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January 2016

Vol. 21, No. 4 Week of January 24, 2016

Interior Energy Project reports progress

Moving toward decision on LNG supply for Fairbanks from either the North Slope or Cook Inlet; prototype LNG trailer being tested

ALAN BAILEY

Petroleum News

The Alaska Industrial Development and Export Authority’s Interior Energy Project has submitted its latest quarterly report to the Alaska Legislature, describing progress in making a major boost to gas supplies for the city of Fairbanks and the surrounding region of Interior Alaska. The idea is to reduce fuel costs in the Interior by making natural gas readily available to residents and businesses, while also improving air quality in Fairbanks by lowering the incentive to use pollution causing, wood burning stoves.

Two concepts

Having received several responses to a request for proposal for the gas supply arrangements, the team has narrowed the supply options to two concepts, both involving the manufacture of liquefied natural gas and the transportation of LNG to Fairbanks. One option involves the construction of an LNG plant in the Cook Inlet region, while the other involves the construction of an LNG plant on the North Slope. In both cases the LNG would probably be trucked to Fairbanks by road, although shipment by railroad is also a possibility for LNG from Cook Inlet.

Robert Shefchik, Interior Energy Project team leader, told the AIDEA board during the board’s Jan. 13 meeting that the evaluation committee for the LNG proposals anticipates meeting on Jan. 22, with a view to putting a recommendation for a preferred LNG option to the board ahead of a special board meeting in the latter half of February, or by the board’s scheduled meeting on March 3, at the latest. The board can then formally decide which option to adopt.

This timeframe is consistent with the project development schedule that each of the two short-listed proposers have put forward, Shefchik said.

Progress on gas supply

Progress has also been made in establishing a gas supply for either LNG option, the Interior Energy Project quarterly report says.

If the North Slope option is picked, Golden Valley Electric Association, the Fairbanks electric utility, has formed a joint venture called Northern Lights Gas with engineering firm MWH to market gas using an existing North Slope gas supply contract between Golden Valley and BP, the report says. AIDEA has been holding talks with Northern Lights Gas to determine the terms and conditions for the sale of gas to the partners in the Interior Energy Project. The project is also evaluating potential gas supply options from other North Slope producers, the report says.

In the Cook Inlet region, the Interior Energy Project team has been evaluating responses to a request for interest in providing an appropriate gas supply. And the identification of a selected gas supply arrangement, with costs and expected terms, forms part of the process for selecting an LNG option from the request for proposal, the report says.

The two finalists being considered for an LNG supply are Spectrum, a western U.S. regional LNG producer, and Salix, a subsidiary of northwestern U.S. electric and gas utility Avista Corp. Spectrum proposes the North Slope option while Salix favors a Cook Inlet supply. The Spectrum North Slope plant would have an initial gas processing capacity of 6 billion cubic feet per year, while the Salix plant would have an initial capacity of 3 bcf per year, the report says.

Oil price challenge

The falling cost of fuel oil in Fairbanks, as world crude oil prices drop, is presenting some challenges for the project, as oil becomes more cost competitive with gas. In mid-December the Golden Valley Electric board authorized a long-term oil supply for use in the utility’s North Pole dual-fuel power plant. That will have the effect of limiting Golden Valley’s purchase of Fairbanks LNG to the summer. This summer purchase of LNG will compensate for an otherwise low seasonal gas load at that time, although the overall lower annual gas demand for power generation may cause higher space heating costs in Fairbanks, the report says.

And the low oil prices have triggered a re-work of projections of the anticipated rate at which Fairbanks residents may convert their home heating systems to gas rather than oil. The team now expects conversions to drop by about one-third from earlier projections. First conversions should take place in 2017, as new gas supplies start to come available, with the number of conversions increasing from some 1,600 in that first year to a cumulative total of some 10,800 by 2023, the report says. The team is investigating means whereby people could obtain financial assistance with gas conversion. Possibilities include commercial loans; and funding from state and federal government energy efficiency, clean energy, air quality and clean water programs.

Road tests for trailer

From the perspective of shipping LNG to Fairbanks, a prototype, large capacity LNG trailer is undergoing Alaska road tests. Tests will be conducted on both the Parks Highway and the Dalton Highway, the two highways to Fairbanks from the south and the north, the report says. And, having approved the carriage of LNG on the Alaska Railroad for a small scale test, the Federal Railroad Commission has now increased the volume of LNG that the railroad can carry and extended the time period for the LNG carriage approval, thus opening the possibility of shipping LNG from the Cook Inlet region by rail. Salix is working closely with the Alaska Railroad on this possibility, the report says.

In anticipation of a much expanded gas supply, the build out of the gas distribution pipeline system in the Fairbanks area by utilities Fairbanks Natural Gas and the Interior Gas Utility continued throughout the summer of 2015, the report says. Fairbanks Natural Gas has now added more than 60 miles of new pipeline to its system in central Fairbanks. The Interior Gas Utility installed 73 miles of pipeline in the North Pole area.

Pentex purchase

On Sept. 30 AIDEA completed its purchase of Pentex Natural Gas Co. LLC, the owner of Fairbanks Natural Gas, a small LNG plant near Point MacKenzie on Cook Inlet and a transportation business that trucks LNG from Point MacKenzie to Fairbanks. As a consequence of AIDEA’s ownership, Fairbanks Natural Gas has proposed reducing the gas rates for its residential customers by 13.5 percent.

The eventual objective is to combine Fairbanks Natural Gas and the Interior Gas Utility into a single operation that would be spun off to a local control entity. Based on discussions with several entities, AIDEA has begun discussions with the Interior Gas Utility over that utility’s potential purchase of Fairbanks Natural Gas, and possibly also of the associated Point MacKenzie LNG plant and LNG trucking operation. The objective is to complete negotiations by March 31, with a target of closing transactions by June 30, the report says.

And on Dec. 4 utility representatives met with personnel from AIDEA and the Alaska Energy Authority in the Anchorage offices of Enstar Natural Gas Co. to discuss LNG storage and distribution system design options for an integrated Fairbanks gas distribution network. Following further meetings, final system build out models are expected by the end of June, the report says.

$14.3 million spent

So far AIDEA has spent $14.3 million of a $57.5 million capital appropriation by the state Legislature on the Interior Energy Project, the report says. $14.1 million of that expenditure went into an initiative to build an LNG plant on the North Slope, including $6 million for the construction of a gravel pad on the Slope for the proposed plant. The current initiative, involving the request for proposal for a Fairbanks LNG supply, came about after engineering work and associated cost estimating had shown the original initiative to be uneconomic.

So far AIDEA has issued $53.7 million in loans under Sustainable Energy Transmission and Supply, or SETS, funding to the Fairbanks utilities for the build out of the storage and gas distribution system in Fairbanks. Total available SETS funding for the project is $125 million. The legislature has also authorized the issue of $150 million in bonds for the project, but no bonds have yet been issued, the report says.






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