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Plan to supply gas to Fairbanks moves toward best, final offers

  • Author: Alan Bailey
  • Updated: September 28, 2016
  • Published November 1, 2015

With a required quarterly report having gone to the state Legislature, the Interior Energy Project, an Alaska Industrial Development and Export Authority project to bring affordable energy to Fairbanks and the surrounding Alaska Interior, is steadily moving toward a decision point in December over a gas supply for the city, the project team told the AIDEA board Oct. 22.

Shortlist

The team has narrowed down the list of contenders for implementing the gas supply to five vendors, each of which is working toward preparing its best and final offer for a supply proposal, Nick Szymoniak, AIDEA's energy infrastructure development officer, told the board. Following three rounds of discussion with AIDEA, each proposer has been invited to a public forum on Nov. 4 in Fairbanks to present its final offer, after which the AIDEA evaluation team will meet to select a single finalist for presentation to the AIDEA board on Dec. 3. The intent is that on Dec. 17 the board will be able to decide whether to approve the selected finalist, Szymoniak explained.

All five shortlisted finalists have proposals for the supply of gas to Fairbanks in the form of liquefied natural gas, thus eliminating the options of supplying gas to the city by small diameter pipeline or of supplying energy in the form of propane. LNG might come from the North Slope or from the Cook Inlet region, although there is one proposal involving importing LNG from Canada.

The project team has also entered into discussions with gas producers who responded to a request for information about a possible source of Cook Inlet gas. The idea is to have a gas source lined up, should the selected finalist for gas delivery arrangements propose an LNG plant that separately requires a suitably priced gas supply, Szymoniak said.

Pentex purchase

As part of its efforts to ensure viably priced gas in Fairbanks, AIDEA has already completed its purchase of Pentex Natural Gas Co. LLC, the owner of utility Fairbanks Natural Gas. Through its ownership of Fairbanks Natural Gas, AIDEA, with lower business costs than a private utility, anticipates reducing the price of gas for Fairbanks Natural Gas customers. Fairbanks Natural Gas and AIDEA management are preparing a recommended gas price schedule for presentation to the AIDEA board, probably during the board's Dec. 3 meeting, Robert Shefchik, Interior Energy Project team leader, told the board.

Pentex also owns a small LNG plant at Point Mackenzie on Cook Inlet, with that plant currently supplying LNG for Fairbanks Natural Gas -- the Interior Energy Project will require a significantly expanded LNG supply. AIDEA had envisaged selling the LNG plant to Harvest Alaska LLC, an affiliate of Hilcorp Alaska, a Cook Inlet gas producer. However, the Alaska attorney general, concerned about LNG pricing under the Harvest ownership, has prohibited that sale. Szymoniak said that AIDEA is now considering options for incorporating the LNG plant into the Interior Energy Project.

Merging utilities

Also through its ownership of Fairbanks Natural Gas, AIDEA anticipates merging the two current Fairbanks gas utilities, Fairbanks Natural Gas and the Interior Gas Utility. The combined utility, which would ultimately be spun off to some third party business, would be in a position to achieve efficiencies and economies of scale that would minimize the delivery cost of gas in Fairbanks, AIDEA has said.

AIDEA has scheduled a workshop on Oct. 28 to brainstorm concepts for how the Fairbanks gas distribution network can best be integrated following the merging of the utilities. The workshop will also evaluate how to best plan the LNG storage facilities that will be needed in the Fairbanks region, to support the supply of LNG to the region.

Meanwhile, the management transition for AIDEA ownership of Fairbanks Natural Gas is proceeding smoothly, Szymoniak said. And, during the 2015 construction season, Fairbanks Natural Gas installed 30 miles of new gas distribution pipeline in downtown Fairbanks, while the Interior Gas Utility laid 73 miles of pipeline in its service area, in anticipation of an expanded gas supply eventually coming available, he said.

With all gas supply proposals assuming the transportation of LNG to Fairbanks by road using trucks that haul LNG trailers, a 13,000-gallon trailer is slated to arrive in Anchorage on Nov. 9 for road tests in Alaska. The precise manner in which this trailer will be tested and used, to assure the workability of the anticipated trucking operation, is currently being worked out with the truck vendor and Fairbanks Natural Gas, Shefchik said.

Should the selected gas supply option involve shipping LNG from the Cook Inlet region, rail transportation to Fairbanks for LNG containers is a possibility. In a significant step towards this concept the Federal Railroad Administration has now approved the shipment of LNG by rail in Alaska, albeit only on a scale sufficient for testing this LNG transportation option. The approval allows for the carriage of about 80,000 gallons of LNG per week for two years until October 2017, a shipment rate insufficient to carry the output from even the existing Point MacKenzie LNG facility, Szymoniak said.

Fairbanks gas demand

A major concern for the Interior Energy Project has been whether enough Fairbanks residents will convert their homes to the use of natural gas -- the project economics hinge on there being sufficient ultimate gas demand to justify establishing the envisaged gas supply. With current low oil prices reducing the cost differential between fuel oil and gas for heating homes, consultant firm Cardno Entrix has run an analysis of the likely impact of low oil prices on Fairbanks gas demand, Shefchik said. The consultants found that the low oil prices might cause a one-third fall in gas demand and a slight slowing down of gas conversions, he said, adding that this new demand scenario would form the basis for the best and final offers that the gas supply proposers are now developing.

Shefchik said that Golden Valley Electric Association, the Fairbanks-based electric utility, has determined that it would be a summer customer for gas usage, given the wholesale gas price that the Interior Energy Project is targeting for Fairbanks. This summer gas demand would be helpful in supporting year-round usage of the gas supply chain, given the huge seasonal swings in heating energy demand between summer and winter, Shefchik commented.

Szymoniak also presented a high level overview of the finances to date of the Interior Energy Project. A first phase of the project, which finished at the end of 2014 and involved the pursuit of an LNG plant on the North Slope, cost a little over $14 million, he said. So far phase two, the current effort to find an appropriate gas supply for Fairbanks, has cost just over $115,000. This expenditure has been met from state capital appropriations. However, the build out of the Fairbanks gas distribution network has been supported by $52.7 million in loans through the Sustainable Energy Transmission and Supply Fund. The project has yet to issue any bonds, Szymoniak said.

Funding of up to $54 million for the Pentex purchase came from AIDEA's Development Finance Program and not from the Interior Energy Project financing package that was established by the state Legislature, AIDEA spokesman Karsten Rodvik has told Petroleum News.

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