by Alan Bailey
Petroleum News

The Interior Energy Project, a project sponsored by the Alaska Industrial Development and Export Authority for the delivery of affordable natural gas to the Fairbanks area, raises some interesting questions about state government participation in sectors of the Alaska economy which might be otherwise viewed as the responsibility of private industry. AIDEA has a role of providing finance in support of Alaska economic development, with the eventual aim of assuring economic value for the state.

For years Fairbanks and the Interior have suffered from exceptionally high energy prices, especially given the high cost of fuel oil and diesel fuel. High energy costs likely inhibit economic activity and development in the city. And the use of wood burning stoves to alleviate heating bills has caused severe air pollution problems.

It has become apparent from discussions at AIDEA board meetings that attempts to bring affordable gas to Fairbanks face two primary risks that may dampen the willingness of private investors to put money into a gas supply project. The first of these risks revolves around the question of whether it will prove feasible to obtain a reliable source of gas at an affordable price for the city. The second risk concerns uncertainties over whether there will be sufficient future gas demand in Fairbanks to render a new gas supply viable. And that second risk relates back to uncertainties over how many Fairbanks residents and businesses would be willing to pay to convert their existing heating systems to use gas rather than oil as a fuel.

Without a gas supply and customers, private utilities are reluctant to sink money into the gas infrastructure. And without an assured demand, gas suppliers are hesitant to put capital into gas supply development.

AIDEA clearly sees itself as having a role in making state financing available to help overcome what may otherwise be an economic impasse, to achieve some critical mass of Fairbanks gas supply and demand, with the agency taking a back seat once that critical mass has been achieved.

Under the Interior Energy Project, AIDEA has already furnished loans to Fairbanks Natural Gas and to the Interior Gas Utility, the other Fairbanks gas utility, for the expansion of the gas distribution system in Fairbanks. And on Feb. 5 the AIDEA board approved a new loan, for the continuation of IGU’s distribution system expansion. However, an attempt to help finance the development of an LNG plant on the North Slope, to provide a Fairbanks gas supply, came to a halt late last year.

A recent announcement by AIDEA that the authority intends to purchase Pentex Alaska Natural Gas Co. as a means of achieving the Interior Energy Project objectives has raised the hackles of some legislators, who accuse AIDEA of apparently straying too far into the realm of private business. Whether this purchase goes ahead and the extent to which the purchase can solve the Fairbanks energy conundrum remains to be seen.