One step closer to North Slope for FNG

GVEA agrees to buy LNG, port authority seeking $250 million through bonds, new North Slope facilities could be online by 2012

Eric Lidji

For Petroleum News

In the Lower 48, natural gas is an important fuel in part because pipelines zigzagging across the continent connect populous areas with far-flung production basins.

In Alaska, proximity has always been much more crucial.

Natural gas is the dominant fuel for heating and electricity in only two places in Alaska: the Southcentral region around Anchorage where two-thirds of the state lives, and Barrow, the northernmost city in the United States and home to around 4,000 people.

Those regions have something in common, though: both are surrounded by natural gas.

Then there is Fairbanks.

Fairbanks is about 500 miles from the massive natural gas deposits on the North Slope, effectively stranded for lack of a pipeline, and 350 miles from the declining Cook Inlet reservoirs that have served Anchorage for decades. While Fairbanks is only 50 miles from a prospective gas basin in Nenana, those reserves have never been commercially proven.

Fairbanks Natural Gas is currently the lone provider of natural gas in Fairbanks. When FNG became a certified utility in 1997, some in the city expected to one day be near a natural gas source: the one coming through town in a pipeline from the North Slope.

A decade later, FNG is close to getting North Slope gas, but it’s getting it the hard way.

In February 2008, FNG announced a 10-year contract to buy North Slope gas from Exxon Mobil. In September 2009, the Alaska Gasline Port Authority announced plans to buy FNG. In March, Golden Valley Electric Association, the electric utility in Fairbanks, approved a 15-year contract to buy liquefied natural gas from the port authority and FNG.

Currently, FNG trucks Cook Inlet LNG north to Fairbanks. The new project would truck North Slope LNG south. The $250 million project requires a new liquefaction plant, and storage and vaporization facilities in the city of North Pole, just east of Fairbanks.

The port authority, a voter-created entity, hopes to pay for the project through a bond package, details of which could become public in the coming months. FNG President Dan Britton said the players hope to have financing in place by the end of summer. The total project cost includes $55 million to buy FNG, plus $9 million to be earned later.

Proponents tout potential savings not only for the 1,100 natural gas customers in Fairbanks, but also for the nearly 100,000 members of GVEA scattered from Healy to Delta Junction. Those savings come not only because of the relative cost of natural gas to heating oil, but also because the port authority would price gas based on cost of service.

Some Fairbanks officials have questioned why the purchase price of FNG was based on comparable utilities and not an appraisal, The Fairbanks Daily News-Miner reported.

Britton said the goal is to bring the project online in 2012, delivering up to 3.6 billion cubic feet per year to GVEA, as well as its existing volumes to its own customers. FNG has contracted Cook Inlet gas through May 2013, the company told regulators this past November.

Latest in a string of owners

It began as a division of Northern Eclipse, LLC, a company created to buy natural gas in Cook Inlet, liquefy it and truck it north to Fairbanks. In 2004, regulators let Pentex Alaska Natural Gas Co. buy a controlling interest in FNG, but to afford the purchase, Pentex needed to partner with Harrington Partners, L.P., a Minnesota investment group.

Coming into the sale to the port authority, Harrington held an 85 percent interest in the company, while Pentex held 10 percent and Britton held the remaining 5 percent.

Under the new set up, FNG would most likely become an entity within the port authority, Britton said, unless the group saw tax-related advantages from some other set-up.

Regulation, supplies, prices

As the only natural gas utility in Fairbanks, the second largest city in the state, FNG is technically a monopoly, but diesel fuel is undisputedly king in Fairbanks. With half a dozen local suppliers, customers can switch based on savings of a penny per gallon.

Those companies can raise or lower prices at will without having to get approval from the Regulatory Commission of Alaska. In 2002, with only 125 residential customers and twice as many commercial customers, FNG asked the RCA for that same privilege, looking for more agility in the fight against diesel for a share of the local heating market.

Regulators granted that request. For nearly four years, FNG proceeded untroubled. Then, a supply crisis in late 2006 brought the utility within a week of not having adequate gas on hand, and one local lawmaker, Rep. Jay Ramras, called for a return to rate regulation.

It took more than two years for FNG to dodge that bullet, eventually cutting a deal with the state Attorney General, but in that time the utility got hit by a different shot: prices.

When FNG became an Enstar customer, its rates jumped 20 percent. When regulators changed the terms of that contract, its rates jump another 24 percent, making natural gas more expensive than heating oil in Fairbanks for the first time in company history.

That undesired distinction quickly disappeared when oil prices hit record highs in mid-2008, but by then heated contract debates among Enstar Natural Gas, local producers and state regulators created enough writing on the wall for FNG to look north for supplies.

FNG took two steps forward and one step back in 2007 and 2008.

First, the state Legislature expanded a tax break on gas produced for local use to cover the entire state, and not just Cook Inlet. Then, the contract with Exxon provided for up to 17 bcf of natural gas per year for 10 years. In the wake of the financial collapse in late 2008, though, FNG couldn’t get financing to build its North Slope facilities. The company even asked the state for a $250 million bond in early 2009, with no luck.

Britton said the new set-up doesn’t preclude pursuing gas from a North Slope pipeline or from a closer basin, like Nenana, in the future. But, he said, from the start the company never bet on proximity. “You wouldn’t take that kind of risk on a big line,” he said.