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Vol. 17, No. 49 Week of December 02, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Flint Hills drops LNG

Refiner cites improved economics, reluctance to lead in solving energy problems

Eric Lidji

For Petroleum News

Although still amenable to using natural gas, Flint Hills Resources LLC is backing away from leading a project to truck liquefied natural gas from the North Slope to the Interior.

The refiner recently terminated its memorandum of understanding with the electric utility Golden Valley Electric Association, citing the improved economics of its internal energy use as well as the belief that a third party should be leading any efforts going forward.

“Flint Hills still believes LNG trucking is a valuable project for Fairbanks and Interior Alaska,” Flint Hills Resources Alaska Vice President Mike Brose said in a statement. “However, there are a number of other entities that have expressed interest in this project, and we think the time is right for a third party to determine if there is sufficient support for the project outside of the industrial demand that Flint Hills has been targeting.”

The announcement came as Flint Hills also said it had completed the second phase of engineering on the project it launched with GVEA in August 2011. Having reached that milestone, the company now believes the Alaska Industrial Development and Export Authority and the Alaska Energy Authority should study whether the demand for LNG, outside of the amount Flint Hills intended to use, justifies the construction of a plant.

“We don’t think that we would build the plant for our needs and the needs of other industrial users alone, so we will wait for AIDEA or AEA to do further investigation and present a proposal if they think that is appropriate,” Brose said, adding Flint Hills would share its engineering studies with the state if it would help move the project forward.

GVEA told the Fairbanks Daily News-Miner it would continue pursuing the project, noting a 20-year gas supply agreement it signed with BP Exploration in September.

Improved efficiency

Under the August 2011 memorandum, Flint Hills and GVEA planned to build a liquefaction plant at the Prudhoe Bay unit and truck LNG down the Dalton Highway to a vaporization plant in North Pole, where the companies operate neighboring facilities.

By getting a natural gas supply “at cost,” Flint Hills hoped to become more competitive and efficient, while GVEA hoped to be able to lower, or at least temper its rates.

With wide ranging Interior energy issues now being discussed at the state level, though, Flint Hills no longer saw the need to pursue a project for its narrow interests, Flint Hills Alaska spokesman Jeff Cook told Petroleum News. Internal changes over the past year have improved Flint Hills’ operating efficiency, he said. Those changes include installing a heat recovery operation to maximize its energy use, and idling one of its two remaining processing units. Since the idling of unit No. 1, the remaining unit, No. 2, is now running at full efficiency, according to Cook. “We’ve improved our energy position,” he said.

Even with the changes, Flint Hills is interested in natural gas, should it become available in the Interior at “competitive” prices, Cook said. Although the company would need to retrofit some equipment to accommodate the fuel, Cook described the changes as minor.

Could speed up project

In November, two Flint Hills subsidiaries began permitting the $183.6 million project. The filings outlined a system capable of delivering 29.5 million cubic feet of gas and 10,000 gallons of propane per day to the Interior over 20 years, starting in 2016. (When they launched the project last summer, the two companies projected a 2014 startup.)

The system would use 13,000-gallon long-haul trucks to deliver the fuel to the region.

The courtship between Flint Hills and GVEA promised to extend the mutually beneficial relationship between the companies at their neighboring facilities in North Pole. The Flint Hills refinery uses electricity produced by GVEA. The GVEA plant in North Pole runs on naphtha produced by Flint Hills (but was designed to also operate on natural gas).

It remains to be seen how Flint Hills’ decision will impact larger efforts to coordinate the various proposals for bringing gas to the second largest population center in Alaska.

Before Flint Hills and GVEA signed their memorandum of understanding, Fairbanks Natural Gas LLC proposed a system to truck LNG from the North Slope. The local distribution company claims to be ready for construction, but wants to align its intensions with those of the largest potential consumers in the region, namely Flint Hills and GVEA.

Fairbanks Natural Gas and GVEA entities have been in talks, according to both sides.

Whether separately or together, both Fairbanks Natural Gas and GVEA have said they would seek state assistance on the project. But Flint Hills, in its statement, said it “has been and continues to be opposed to all government mandates and subsidies as they have reviewed the LNG project and never requested State assistance for this project.”

Incoming GVEA President Cory Borgeson told the News-Miner the split could actually speed up the project. “We might be able to move faster. When you’ve got two parties working on things together, it takes longer to coordinate, come to consensus,” he said.

State funding likely

The prospect of state funding promises to alter the project considerably.

Specifically, the Parnell administration wants any project it funds to be open-access and wide-ranging. “If state funds are used for a North Slope liquefaction facility, we will assure long-term access to that facility for other companies ... that want to purchase gas from producers and run it through there,” Parnell told the industry during his keynote address at the annual Resource Development Council meeting in Anchorage on Nov. 14.

While the LNG trucking project has been described as a way to bring the benefits of gas to Fairbanks, “if you look ahead beyond that, it’s about gas for rural Alaska, it’s about gas for the Richardson Highway. And that liquefaction facility could pull propane off and we could ship it then to communities along the river system,” Parnell said. “We could make that transition from diesel in the communities to propane and gas. We could truck it down the Richardson Highway as well to those communities who feel they’ve been forgotten, who are not forgotten, but indeed could have that cheaper energy as well.”

One of the larger outstanding questions is how any partnership between the state, a private for-profit natural gas distribution company and a member-owned not-for-profit electric cooperative would be structured. Parnell said his administration would “continue working to utilize the private sector... to the extent we can, and where those are not working, then the state will propose public-private partnerships with private companies, perhaps through loans... financing, lower-cost financing to move the project along.”

Whether those goals could be meet through conditional funding, or would require a state-owned project, could become clear when Parnell releases his budget on Dec. 15.

IANGU is a wildcard

As these efforts progress, a newly formed municipal utility is making its desires known.

The Interior Alaska Natural Gas Utility plans to ask the Parnell administration for $200 million for a North Slope liquefaction plant operated under a “transparent, cost-based commodity pricing model,” according to the News-Miner. As Petroleum News went to print, the utility board had not yet formalized its request, according to a spokeswoman.

The utility partnership of the cities of Fairbanks and North Pole and the Fairbanks North Star Borough to expand gas use in the region also plans to ask for another $200 million in grants and loans for a distribution system and to help homeowners convert their boilers, according to the News-Miner, but may table some of its requests until next year.

While the three municipalities formed the utility in October to address energy issues across the region, it plans to begin by focusing on the city of North Pole. “We’re focusing on North Pole because it’s the next most dense area outside the Fairbanks area, it’s got the most air quality problems and it’s the other end of town from the certificated area served by (Fairbanks Natural Gas),” the News-Miner quoted board member Bob Shefchik as saying. “It makes logical sense to start out there and work your way toward town.”

—Petroleum News Editor Kristen Nelson contributed to this article.

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