contract which runs through the beginning of 2018.

Liquefaction

Since March, to progress the proposed new Cook Inlet LNG plant, the project team, together with representatives from Fairbanks Natural Gas and the Interior Gas Utility, has been working with Salix to advance the LNG project’s commercial terms and technical design. Key products from this work will be details of project financing, the pricing of the LNG and the assignment of project risks. Another anticipated product is a contract for the funding of work associated with front-end engineering and design, the report says.

The start of front-end engineering and design will be contingent on AIDEA board approval. And after that stage of the project has been completed the board will make a final investment decision for the construction of the LNG plant.

One issue that has arisen is the possibility that exploration drilling that Doyon Ltd. is currently conducting in the Nenana basin could result in a gas supply for Fairbanks, as an alternative to what the Interior Energy Project is proposing.

“The team has evaluated available information associated with the ongoing Nenana basin exploration,” the report says.

Transportation

The Interior Energy Project anticipates transporting LNG to Fairbanks by road, along similar lines to the existing LNG supply service. But, to achieve economies of scale, the project team anticipates using larger LNG trailers than the 10,500-gallon capacity trailers currently in use. The team has been testing a prototype 13,000-gallon trailer supplied by Western Cascade, although highway restrictions in Alaska would limit the capacity to about 12,300 gallons, the report says.

The Fairbanks Natural Gas affiliate that currently ships LNG to Fairbanks has already purchased the prototype trailer and has ordered three more similar trailers, to replace aging trailers in its fleet and reduce its transportation costs, the report says.

With the future railroad transportation of LNG being another possibility, the Alaska Railroad has arranged with Hitachi High-Tech AW Cryo to bring two 40-foot LNG containers from Japan in September, for a pilot project involving the transportation of LNG to Fairbanks by rail.

Fairbanks distribution

Although there has been no further buildout since October 2015 of the gas distribution system in Fairbanks, the Interior Energy Project has continued discussions on how future system expansion can be carried out in a way that facilitates the consolidation of the Fairbanks Natural Gas and Interior Gas Utility distribution systems into a single entity. And Fairbanks Natural Gas has been working with the City of Fairbanks, the Fairbanks North Star Borough and the Alaska Department of Transportation and Public Facilities to coordinate any gas pipe installations that might be done efficiently in conjunction with major roadwork, the report says.

AIDEA had originally envisaged consolidating the two existing Fairbanks gas utilities by selling Fairbanks Natural Gas to the Interior Energy Project by the end of June. But the parties involved have now deferred the target date for consolidation to the end of 2016, the report says. Meanwhile, the utilities have been exchanging term sheets, advancing a plan for the physical integration of their distribution systems, and conducting economic modeling of the consolidated system.

Gas conversions

Given the economic challenges to the project emanating from the current low price of oil, efforts towards encouraging consumer gas conversions have been focusing on the availability of low-cost loans and other financing mechanisms to help fund the conversions. There are multiple potential funding sources, including commercial loans; government loans and grants; and energy efficiency and clean air programs.

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, with $14.1 million of that expenditure going into an earlier initiative to build an LNG plant on the North Slope. So far 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.

The $54 million required for the purchase of Pentex came from a separate AIDEA revolving fund - the agency anticipates recovering this cost and making a return on the investment through the eventual sale of the business.



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