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Vol. 21, No. 45 Week of November 06, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Progress slow for IEP

Firming up Cook Inlet gas supply to meet Fairbanks gas price target challenging

ALAN BAILEY

Petroleum News

The Alaska Industrial Development and Export Authority’s Interior Energy Project has sent a potential gas supply term sheet to a Cook Inlet gas producer and is waiting to see if a gas supply contract can be closed, Gene Therriault, IEP team leader, told the AIDEA board on Oct. 27. The objective is to establish an expanded supply of natural gas for Fairbanks and the surrounding Interior at a price that competes with that of fuel oil, for the heating of buildings and for power generation. The project has been targeting a price level of $15 for gas delivered to consumers.

The idea is to liquefy the Cook Inlet gas in a new LNG plant that will be built as part of the project, and to transport the LNG to Fairbanks by road trailer or on the Alaska Railroad. In Fairbanks, in the interests of gas distribution efficiency, the IEP team is moving forward with the planned consolidation of the city’s two existing gas utilities, Fairbanks Natural Gas and the Interior Gas Utility. AIDEA, which owns FNG, plans to sell FNG to IGU, with an agreement on that sale expected by the end of this year, Therriault said.

The supply challenge

The gas supply challenge that the project is grappling with involves the need for a supply arrangement that can start small, to meet the initial demand for gas in the Interior, but that can grow as that demand increases; at the same time, the gas price must be low enough to motivate Interior residents to convert from their existing oil-based heating systems. In other words, the gas supplier must have gas reserves to enable the supply growth, but must initially commit to a small supply at a workable price without any guarantee of future expanded volumes.

“We’re looking for a gas supplier that will work with us as we grow this demand in Interior Alaska,” Therriault said, adding that any commitment to purchase more gas than needed at the outset of the planned supply arrangements would push up the initial price of gas for consumers, to the detriment of the project economics. On the other hand, a gas producer that does sign up for the IEP gas supply would enjoy the benefit of an expanding business, as that Interior gas demand grows, Therriault commented.

At the demand end of the IEP’s supply chain, the challenge is to convince a sufficient number of residents and businesses to convert their heating systems to gas, especially given the current relatively low price of fuel oil. The IEP team has been investigating ways whereby various financing tools could help consumers deal with the pain of conversion costs.

For businesses, one solution may be Property Assessed Clean Energy, or PACE, legislation that could be passed by the state Legislature. PACE would enable a local government to authorize low cost financing for businesses to convert to gas, with loans having relatively low interest rates and long pay-back periods. A possible option for residential customers is the repayment of conversion financing through regular utility bills, perhaps also using low cost financing. The intent is to at least offset the conversion cost through reduced fuel costs, Therriault said.

It also appears that the U.S. Army base at Fort Wainwright is interested in what the IEP team is doing - the team is currently working with IGU to respond to a request for information from Fort Wainwright for a potential gas supply, Therriault said.

And tackling severe air pollution problems in Fairbanks, primarily resulting from the widespread use of wood burning stoves for heating buildings in the region, is another purpose of the project. Clean burning gas would presumably alleviate health problems resulting from the breathing of polluted air.

Working with Salix

With the cost of liquefying gas into LNG also being critical to the ultimate cost of gas in Fairbanks, the IEP team has been working with Salix Inc. on evaluating ways of driving down the capital and operational cost of the proposed plant, Therriault said. In early March the team recommended a proposal by Salix as the preferred option for LNG plant construction, but the team has yet to put a recommendation to the AIDEA board for a decision to move to the front-end engineering and design, or FEED, stage of the construction project.

During the board meeting the board passed a resolution, allowing the securing of the Salix pre-FEED documents, to enable the IEP team to prepare a plan for the LNG plant for the board to consider. The resolution formally approved the selection of Salix as the preferred respondent to AIDEA’s request for proposal for the plant and authorized the payment of $250,000 for the Salix documents.

The board also approved a resolution authorizing an additional $550,000 of AIDEA funding for the evaluation of options for an enlarged gas supply for Fairbanks. The funding addition is split equally between an existing capital appropriation from the state Legislature and AIDEA Sustainable Energy Transmission and Supply loans.

A small LNG plant near Point MacKenzie on Cook Inlet currently produces LNG for FNG in Fairbanks, with the LNG being trucked on the highway system to the Interior city. The concept behind the IEP involves a major expansion of that supply, using the new LNG plant, coupled with a reduction of the current price of gas in Fairbanks. AIDEA owns the holding company for both FNG and the existing LNG plant, as well as the current trucking operation.

Transportation options

In terms of the transportation of LNG from the Cook Inlet region to Fairbanks, successful tests in Alaska in 2015 of a prototype trailer, larger than those currently in use, have opened a means of reducing the trucking cost. FNG has purchased the prototype trailer and ordered three similar trailers for delivery in 2017, Therriault said.

The Alaska Railroad has now concluded its tests of LNG transportation in Alaska by rail, using two borrowed LNG containers for the testing. The railroad has yet to run the numbers for the test results, although members of the Federal Railroad Administration evaluated the testing and expressed satisfaction with what they saw, Therriault said.

Given the moves towards consolidating the two Fairbanks gas utilities, the utilities have agreed on a proposal to build a large volume LNG storage facility in south Fairbanks, in support of an expanded Fairbanks gas distribution system, Therriault said. The idea would be to reposition the existing small capacity LNG storage from that south Fairbanks site to a site at North Pole, as a temporary arrangement. This would enable a feed of gas into a new distribution system that IGU has started in North Pole until the pipe work there eventually connects to FNG’s distribution system, Therriault explained.

In fact, one reason for combining FNG and IGU is to enable IGU’s relatively few initial customers at North Pole to obtain gas at an affordable price, piggybacking off the combined gas demand from both North Pole and central Fairbanks, he said.

Distribution expansion on hold

Expansion of the gas distribution system in Fairbanks by FNG and IGU started in 2015 but has been placed on hold since then. Under the terms of House Bill 105, the bill authorizing AIDEA to seek sources other than the North Slope for gas for Fairbanks, AIDEA cannot assist with further funding of the distribution expansion until the AIDEA board has approved an entire plan for the gas supply, thus ensuring that there will be gas to feed the enlarged system, Therriault explained. The distribution buildout started at a time when the IEP had been pursuing an assumed North Slope option. Meanwhile, the project team is working with IGU, figuring out how to use the financial tools that will become available, and how to move forward with the distribution expansion once that restarts, Therriault said.

Overall, Therriault sees the Interior Energy Project as continuing to move towards its goal.

“Things are advancing more slowly than we’d hoped, but we still believe we are making good progress,” he said.



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