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Energy

State moves on sale of LNG facilities to get natural gas to Fairbanks

  • Author: Alex DeMarban
  • Updated: December 2, 2017
  • Published January 12, 2017

The state and a Fairbanks utility finalized a preliminary deal this week setting the stage for a $330 million plan to boost natural gas shipments to the Fairbanks region to lower energy costs and reduce air pollution there.

The Alaska Industrial Development and Export Authority approved the memorandum of understanding on Wednesday to pursue the final steps to expand a state-owned operation that delivers small amounts of natural gas from the shores of Cook Inlet to Fairbanks.

The plan would increase the customer base of Pentex Alaska Natural Gas from 1,100 customers to 8,900 in Fairbanks and North Pole, with the natural gas replacing particulate-spewing wood stoves and furnaces that burn stove-oil.

The Interior Gas Utility, created by the Fairbanks North Star Borough in 2012 to get more gas to the area, approved the same document on Tuesday. It's expected to lead the acquisition of Pentex's gas-liquefaction plant at Port MacKenzie and related delivery facilities.

AIDEA board member Gary Wilken, a Fairbanks resident and former state senator, teared up on Wednesday after voting with colleagues to approve the memorandum.

"Seldom in your life do you get a chance to participate in something that provides benefit to generations to come," he said, wiping an eye.

"I'm not ready to pop the champagne corks, but I'm ready to take it out of the case and put it in the refrigerator because I feel good about where we're headed," he said.

Supporters of increased gas shipments say it will provide a long-sought source of affordable heat for home and businesses. They say it will stabilize an economy that will be slammed hard when the price of stove oil returns to the costly levels seen before the mid-2014, when oil prices were twice as high as today.

But some worry the proposed savings are currently not great enough to convince enough homeowners to spend money converting their heating systems to gas, a problem they say could put the state-supported project in jeopardy.

The agreement approved this week sets terms for the gas utility to acquire Pentex — purchased by the state agency in 2015 for $52.5 million, using agency funds — by the end of March. Under the proposal, the utility would pay AIDEA an estimated $58.2 million, allowing AIDEA to recover its original purchase price and to meet the agency's statutorily required return on investment.

A key stipulation that must be met for the deal to move forward is completion of a long-term gas supply contract. AIDEA is working to finalize a proposed contract with a Cook Inlet gas producer, but AIDEA officials would not name the producer.

The first conversions, following the construction of facilities including gas storage tanks, pipelines and expansion to the gas liquefaction plant, are scheduled to begin in 2020.

Fairbanks North Star Borough Assembly member Van Lawrence said he has concerns that the state agency paid too much for the Pentex operation, originally built starting in 1996, with upgrades over the years as capacity increased.

With its small customer base, the facility made about $3 million a year, on average, before the state acquired it, a Pentex official said. The state's purchase price was 17 times higher than that annual income.

The large acquisition costs could be burdensome for the utility, particularly if potential customers balk at converting boilers, a cost that could reach up to $15,000 a home, Lawrence said. Conversion costs are expected to be paid by customers, recovered over many years as a surcharge on bills, though the utility hopes to find federal grants that can greatly lower costs.

The project calls for a price of delivered gas that's equivalent to about $2 a gallon for stove oil. Heating oil prices in Fairbanks are currently about $2.40 a gallon, Lawrence said, potentially removing some of the incentive to convert.

On the other hand, Lawrence said he sees the potentially huge benefit to the Fairbanks area if the project succeeds. He said he would likely sign up for gas himself if it becomes available, converting his old boiler that will eventually need replacing anyway.

Energy costs in Fairbanks are among the highest in the nation, much higher than in Southcentral Alaska, he said. That disparity has contributed to economic decline as residents and businesses move to Wasilla, Anchorage and other Alaska communities.

"We're desperate for something to be done," he said.

Jack Wilbur, vice chair of the Interior Gas Utility, said he's certain heating oil prices will rise enough to alleviate concerns and save the community hundreds of millions of dollars yearly that can be reinvested back into Fairbanks.

He said he has heard far more support than criticism, including at two Interior Gas Utility board meetings this month with opportunities for public comment.

The project's economics are built upon a conservative estimate, he said. A study found that even with today's low price of heating oil, one of two houses in the proposed service areas will switch from heating oil to gas.

"It won't be long before people will be absolutely delighted and the complaints about prices will disappear," he said.

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