|
Utilities give more information on LNG Fairbanks Natural Gas explains prior delays in service record; Interior Alaska Natural Gas Utility makes the case for service area By Eric Lidji For Petroleum News
The two utilities looking to expand gas distribution service throughout the Fairbanks North Star Borough have given regulators additional information about their projects.
The Regulatory Commission of Alaska is considering competing proposals from Fairbanks Natural Gas and the Interior Alaska Natural Gas Utility to serve the area around North Pole and Eielson Air Force Base. The privately held Fairbanks Natural Gas wants to expand its existing service area in the core of Fairbanks, while the municipal Interior Alaska Natural Gas Utility wants an RCA certificate to provide new service.
With its questioning, the RCA is trying to determine whether one of the utilities is more “fit, willing and able” to provide this service than the other. Generally, the RCA has been asking Fairbanks Natural Gas to explain its 16-year service record in the Interior, and asking the Interior Alaska Natural Gas Utility to prove it is capable of being a utility.
In their responses, Fairbanks Natural Gas has blamed its prior inability to expand on market forces outside its control, while the Interior Alaska Natural Gas Utility believes those delays prove that the Interior distribution market needs a municipal player. In turn, Fairbanks Natural Gas believes the Interior Alaska Natural Gas Utility is unable to pull together the financing required for the build out, while the Interior Alaska Natural Gas Utility believes it can access existing funding and expertise to bring its project online.
PHMSA consent agreement The RCA asked Fairbanks Natural Gas about three specific moments in its history.
First, the RCA wanted information about a consent agreement Fairbanks Natural Gas entered with the U.S. Pipelines and Hazardous Materials Safety Administration in July 2012. It concerned the regulatory status of the Pt. McKenzie liquefaction facility.
Fairbanks Natural Gas described the issue as largely procedural.
When the utility brought the facility online in 1997, PHMSA waived its standard oversight rules, and regulated the plant under “alternative safety requirements” instead, according to Fairbanks Natural Gas. The parties agreed in 2012 to terminate the waiver, which required the utility to bring the facility into compliance with the traditional rules.
“Inspections were carried out, and FNG believes that the plant and its operation fully comply with all applicable federal regulations, although PHMSA has not yet provided final approval on a couple of items that were completed last year,” FNG told the RCA.
History of supply shortages Second, the RCA wanted to know if Fairbanks Natural Gas pressed ahead on plans to expand service in the Interior even though it knew about Cook Inlet supply shortages.
The question grew from a comment Fairbanks Natural Gas President Dan Britton made during a July 30 hearing: “We’re also, for the first time in 10 years, having discussions with entities that want to look at increasing the gas they make available to our facility as well as others in the Cook Inlet.” The reference to a decade without increased supplies suggested Fairbanks Natural Gas was aware of supply shortages in 2004, when its parent company outlined plans to accommodate a 10-fold expansion in its customer base.
Fairbanks Natural Gas said the comment referred to overall market conditions.
Elsewhere in his comments, Britton traced the supply shortages in Cook Inlet to 2006, when Fairbanks Natural Gas lost its existing gas supplier. “Mr. Britton’s testimony is straightforward,” the company explained. “Significant gas supply problems began in 2006, but the situation right now is better than at any time in the last 10 years.”
In 2004, Fairbanks Natural Gas was two years into a five-year contract providing up to 10 million cubic feet per day and a 10-fold increase in customers would have required only 9.2 MMcf per day. The company “thought that it could readily contract for additional supplies. There simply were no gas supply issues to mention in the 2004 application.”
Lessons from 2006 Third, the RCA wanted to know what Fairbanks Natural Gas learned from the 2006 incident, when the utility came within days of being unable to serve its customers.
Fairbanks Natural Gas said the incident changed how it negotiates its gas supply contracts, how to considers expansion requests and how it lobbies policymakers.
On the question of supplies, Fairbanks Natural Gas said it had once assumed it could “purchase gas when needed in the Cook Inlet market,” but after the events of 2006 the utility has required “firm supply contracts in the amount of its firm commitments.”
On expansion, Fairbanks Natural Gas said it changed its policy after 2006 to be more cautious in accepting service requests. Now, the utility said, it will only add a firm customer to its system if it has sufficient firm supplies contracted “on a long term basis.”
“Even where it has existing lines in place and can physically serve a new firm customer in the summer, FNG will sign up the new customer only when it is confident it has a firm and reliable long term supply source for that customer,” Fairbanks Natural Gas said.
Additionally, Fairbanks Natural Gas said it started adding more interruptible customers to its system, which would allow it to divert supplies internally during a supply crunch.
Ultimately, though, Fairbanks Natural Gas believes the only long-term solution is to move its supply source from the Cook Inlet to the North Slope. The utility currently has a contract for North Slope gas supplies, but it needs to establish a supply chain before it can put the contract to use. Those efforts have been ongoing for several years now.
Polar LNG schedule Finally, the RCA wanted an update on those efforts.
The system for bringing North Slope supplies to the Interior requires a North Slope liquefaction plant, a short pipeline to feed the plant and an LNG trucking operation.
The Fairbanks Natural Gas affiliate Polar LNG is trying to establish that supply chain.
