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February 2008

Vol. 13, No. 7 Week of February 17, 2008

Exxon to sell ANS gas

Deal with Fairbanks utility viewed as precedent for larger commercialization effort

Eric Lidji

Petroleum News

ExxonMobil Corp. will start selling North Slope natural gas to Fairbanks Natural Gas LLC sometime in 2009, the companies announced on Feb. 12.

Under the 10-year contract, the natural gas utility for Fairbanks will buy up to 10 billion cubic feet of natural gas a year from ExxonMobil Gas & Power Marketing Co. The contract can be renewed annually after the initial 10-year period.

The 2009 startup date allows Fairbanks Natural Gas to complete construction of a new liquefaction plant at Prudhoe Bay. The plant will be built and owned by a Fairbanks Natural Gas affiliate called Polar LNG, LLC.

Fairbanks Natural Gas will eventually truck the liquefied natural gas nearly 500 miles along the Dalton Highway to its distribution grid in Fairbanks.

Lawmakers, governor see precedent; Exxon doesn’t

The deal between ExxonMobil and Fairbanks Natural Gas comes as state lawmakers and the governor’s gas line team discuss options for bringing North Slope natural gas to market.

Many state lawmakers and Gov. Sarah Palin immediately pointed to the contract as a precedent-setting achievement for commercializing North Slope natural gas, particularly as ExxonMobil made the deal alone, without the approval of other Prudhoe Bay partners.

“It’s proof that the producers will commercialize their gas when given the opportunity,” Palin said.

Exxon shrugged off any implications this deal might have on a large natural gas pipeline.

“I’m reluctant to say it’s precedent. It’s an opportunity we thought was a good opportunity,” said spokesman Patrick McGinn. “At this point, we look at it as a discrete event.”

Exxon used its share of natural gas at Prudhoe Bay for the contract, and therefore did not need prior approval from the unit operator, BP. However, McGinn said Exxon planned to work with BP to facilitate interconnection with the new Fairbanks Natural Gas liquefaction plant.

In a statement, ExxonMobil’s Alaska production manager Craig Haymes said, “We continue to look for viable projects to demonstrate ExxonMobil’s commitment to commercializing North Slope gas.”

Deal lets FNG leave Cook Inlet

The deal with ExxonMobil allows Fairbanks Natural Gas to end an unusual 10-year relationship with the Cook Inlet.

Fairbanks Natural Gas started in 1998 to provide an alternative to fuel oil, the dominant heating option for residences and businesses in Fairbanks.

Touting natural gas as a low cost and clean alternative to heating oil, Fairbanks Natural Gas has grown over the past 10 years to supply more than 1,100 residential and commercial customers in Fairbanks.

But because no gas pipeline exists between Fairbanks and the Southcentral natural gas fields, Fairbanks Natural Gas began trucking liquefied natural gas along the Parks Highway into Fairbanks.

For nearly 18 months, Fairbanks Natural Gas has been purchasing its supply from the Enstar Natural Gas Co. under a contract created under less than ideal circumstances back in September 2006 and the major cause for several rate increases since.

Fairbanks Natural Gas turned to Enstar after losing a supply contract with Aurora Gas LLC.

“We’re still going to be in the Cook Inlet for a while,” Fairbanks Natural Gas President Dan Britton said.

When state regulators approved the Enstar contract, they required Fairbanks Natural Gas to find a new supplier by June 30, 2008. Because the ExxonMobil contract won’t go into effect until 2009, Fairbanks Natural Gas asked Enstar to extend the emergency contract for another 10 months.

Enstar is open to the extension, but still needs to secure 2 bcf of natural gas for its own supply needs in 2009, according to Enstar spokesman Curtis Thayer.

“You add Fairbanks Natural Gas on top of that and it just widens the gap,” Thayer said.

Any deal between the companies would have to be approved by the Regulatory Commission of Alaska, but a 10-month extension would only secure a gas supply for Fairbanks Natural Gas through April 2009.

As a result, Britton said Fairbanks Natural Gas also entered into a contract with another Cook Inlet natural gas company to start supplying gas on April 1, 2009. Britton declined to name the company.

FNG hopes deal lowers costs

The new deal with ExxonMobil will lower costs for Fairbanks Natural Gas, Britton said.

Because Fairbanks Natural Gas has essentially been a large customer of Enstar, rather than buying directly from a producer, costs have jumped over the past year and a half.

As a result, Fairbanks residential customers pay $21.23 per thousand cubic feet of natural gas, among the highest rates in the country although still cheaper than fuel oil in Fairbanks based on energy output.

Even though Fairbanks Natural gas will now be trucking its liquefied natural gas much farther than it currently does, Britton expects costs to go down.

He said the company will be purchasing gas at a lower price and will gain efficiency because colder ambient temperatures on the North Slope give a degree of “free cooling.”

However, the $10 million liquefaction plant at Prudhoe Bay is now expected to cost between $20 million and $40 million, Britton said.

Deal takes advantage of new taxes

The deal will be the first to utilize a new tax cap on natural gas bound for in-state use.

Propelled partially by the lobbying efforts of Fairbanks Natural Gas during a special legislative session this past November, state lawmakers inserted the provision into legislation to raise production taxes on the oil industry.

Britton called the tax cap a decisive issue for Fairbanks Natural Gas’ plans on the North Slope.

“Otherwise we wouldn’t be able to move forward with our project,” Britton said.

For years, natural gas produced in Cook Inlet and bound for in-state markets has not been taxed as heavily as natural gas bound for export, but lawmakers never extended these breaks to other parts of the state because there had never been any need.

Unlike Cook Inlet natural gas, which is sold as a heating fuel to Alaska’s population center, North Slope natural gas has typically been reinjected into oil fields, but not sold to outside markets.

But in recent years, natural gas prospects have sprung up around the state.

In addition to Fairbanks Natural Gas’ search for a supply contract on the North Slope, the Rutter and Wilbanks Corp. continues exploration around Glennallen and Doyon Ltd. works toward exploring natural gas prospects in the Nenana basin and the Yukon Flats.






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