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For years, many Alaskans have hoped for a North Slope gas pipeline project, longing for the related economic boom and for the cheap fuel that could be available to the rest of the state.
While North Slope producers and Alaska government leaders focus on the long-discussed, large-scale gas pipeline project that many desire, a Fairbanks-based, privately owned gas distributor is seeking to jump-start the process of commercializing North Slope gas.
Fairbanks Natural Gas has been negotiating with North Slope producers to purchase up to 1 billion cubic feet of natural gas a year, as a new feedstock for the company's growing gas distribution system in Fairbanks.
As envisioned, the company would build small liquefaction facilities on property it has acquired in Deadhorse, trucking LNG the 400-plus miles south to Fairbanks. Anticipating purchasing about 1 billion cubic feet of gas annually, Fairbanks Natural Gas expects to invest between $20 million and $50 million on the project, according to company president Dan Britton.
"One of our primary drivers in our North Slope project is to get into a stable-priced market," he said. "It's a huge investment for a company of our size, but it will provide some stability and security."
Already, the company has spent about $250,000 on the project, including land acquisition and permitting work. Fairbanks Natural Gas received its development permit from the North Slope Borough in November 2006, a lease from the state for land at Deadhorse, an exemption from the Environmental Protection Agency for completing a storm water pollution prevention plan and a determination from the Federal Aviation Administration that the project will not constitute a hazard to air navigation.
As soon as negotiations with the producers are complete and taxation issues are resolved, Fairbanks Natural Gas will order equipment and begin the construction project, anticipated to be a 16-month process.
Trucking liquefied natural gas down the Dalton Highway--a mostly gravel, industrial route with significant driving and road hazards--will be more expensive and add to maintenance costs for the company's existing fleet of 16 tanker trailers, Britton said. But those increased transportation costs will likely be offset by savings in North Slope gas prices, compared to the ever-increasing Cook Inlet gas costs, he said.
ESCALATING PRICE FOR EXISTING COOK INLET FEEDSTOCK
Currently, Fairbanks Natural Gas buys its feedstock from the Beluga River gas field in the Cook Inlet region. The gas is liquefied at the company's Point MacKenzie facilities, trucked to Fairbanks using special tractor-trailers, re-gasified at one of two storage centers and sent to the company's 1,100 customers in Fairbanks via the ever-growing pipeline network the company is building.
Fairbanks Natural Gas has grown substantially each year since starting up in 1997, adding main distribution pipe and feeder lines each summer. In 2000, the company started gas service to its 100th customer. Now, Fairbanks Natural Gas supplies gas product to more than 1,000 residences and nearly 100 businesses through its 70 miles of distribution pipeline.
In past years, Fairbanks Natural Gas was competitive with conventional markets, sometimes as much as 30 percent less expensive than oil-based heating fuels in Fairbanks. But a recent tightening of natural gas supplies in Cook Inlet has transformed that traditionally, low-price fuel into a highly sought after product.
In 2006, the company's supplier of Cook Inlet feedstock, Aurora Gas, gave the Fairbanks-based distributor about a month's notice that it would stop providing gas. Scrambling, Fairbanks Natural Gas ended up signing a short-term contract to purchase gas from Enstar Natural Gas Co., at a commercial rate. Feedstock costs have doubled in the last year, Britton said. Currently, Fairbanks Natural Gas customers are paying roughly 10 percent more than comparable oil-based heating fuels, he said.
TAXATION, VALUE CALCULATIONS POTENTIAL 'DEAL BREAKERS'
Development of the North Slope LNG project has progressed slowly. Britton described efforts that Fairbanks Natural Gas has completed to date during a September meeting of the Alaska Miners Association.
Negotiations with North Slope oil and gas producers, who control the flow of gas from existing infrastructure, are still in the process, Britton said.
"We're dealing with large producers who have a different focus than we do," he said. "Our project, in comparison to the scale of their business, is nothing. With all the issues to work out, it seems to be difficult for them to allocate the resources to our project."
In addition, the state's profits-based taxation system has some detrimental impacts on the proposed LNG project. Because the prevailing value for natural gas is currently tied to the price of crude oil, selling for more than $80 per barrel in September, North Slope gas is being valued at more than $8 per million cubic feet, Britton said.