In July 2011, Polar LNG sought a speedy review of its request for a certificate to operate the pipeline, saying it hoped to begin construction the following winter, but the company later acknowledged it was facing delays. The RCA issued the certificate in March 2012.
Fairbanks Natural Gas said it took “an extraordinary period of time” for Polar LNG to negotiate with the Department of Natural Resources for a pipeline right-of-way lease, but expected state approval imminently. The DNR ultimately approved the right-of-way request on the same day Fairbanks Natural Gas made its reply to the RCA (see sidebar).
The project now faces a different sort of delay, though.
With a recently approved state financial package, the Alaska Industrial Development and Export Authority is now leading the effort to bring the project into fruition. The public corporation is currently in the process of selecting a private partner. If AIDEA chooses Polar LNG, construction could begin this winter, according to Fairbanks Natural Gas.
Even so, Fairbanks Natural Gas said its experience operating a natural gas distribution system in the Interior, its North Slope supply contract and its recent efforts to prepare for expansion by adding storage facilities and increasing its trucking fleet, prove the utility is “fit, willing and able” to expand its service in the Fairbanks North Star Borough.
What about matching capital? For the Interior Alaska Natural Gas Utility, the RCA asked first about financing.
The Interior Alaska Natural Gas Utility previously said it would use grants, loans and bonds to fund its build-out, but the RCA wanted to know how the utility planned to raise $150 million in “matching capital” AIDEA has said it would require from a partner.
The utility said it would also seek public funding for this “matching capital.”
Previously, the utility expected to spend $492 million over the first six years of its build out, but acknowledged that the actual scope of its early work would depend on public funding. A funding package is currently available through the recently passed Senate Bill 23, but much of the package is set aside for specific uses, such as a liquefaction plant.
Recently, the two utilities have disagreed on the amount of distribution pipeline needed for the expansion area. The Interior Alaska Natural Gas Utility believes it will require some 1,098 miles while Fairbanks Natural Gas puts the estimate closer to 463 miles.
The Alaska Energy Authority is currently taking an independent look at the issue. If it determines that the Interior Alaska Natural Gas Utility overestimated by at least a third, the utility believes it can fund three years of construction using the existing funds. In geographic terms, that would mean natural gas for North Pole and its immediate vicinity.
While the AEA figures may not be available until September, the Interior Alaska Natural Gas Utility said the agency, after an Aug. 12 design meeting, considers 810 miles to be a “realistic” estimate. The figure is roughly halfway between the estimates of the two utilities. At an AIDEA meeting in early August, AEA Deputy Director Gene Therriault said early work had suggested the Fairbanks Natural Gas estimate was “more valid.”
More progress than ever The utility is taking the credit for securing the public funding to date, saying its “ongoing cooperative, financial, political, technical, and engineering efforts to have natural gas service provided to the residents of the [Fairbanks North Star Borough] has contributed to this progress and to the availability of financing for the first three years of build out.”
The progress made on the project since the Interior Alaska Natural Gas Utility came into being last October is “greater than has been made on these issues for the past 16 years,” the utility said. The timeline is a dig at Fairbanks Natural Gas, which started in 1997.
Even if the utility gets all the financing available from SB 23, though, it would need to pinpoint the additional financing required for the final three years of its initial build out.
As far as future financing goes, the utility said it needs an RCA certificate to engender the public support required to finance the final three years of its six-year build out.
Downstream partner The RCA also wanted the Interior Alaska Natural Gas Utility to prove its “fitness and ability” to handle all the complex components required to bring the project into existence.
Those include getting a gas supply, and securing long-term agreements for LNG production, trucking, storage and re-gasification, and gas transmission and distribution.
The utility continues to minimize these concerns. Under the Interior Energy Plan launched by SB 23, AIDEA is responsible for managing the upstream and midstream aspects of the operation and would sell LNG to its downstream partner, the utility said.
Considering that both Fairbanks Natural Gas and Golden Valley Electric Association have North Slope supply contracts, the utility sees no need to negotiate a third one.
Industry or community? These responses get to a philosophical point made by the utility.
“With 90 percent of Alaska’s communities not having affordable energy, and recognition that regulation alone has not been and cannot be the solution to bringing affordable energy to Alaska’s small communities, it is now past time we collectively find new solutions for this unmet need,” Fairbanks Economic Development Corp. President and Chief Executive Officer Jim Dodson wrote on Aug. 6 to RCA Chairman T. W. Patch.
While Fairbanks Natural Gas blames its delays on tight supplies, Dodson accused the utility of being “unwilling to invest — invest time and profit margin in securing Cook Inlet gas supply, invest dollars in necessary local infrastructure, invest in Fairbanks.”
The only solution, Dodson said, is to have a “community owned utility.”
“It is time we realize that private industry cannot be the sole energy solution for the 90 percent of our communities that today do not have affordable energy,” Dodson wrote.
The letter contained one note of irony.
As proof of the long-term failures of private industry in the market, Dodson wrote that energy costs in Fairbanks have been tied to crude prices for more than 40 years.
While the sponsors of the current effort to bring gas to the Interior hope to cut energy costs in half over fuel oil, the existing Fairbanks Natural Gas and Golden Valley Electric Association gas contracts on the North Slope are both thought to be tied to crude oil.
| 