FAIRBANKS — The state-backed plan to truck natural gas to Fairbanks looks like it’s strayed from the promise that was used to sell the multimillion-dollar project to the Legislature, to deliver low-cost energy to the community.
The head of the Interior Gas Utility, Bob Shefchik, told the Borough Assembly during a quarterly update that there are several issues emerging in the Interior Energy Project, including cost, timing and — more recently — a shifting of risk from private investors to Fairbanks utilities.
The rising price has been a more recent development.
The initial goal set when pitching the project was $15 per thousand cubic feet, or mcf, which is about half the cost of heating with $4 per gallon of heating oil.
The estimate provided by the Interior Gas Utility to the assembly was $20.50 per mcf, with a range between $17.80 and $26.30 per mcf.
Shefchik explained that the biggest hurdle to hitting $15 per mcf are all the expenses before gas reaches Fairbanks; there’s the cost of gas, the cost of the North Slope processing plant, which has risen significantly since it was first pitched, and the cost to truck the gas. His estimates put it at $14 per mcf.
“At $14 to Fairbanks, it’s a sticker shock, even at $12 at the low end of the range (estimated by the state) it’s a challenge,” he said. “So from the original target of $10, we’re economically challenged before we even get gas to town.”
The exact price of the North Slope plant hasn’t been released yet, and Shefchik said he’s expecting to get a peek at them in the coming days.
The IGU estimates to store and distribute gas are about $6, according to Shefchik’s presentation. He said it’s difficult to trim down the local price because much of the low-cost loans and grants have already gone to helping the North Slope plant along.
“Gas at $10 was easy, but the combination of pushing up the costs up north, which pushed the lower-cost energy up north, now you’re at $20 per mcf (to consumers), which in our mind is a challenge to conversion,” he said.
That estimate does not include the cost to convert to natural gas, and Shefchik estimates that cost is between zero dollars for people who pay up front for the conversion up to $7 per mcf for those who finance the $10,000 or more conversion.
“It has been known all along that there isn’t enough money to do everything promised,” Shefchik said, “and the math is coming home to roost.”
The other criticism of the project was a recent move in negotiating the gas contracts with the state-backed natural gas processing facility on the North Slope. The plant is being built in a partnership with a private company and its investors.
Shefchik said the latest proposal would put IGU, the private Fairbanks Natural Gas and the Golden Valley Electric Association responsible for all the costs outside the North Slope plant, while preserving a 12.5 percent rate of return for private investors.
Hopkins asked if the arrangement is driving up the cost estimates.
Shefchik explained that many of the costs today are mostly the same under either arrangement, but said any risks or interruptions in gas supply will be shouldered by the utilities.
“Do you believe that?” Hopkins asked.
“Yes,” Shefchik said, “but what changes is the risk of unknown costs.”
Shefchik went on to explain that if there is an interruption and for some reason BP can’t sell gas to the project, the utilities would end up paying while getting nothing.
“We’re paying for the use of the plant, and if we don’t provide the gas, we still have to pay for the plant that’s sitting there, idling,” Shefchik said. “That’s the exact risk we’re running.”
Ultimately Shefchik said everything amounts to a concern that the state agency heading the project, the Alaska Industrial Development and Export Authority, is too focused on the plant and not at the final price paid by customers.
“We’ve turned from a partner to someone who’s whining for money from them,” he said. “They’re missing the point that we’re trying to work on a goal for the community. … We need a full community solution and focus on this community mission and not focus on getting a plant that will be successful, what’s successful is getting low-cost gas to the community.”
Assemblyman Van Lawrence asked what the options are to salvage the original goal and lower the price of the project.
Shefchik said other sources of gas, including a proposal to bring gas up from Cook Inlet to the Interior by rail, are beginning to look competitive with what the state’s project has to offer, without the risk.
“All those are challenged by the fact that the plant costs a lot more than anybody expected and Senate Bill 23 (the bill that made more than $300 million of low-cost loans and grants available for the project) was tight to start with,” he said. “And it doesn’t mean its not going to work.”
Assemblyman Lance Roberts said he hopes AIDEA announces positive progress on a number in the next few days that are lower than IGU’s estimates, but he said he doesn’t doubt the need for more state subsidies for the project.
“I think ultimately we’ll need more help from the Legislature and our next governor,” he said. “The bottom line is that we have a populations that makes these projects hard.”
AIDEA representatives could not be reached as of press time. A follow-up story with the state’s response is planned.
Contact staff writer Matt Buxton at 459-7544. Follow him on Twitter: @FDNMpolitics.