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December 2016

Vol. 21, No. 50 Week of December 11, 2016

IEP negotiations continue; cost of natural gas, supply chain critical

The Alaska Industrial Development and Export Authority’s Interior Energy Project team continues to feel optimistic about its objective to bring affordable natural gas to Fairbanks and the surrounding Alaska Interior, Gene Therriault, IEP team leader, told the AIDEA board on Dec. 1.

“We still think very much that that is possible,” Therriault said.

Gas in modest quantities is currently supplied to Fairbanks via a small liquefied natural gas plant near Point MacKenzie and a trucking operation to ship the LNG to the Interior city. The IEP concept involves increasing the gas supply by expanding the LNG plant and ramping up the LNG transportation operation.

But the price of gas delivered to Fairbanks consumers is key to the viability of the project. The price needs to be low enough to compete with the cost of heating oil, enticing consumers to convert their building heating systems from oil to gas. IEP has set a target gas price at the burner tip in Fairbanks of $15 per thousand cubic feet, a price significantly below that of the gas currently delivered to the city.

There are currently two gas utilities in Fairbanks: Fairbanks Natural Gas and the Interior Gas Utility. FNG provides the current gas supply to the central area of the city. IGU does not currently supply gas but plans to do so, once an expanded gas supply has been established.

As part of IEP, AIDEA has taken ownership of Pentex Alaska Natural Gas Co., the owner company of FNG and of the companies operating the Point MacKenzie LNG plant and the LNG trucking operation.

Expanding the gas supply

Therriault told the AIDEA board that negotiations continue with a Cook Inlet gas producer over a potential expanded gas supply for the LNG plant. Finding a supply arrangement acceptable to both the producer and IEP is tricky because, while the gas price needs to be low enough to meet the IEP gas price target, initial gas volumes will be relatively small, with no certainty over the scale of eventual gas demand in the Interior.

Similarly, the cost of expanding the LNG plant must fit within the required gas price parameters. The IEP team had been working with Salix Inc., a subsidiary of electric and gas utility company Avista Corp., on a plan for plant expansion. However, a couple of months ago, in a move to drive down costs, Salix withdrew from the project, selling its project documentation for the plant expansion to AIDEA. The idea now is that FNG will pursue the LNG plant expansion - Therriault told Petroleum News that the IEP team is working towards preparing a proposal for plant expansion that can be put before the AIDEA board for approval. Therriault told the board that Dan Britton, president of FNG, has reviewed the Salix documentation and contacted the vendors that had been involved in the LNG plant work.

Reduced transportation cost

IEP has seen success in moves to reduce the cost of transporting LNG to Fairbanks. Following successful tests in 2015 of a prototype large capacity LNG trailer, to improve the economies of scale for the LNG transportation, that trailer continues in use and FNG has ordered more trailers of the same design.

“That’s working out well to drop the delivered price of LNG into the community,” Therriault said.

As an alternative to road transportation, this fall the Alaska Railroad tested the carriage of LNG by rail, using cryogenic LNG trailers borrowed for the purpose. Britton told the AIDEA board that the railroad test had proved very successful. The challenge now is to reduce the cost associated with shipping the LNG trailers by road between the LNG plant and the railroad, and between the railroad and the LNG storage facilities in Fairbanks. For example, it may be possible to load the containers onto rail cars at some intermediate point on the railroad route, such as Houston or Pittman, Britton commented.

Consolidating the utilities

AIDEA’s plan for an expanded gas distribution system in Fairbanks is to sell Pentex to IGU, thus consolidating the utilities into a single organization that can achieve economies of scale while also implementing a fully coordinated gas distribution system. The IEP team had hoped to complete a draft agreement for the Pentex purchase by IGU by the end of this year. Therriault told Petroleum News that negotiations over the purchase are now likely to continue beyond December but that the IEP team hopes to present an agreement to the AIDEA board early in 2017.

Therriault told the board that Jim Whitaker, Gov. Bill Walker’s senior adviser for major projects, is now acting as a facilitator in the negotiations between the two Fairbanks utilities. IGU would like to see more of the state funding for the project made available, but there are limitations on how those funds can be used, Therriault said.