Taxing North Slope gas at 22 percent of $8 per million cubic foot "... instantly kills our project," Britton said.
The company is working with the Alaska Department of Revenue and the Legislature to identify the issues and work out a solution. Historically, small amounts of natural gas have been sold on the North Slope to Deadhorse customers for slightly more than $1 per million cubic foot, Britton said. Those long-term contracts will likely increase, he said, possibly up to $4 per million cubic foot, but still well under the current system for establishing a taxable value for North Slope gas.
"Obviously we view it as an abundant gas supply with little market, so it should be priced to reflect the abundance," Britton said.
Fairbanks Natural Gas hopes to finalize negotiations with producers for a gas supply contract by the end of 2007. If so, the company can begin ordering equipment for the LNG plant, with a possible June 2008 construction target.
LNG STORAGE IN FAIRBANKS INCREASES
Meanwhile, the company continues to grow its Fairbanks system. Fairbanks Natural gas is a wholly owned company of Pentex Alaska Natural Gas Co. and Pentex is a privately held company with limited shareholders, with financial commitment from the Harrington Partners.
In 2006, the company acquired about 22 acres of land in southwest Fairbanks, next to the Tanana River levy, for its new storage facility. The company installed two 50,000-gallon storage tanks in late 2006 and new vaporization equipment, with a total cost of $3.2 million for the project.
This year, Fairbanks Natural Gas installed two 75,000-gallon storage tanks, each with a $1 million price tag. The second tank was installed in September, with electronics, piping and final installation work being completed at the end of the month.
The new property allows for future expansion, as the company's gas distribution pipeline grows. Up to 16 large LNG storage tanks can be installed on the property, Britton said.
The four new tanks, totaling 250,000 gallons, add to the company's existing storage of 92,000 gallons located off of Van Horn Road. At the peak demand in winter, the total storage provides a six-day supply of gas for the existing customer draw, Britton said. In summer months, as consumption drops, the in-town supply increases to about 25 days for peak draw.
"That's one of the biggest challenges to our business--we have such a big capital investment for the short peak," Britton said.
In addition, the company continues to expand its network of distribution pipe throughout Fairbanks, illustrated during Britton's power point presentation. The company started in 1997 with just a few customers in the south industrial part of Fairbanks.
Expansions continued north, including a large project crossing the Chena River to offer gas to the recently expanding retail and commercial district growing on the northeast side of Fairbanks.
In 2006, Fairbanks Natural Gas installed 14 miles of new distribution pipe and hooked up 150 new customers, for a capital cost of $1.6 million.
REPLACEMENT WORK FOR OIL TRANSIT LINE CONTINUES
On the North Slope, oil and gas producers are more focused on replacing transit line pipe, suffering from unexpected corrosion due to low flows of crude oil. The problems were identified more than a year ago, when operator BP temporarily shut down the transit line moving crude oil from the Eastern Operating Area.
Analysis of data from smart pig inspections completed in July 2006 identified 16 anomalies in 12 different locations in the oil transit line located between Flow Stations 1 and 2, according to BP's Web site. Follow-up inspections indicated corrosion-related wall-thinning appeared to exceed BP criteria for continued operation.
After a spill reported in early August of four to five barrels of crude, BP announced they would ramp down production from about 1,000 wells during a three- to five-day period and ultimately replace 16 miles of transit pipeline, according to the Joint Pipeline Office. In March 2006, 200,000-plus gallons spilled from the Western Operating Area transit line due to corrosion, according to JPO.
Last winter, construction crews began replacing 8 miles of old transit line, ranging in size from 30 to 34 inches in diameter, with 16-inch diameter line.
"Lower diameter pipe ensures that the flow rates remain high enough so that small volumes of sediment within the crude oil stream will not settle out and accumulate in the lines," said Spokesman Daren Beaudo, in an e-mail response to questions about BP's pipeline maintenance and construction project.
This winter, crews will continue replacing eight more miles of transit lines. Total cost on the two-year project is about $250 million, Beaudo said. "It is not a replacement as much as it is a renewal of the system in order to address the production needs for decades to come," he added.
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