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North Slope LNG plant ‘feasible’ AIDEA believes project would reduce fuel costs in Fairbanks enough to justify the project; moving forward to choose a partner Eric Lidji For Petroleum News
A proposed North Slope liquefied natural gas facility is “technically and economically feasible,” according to the Alaska Industrial Development and Export Authority.
The public corporation believes a 9 billion-cubic-foot per year liquefaction plant could meet “initial” heating demand in the Fairbanks North Star Borough, while cutting annual heating costs for consumers by the levels local leaders hope to achieve with the project.
AIDEA believes the system could deliver natural gas to residents and businesses at $14.09 to $17.09 per thousand cubic feet, equivalent to $1.88 to $2.28 per gallon for fuel oil. The price of fuel oil in the Fairbanks area is currently closer to $4 per gallon.
With the feasibility study completed, AIDEA is now conducting due diligence to choose a private sector partner, and developing a business structure and financial plan.
The cost savings of natural gas to fuel oil somewhat masks the $3 per mcf range in the AIDEA estimate, which comes in part for differing estimates of the size of the project.
(By comparison, the estimated price range for LNG delivered into Fairbanks — before storage, re-gasification and distribution — is currently $10.52 to $11.59 per mcf.)
Disagreement over distribution needed While Fairbanks Natural Gas estimates the project will require some 500 miles of distribution pipeline, the Interior Alaska Natural Gas Utility says twice as much pipe would be needed to adequately provide service throughout the borough. If the actual figures prove to be closer to the high end of the estimate, the state financial assistance approved earlier this year may not be enough to adequately pay for the entire project.
“That’s driving a lot of the angst in the community,” Alaska Energy Authority Deputy Director Gene Therriault said during an AIDEA board meeting on July 25.
The Interior Alaska Natural Gas Utility reached its figure using the density of the Enstar Natural Gas Co. system in Southcentral as a model, according to Therriault, while Fairbanks Natural Gas used AutoCAD mapping, the details of which are proprietary.
To alleviate the “angst,” AEA hired a third party to make an independent estimate. Early results suggest the Fairbanks Natural Gas estimate is “more valid,” Therriault said.
That said, he added, “Nothing beats drawing lines on an actual map.”
Upstream or downstream? The contradictory figures highlight a larger debate about the project: whether it is wiser to finance the upstream and distribution components of the system, or to leave those portions to the private sector and instead pay to convert home heating systems to gas.
In comments to the board, Spectrum Alaska President Ray Latchem supported the latter proposal, saying every dollar spent in Fairbanks would have “100 percent impact” on the price. Spectrum Alaska wants to build a North Slope liquefaction plant, but declined to request state aide. “We just want to see a transparent and competitive process,” he said.
The question remains a concern because if enough homeowners cannot afford the upfront costs to convert their burners, the financial case underpinning the project could collapse.
AEA believes the risk is manageable, Therriault said.
AHFC incentives For starters, the Alaska Housing Finance Corp. currently offers some financial incentives for homeowners looking to convert. Additionally, Rep. Tammie Wilson, a North Pole Republican, plans to introduce a bill next year to provide financing for homeowners looking to convert their heating systems to natural gas. Finally, the utility could always pay for the conversion upfront and amortize the cost into monthly bills.
Even without assistance, AEA believes the average household could recoup the cost of conversion within three years based solely on the cost savings of gas over fuel oil.
What’s more important, Therriault said, is to make sure the delivered cost of natural gas is affordable, which is why the state agencies are focusing on upstream components.
That said, AEA plans to conduct a door-to-door survey through the region to determine the sensitivity to pricing at the household level. Would homeowners be willing to convert their heating systems for gas equivalent to $2 per gallon fuel oil? What about $2.50?
Interior officials are also worried about supplies. Specifically, would the proposed storage capacity for the project leave the Interior open to supply disruptions during an extended bout of severe weather? AIDEA officials said they are studying the matter.
What will the gas cost? Another upstream issue is commodity pricing.
While Fairbanks Natural Gas and Golden Valley Electric Association have supply contracts in place, neither is public. In its feasibility study, AIDEA wrote, “Assuming the project proceeds, AIDEA will work with the North Slope parties to secure purchase agreements for sufficient gas to meet the supply needs of the (North Slope) LNG Plant.”
The study appears to use $3 per mcf as a placeholder figure for the cost of supplies.
At the meeting, AIDEA board member Gary Wilken asked why Alaskans should have to pay anything for North Slope gas. “Why can’t we get it for free?” he said. The question presumably referred to the portion of all oil and gas production the state takes “in-kind.”
The idea of using royalty-in-kind to alleviate local energy costs is a common one among policymakers, but is generally dismissed because the Alaska constitution requires all natural resources to be used for the “maximum benefit of its people,” and using a hydrocarbon in one region of the state would preclude its use in another region. For this reason, the state has historically sold its royalty-in-kind as a way to generate revenues.
A six-hour hearing In the short term, a much bigger question for the project is who will deliver the gas.
The Regulatory Commission of Alaska is considering requests from Fairbanks Natural Gas and Interior Alaska Natural Gas Utility to serve a similar section of the Interior.
The RCA scheduled a six-hour hearing in Fairbanks on July 30 to take comments from the community about the two proposals. In a sign of the passions surrounding the matter, the Interior Alaska Natural Gas Utility asked regulators if it would be allowed to cross-examine certain consumers who testified at the public hearing, a request the RCA denied.
The utilities continue to debate some basic aspects of the proceedings, as was seen when they answered a slate of questions regulators posed in advance of the public hearing. The questions addressed whether the proposals were “mutually exclusive,” or whether they would be directly competing, designations which would trigger regulatory procedures.
Fairbanks Natural Gas believes the point is moot.
For starters, Fairbanks Natural Gas believes recent legislative actions have invalidated the Interior Alaska Natural Gas Utility application. The RCA found the application to be complete before the Alaska Legislature approved a funding package for the project. The Interior Alaska Natural Gas Utility application anticipated using nearly $500 million in public funds to build out a distribution grid across the Fairbanks North Star Borough, but the state only approved $362.5 million in financial assistance, of which a considerable amount is earmarked for specific components of the project, such as the LNG facility.
Even if the RCA still believes the application is complete, Fairbanks Natural Gas said, existing local ordinances prohibit the Interior Alaska Natural Gas Utility from competing against a private entity without first getting permission from the City of Fairbanks.
The Interior Alaska Natural Gas Utility, though, believes the applications should compete head-to-head before the RCA. Citing significant case law, the utility said Alaska regulators have consistently required a hearing to compare mutually exclusive applications, and either chosen one outright or divided a service area between the two.
In such a case, the Interior Alaska Natural Gas Utility believes it would win, because it believes it is proposing to provide service to more customers than Fairbanks Natural Gas.
The two utilities agree on a key point, though. They both believe it would be impractical, as well as bad for consumers, if they were forced to compete within the service area.
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