Encouraging conversion

With the rate of conversion of Fairbanks homes and businesses to the use of natural gas being so critical to the economics of IEP, the IEP team continues to seek ways to alleviate the conversion costs - the drop in the price of fuel oil following the fall in oil prices since 2014 has rendered the gas conversion question particularly challenging. One possibility is the passing of Property Assessed Clean Energy, or PACE, legislation in Alaska. Legislation of this type, which enables low-interest loans for energy conversions, is being re-introduced in the upcoming legislative session, having missed the cut in this year’s session.

The PACE legislation would only apply to commercial properties. The use of PACE for residential properties has been tried in some states but has run into difficulties relating to the transfer of a PACE loan to a house buyer after a house sale, Therriault commented. Essentially, under mortgage arrangements, the transfer of a PACE loan can disqualify a buyer from obtaining financing, he said.

Originated in 2013

IEP originated in 2013 as a consequence of legislation introduced by then Gov. Sean Parnell. The idea was to alleviate the high cost of energy in Fairbanks by making available an affordable supply of natural gas. A secondary purpose was to eliminate the severe winter air pollution in Fairbanks by encouraging residents to use clean burning gas rather than wood stoves for heating their homes.

Unusually for AIDEA, the project was mandated by the Legislature, with state funding appropriated for the project. The Legislature also approved the use of AIDEA loans for some of the project funding.

Originally the plan, as set out in the legislation, was to purchase and liquefy natural gas on the North Slope and then truck the LNG to Fairbanks using the Dalton Highway. The project built a gravel pad on the Slope for the LNG plant, developed a plan for the construction of the plant and advanced negotiations with the Fairbanks utilities. But in January 2015 AIDEA called a halt to the project when it became apparent that the capital and operating costs were going to be too high to meet the project objectives.

A change in direction

Instead, with legislative approval, AIDEA opened up the project to the possibility of obtaining gas from either the North Slope or the Cook Inlet basin; to the possibility of shipping the gas by pipeline as well as in the form of LNG; and even to the possibility of using energy alternatives such as propane. With a source of North Slope gas already established, the Alaska Department of Commerce, Community and Economic Development, AIDEA’s parent agency, led an effort to secure an alternative gas supply from Cook Inlet, while the IEP team sought proposals for transporting gas to Fairbanks.

The upshot was a project in which the team entered into gas supply negotiations with a Cook Inlet gas producer while working with Salix on a plan for a Cook Inlet LNG plant. Meanwhile, in 2015, in anticipation of an enlarged gas supply for Fairbanks, FNG and IGU moved ahead with expansions of their gas distribution systems in the city, using funding from AIDEA loans. Also in 2015, AIDEA purchased Pentex, thus becoming owner of FNG and FNG’s gas supply chain.

But, under the terms of the 2015 legislative authorization for the broadened scope of the project, the expansion of the Fairbanks gas distribution network was suspended after the 2015 construction season, pending AIDEA approval of new gas supply arrangements.

So, at present, AIDEA owns and operates Pentex’s Fairbanks gas supply operation, with plans to sell that operation to IGU. The agency anticipates expanding the Cook Inlet gas supply for the operation at an acceptable gas price. Salix has left the project, but AIDEA’s IEP team anticipates expanding the Point MacKenzie LNG facility at an acceptable cost, thus boosting the LNG deliveries to Fairbanks. This would support an expanded gas distribution system in the city and an increasing number of natural gas consumers.

- ALAN BAILEY





No change to Fairbanks gas price

During its Dec. 1 meeting the board of the Alaska Industrial Development and Export Authority approved a resolution that there will be no change to the price of gas in the New Year for customers of Fairbanks Natural Gas. AIDEA currently owns FNG and, as a state agency, regulates FNG’s tariff in place of the Regulatory Commission of Alaska. Also, as a government agency rather than a private company, AIDEA was able to reduce FNG gas pricing in 2016 relative to price levels when FNG was privately owned.

The board also approved a change in FNG’s fiscal year, to have the fiscal year end on June 30 rather than Dec. 31. That will line up the gas utility’s fiscal year with that of AIDEA. As a consequence there will be another gas rate review at the end of June.

With price increases scheduled for the gas which Hilcorp supplies to FNG, and with warmer than average weather and low fuel oil prices both softening the demand for natural gas in Fairbanks, the FNG gas price may have to go up for the 2018 fiscal year, Dan Britton, president of FNG, told the board.

—ALAN BAILEY


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