Tiny northern line causing angst

Polar LNG getting pushback from Norgasco about the proposed location and operation of an LNG plant and associated pipeline

Eric Lidji

For Petroleum News

An attempt to build a short natural gas pipeline on the North Slope is being held up by a debate about the location of the pipeline and an associated liquefied natural gas plant.

Polar LNG LLC is seeking a certificate from the Regulatory Commission of Alaska to build a 3.8-mile pipeline from Flow Station 1 at the Prudhoe Bay unit to the Polar LNG Pad, formerly known as Child’s Pad, but the proposed route passes through the service area of Norgasco Inc., a local distribution company for industrial users in Deadhorse.

While Norgasco is in favor of the LNG plant, it believes the pipeline would violate its exclusive right to move gas through the area and would be “far more expensive, riskier, disruptive, and less efficient than if the gas for the proposed LNG plant were transported or provided by Norgasco,” the company wrote to the RCA in a protest filing in August.

Polar LNG said it didn’t plan to use the pipeline to compete for utility customers, but simply to supply its plant. The company said it applied for utility status to meet state requirements for North Slope pipelines, but expects to be the sole shipper on the line. “In the unlikely event that any potential shipper requests transmission service, Polar will make capacity available on reasonable terms and at a reasonable rate,” it responded.

Because of those distinctions, the RCA did not allow Norgasco to join the case and denied its petition for reconsideration, but did allow the utility to make comments at a public hearing on the matter in late October in order to get its questions on the record.

Cost, ownership, competition

Polar LNG wants to build the pipeline and the plant to provide a source of supply for Fairbanks Natural Gas Co., an affiliated local distribution company serving the Interior.

Fairbanks Natural Gas currently trucks LNG north from Cook Inlet, but in 2008 secured a 10-year contract to buy North Slope gas from an ExxonMobil subsidiary. That contract, though, will remain dormant until a pipeline and LNG plant are operational.

Throughout that process, the Alaska Gasline Port Authority considered buying the entire Fairbanks Natural Gas and Polar LNG operation, a sale that didn’t go through.

Although Polar LNG planned to operate the plant and the pipeline, the Department of Natural Resources leased the land at Child’s Pad to Fairbanks Natural Gas because of the ease of working with a public utility. Polar LNG applied for a permit to use the lease.

But during the hearing, the commissioners asked why Polar LNG didn’t lease property closer to its source of supply, in order to decrease or eliminate the need for a pipeline.

Fairbanks Natural Gas President Dan Britton said the state and the unit owners preferred Child’s Pad because it was available and close to a gas supply at Drill Site 12. He said moving the plant might lower the capital costs, but would increase the operational costs.

Latchem’s late response

Following the hearing, Norgasco stuck by its original concerns, and specifically said Polar LNG didn’t do enough to consider alternative locations for the plant after its supply source moved and didn’t approach the utility about potentially providing service.

The RCA also received comments from Raymond Latchem, the founder of Norgasco, Fairbanks Natural Gas and the Cook Inlet LNG outfit Northern Eclipse.

Although Latchem remains a shareholder of Norgasco and member of its board of directors, he didn’t submit comments on behalf of the utility, but on behalf of Spectrum Energy Services, an Oklahoma company considering a North Slope LNG export project.

“Once (Fairbanks Natural Gas) realized they would not get a supply from Drill Site 12, they should have re-evaluated their site selection. However, it appears that they decided to keep the original location even though the original supply point was no longer an option. This is the mistake that should be corrected,” Latchem wrote in a Nov. 2 letter.

Concerning Britton’s claims that moving the plant would add operational costs — by increasing the distance trucks would need to travel and by requiring trucks to pass through a BP-operated security point at Prudhoe Bay — Latchem shrugged, saying the potential issue could be addressed “much cheaper than a $12-$14 million pipeline.”

“The only potential benefit” for using Child’s Pad, according to Latchem, is that it might be ready “a few months ahead” of an alternative location, but only if Fairbanks Natural Gas can do installation work this winter, a timeline Latchem suggested wasn’t realistic.

Latchem also echoed concerns from Norgasco about the impact of building a common carrier pipeline through Deadhorse. If large industrial customers see a deal and request service on the new pipeline, Norgasco would be forced to raise rates on its smaller industrial customers to recover its costs. “This is exactly one of the scenarios that regulators such as yourselves are charged with protecting against,” Latchem wrote.

Although Latchem submitted his letter long after the initial public comment period closed, an administrative law judge required Polar LNG to respond to the issues it raised.

Polar LNG called the comments “a lengthy free association that has little to do with the actual facts or with the applicable regulatory requirements,” and noted that Fairbanks Natural Gas, the subject of his comments and objections, is not a party to the case.

Polar LNG said the case only concerns the certification for the pipeline, and that the RCA doesn’t have jurisdiction over the plant. The routing of the pipeline should reflect the needs of the customers, i.e. the plant, according to Polar LNG: “The fact that Polar will operate both the pipeline and the LNG plant should not allow the Commission to bootstrap its authority over the pipeline into authority over the unregulated LNG plant.”

Building a new pad would require additional gravel excavation, cost around $1.6 million and add $1 million in annual operating costs, according to Polar LNG. Additionally, Polar LNG said the Norgasco proposal wouldn’t be viable because of its higher proposed tariffs, its inability to supply sufficient volumes of gas and its low operating pressure.

The RCA has yet to rule on the matter.