By Alan Bailey, Petroleum News

The Alaska Industrial Development and Export Authority has issued a request for information for potential supplies of Cook Inlet natural gas for shipment to Fairbanks. The request comes as part of the Interior Energy Project, an AIDEA initiative to bring affordable energy to Fairbanks and the surrounding area of the Alaska Interior.

As reported in the June 14 issue of Petroleum News, AIDEA has separately issued a request for proposal for the development of a means of shipping the gas to Fairbanks, potentially including the development of a liquefied natural gas plant in the Cook Inlet region, or perhaps the construction of a small-diameter gas pipeline to Fairbanks.

AIDEA wants responses to the request for information for a gas supply by July 16. And, while the agency will not view the information provided as binding, the agency says that it requires “an accurate representation of expected commercial terms.”

The request for information comes at the direction of the Alaska Department of Commerce, Community and Economic Development, following an order from Gov. Bill Walker, requiring the DCCED, the Alaska Department of Natural Resources and the Alaska Department of Revenue to collaborate in advancing the Interior Energy Project. The economies of Fairbanks and the Interior are suffering from high energy costs, and Fairbanks is experiencing poor air quality in the winter as residents try to reduce their home heating bills through the use of wood burning stoves.

Long-term supply

The state is seeking gas producers that can supply gas for at least five years and preferably for a longer term. The request for information says that the state anticipates negotiations leading to gas supply agreements, with either the Interior gas utilities or a developer of a Cook Inlet LNG facility finalizing the negotiations. In April Robert Shefchik, AIDEA’s team leader for the Interior Energy Project, told the AIDEA board that the idea would be to enter gas supply negotiations to the point of near commercial terms, with the ultimate objective of the Fairbanks utilities signing up for supply contracts.
The intent is to be able to deliver gas to Fairbanks homes and businesses at a price of $15 per thousand cubic feet, the request for information says.

The request for information says that although Fairbanks gas demand would be subject to significant seasonal swings, with demand peaking in the middle of the winter, the storage of LNG, assuming that the gas is transported to Fairbanks in this form, would somewhat smooth out the peaks and troughs in the gas supply. However, AIDEA wants potential suppliers to indicate their ability to accommodate seasonal supply variations, and to say whether they anticipate the use of gas storage in the Cook Inlet region as a means of accommodating seasonal demand swings.

Increasing demand

AIDEA says that, depending on the rate at which Fairbanks residents convert to the use of natural gas, the agency anticipates Fairbanks gas demand increasing from 3.44 billion cubic feet per year in 2017 to 9.25 bcf per year in 2026. About 2.6 bcf of the initial demand will come from Fairbanks electricity utility, Golden Valley Electric Association, which anticipates using natural gas for power generation. The power generation gas demand should drop to 2 bcf per year in 2019 and remain fairly constant after that. But total gas demand would grow, as increasing numbers of Fairbanks residents and businesses covert to gas for heating buildings, AIDEA thinks.
In anticipation of new gas supplies coming available in Fairbanks, utilities Fairbanks Natural Gas and Interior Gas Utility have already started building out the gas distribution pipeline network in the city, using AIDEA funding assistance under the Interior Energy Project.

Pentex purchase

Also as part of the Interior Energy Project AIDEA recently confirmed its purchase of Pentex Alaska Natural Gas Co. Pentex owns Fairbanks Natural Gas, a small LNG facility near Point MacKenzie on Cook Inlet and a trucking operation for shipping LNG to Fairbanks. However, Pentex is in the process of selling its LNG plant and trucking operation to Harvest Alaska, a subsidiary of Hilcorp Alaska, a major Cook Inlet gas producer. The completion of the various deals involving Pentex will leave AIDEA as owner of Fairbanks Natural Gas.
The price of gas delivered in Fairbanks by Fairbanks Natural Gas through the current Pentex configuration is far above AIDEA’s $15 target level. However, AIDEA says that, as owner of Fairbanks Natural Gas, it will be able to use its relatively low business costs to reduce the price of gas for Fairbanks consumers. And the eventual aim is to achieve operational efficiencies by consolidating the Fairbanks gas utilities into a single system that could then be sold or perhaps leased to a utility operator. And AIDEA anticipates the negotiation of new gas supply contracts that, in conjunction with the new utility configuration, would bring the Fairbanks gas price down to that $15 level.

RCA authorization requested

On June 15 AIDEA filed a request to the Regulatory Commission of Alaska for authorization of the agency’s Fairbanks Natural Gas takeover. Fairbanks Natural Gas is currently regulated by the commission but, as a public utility owned by AIDEA, would no longer be rate regulated. AIDEA’s filing says that the agency anticipates keeping Fairbanks Natural Gas’ current management team in place, with the utility’s operations continuing uninterrupted. AIDEA has asked for expedited consideration of its authorization request, with authorization needed by Oct. 15, the closing date for the Pentex purchase agreement.
The Interior Energy Project originally planned to obtain gas for Fairbanks via a to-be-constructed liquefied natural gas plant on the North Slope, with the LNG being carried by tanker truck down the Dalton Highway to the city. In early January, following months of investigation, AIDEA terminated the project, primarily because of concerns over the projected cost of the gas that would have been supplied by this means. Although AIDEA has not entirely dismissed the concept of obtaining gas from the North Slope, the agency is now focusing its efforts on gas from the Cook Inlet basin, given the recent resurgence of the Cook Inlet gas industry.