AIDEA rules to keep on trucking to natural gas-starved Fairbanks

Another chapter, and perhaps a final one, is about to be written in a long, troubled saga of trucking liquefied natural gas to Fairbanks. Last week the board of the Alaska Industrial Development and Export Authority approved a contract to sell Fairbanks Natural Gas, which is now owned by AIDEA, to the Interior Gas Utility, a new public utility formed to expand natural gas service in the Interior city.

IGU’s board has 60 days to review the agreement, which has been long in development, according to the utility’s general manager, Jomo Stewart. IGU would pay AIDEA about $60 million for Fairbanks Natural Gas, he said. The state authority purchased FNG from its private owners for $52.5 million in January 2015.

Fairbanks suffers from severe winter air pollution caused by wood smoke and emissions from oil furnaces and bringing cleaner-burning natural gas to areas outside a small core downtown area now served by Fairbanks Natural Gas is a top priority for community leaders.

Under private ownership, the small Fairbanks Natural Gas utility had developed a group of buyers — about 1,100 — in the core downtown Fairbanks area, most of them commercial.

To dent the air pollution problem, however, Fairbanks needed to greatly expand the distribution of gas. The Fairbanks North Star Borough helped form IGU as a public utility, to build a gas distribution system in parts of the borough not served by FNG.

AIDEA stepped in to help finance the expansion and the Legislature appropriated substantial funds in a combination of grants and soft loans administered through the state authority.

Despite the need, the expanded project, The Interior Energy Project, the name AIDEA applied, has travelled a bumpy road, and it’s not clear that it will succeed.

When crude oil prices were at $100 per barrel and heating oil sold for $4 a gallon in Fairbanks, a plan to expand the small FNG distribution system and supply it with additional LNG trucked to Fairbanks seemed like a good idea.

If LNG could be delivered to Fairbanks for about $15 per thousand cubic feet, the goal of the trucking operation, it would be roughly equal to fuel oil at $2 a gallon. Whether the $15 per mcf target could be met has always been problematic. AIDEA’s initial effort was to build a small LNG plant on the North Slope and truck liquid gas down the Dalton Highway. That foundered when studies by MWH Global, a company that worked on the project, found costs would be higher.

MWH Global, based in Colorado, is a large engineering and technology company with extensive experience in energy.

By that time doubts also surfaced over reliability of a large-scale LNG trucking operation on the Dalton, an unpaved road subject to winter road closures, and which also supports a large amount of trucking to support oil operations on the North Slope.

An extended closure of the Dalton due to spring flooding ended the discussion of trucking LNG to Fairbanks from the North Slope.

MWH withdrew from the project in early 2015 and AIDEA and FNG switched their focus to expanding the existing small Titan LNG plant off Ayrshire Road in the Point MacKenzie area of the Matanuska-Susitna Borough. The plant had supplied FNG’s existing small system for several years.

Large tanker trucks carrying LNG traveled down Knik-Goose Bay Road, to Vine Road and eventually to the Parks Highway. At the peak of winter demand about three trucks a day were needed.

Meanwhile, in early 2015 AIDEA agreed to purchase Pentex, Inc., which owned Fairbanks Natural Gas, along with Titan, an affiliated company that owned the small LNG plant in the Mat-Su. The purchase was essentially engineered behind closed doors by senior officials in the administration of Gov. Bill Walker and presented to AIDEA’s board for a quick decision.

A weekend board meeting held by telephone was held to approve the purchase. Legislators were angry over the lack of transparency and process, and AIDEA officials rushed to Juneau to smooth ruffled feathers. They explained that AIDEA’s ownership would be only temporary until a sale could be arranged to IGU.

There were still efforts to bring private enterprise into the deal, at least the LNG supply. Hilcorp Energy, the major Cook Inlet gas producer, stepped in with an offer to buy the Titan plant and pay for its expansion. Gov. Bill Walker’s administration blocked that, however, when former attorney general Craig Richards argued it would constitute an antitrust violation.

AIDEA solicited proposals from other companies and worked with Salix, Inc, a subsidiary of Avista, an experienced energy company based in Spokane, Washington. Salix proposed investing $68 million to expand the Titan plant. The deal fell through, however, when AIDEA decided to do the project itself and not have a private partner, partly because the return on investment to a private investor would be higher than that needed by government.

That left AIDEA still needing to expand the plant, however, a responsibility it would now pass to IGU as the proposed new buyer.

There are still questions over whether LNG can be delivered to Fairbanks even from the Mat-Su plant at the $15 per mcf target. AIDEA just concluded a gas purchase agreement with Hilcorp to buy gas at over $7.50 per mcf. When converted to liquid form and trucked up the Parks Highway, that final delivered cost to Fairbanks would be about $21 per mcf, according to sources familiar with the project who asked not to be identified.

The biggest challenge now, however, is that crude oil prices are about half of what they were in 2014 and 2015. Heating oil prices in Fairbanks have also dropped sharply, to the $2-per-gallon range. If gas, trucked as LNG from the Titan plant, can really be delivered at the $15/mcf price, it might still compare with fuel oil, barely.

But homeowners switching from oil to gas must pay the costs of converting furnaces, which can amount to several thousand dollars. There’s also the cost of building a service line from the nearest distribution pipes that are now being built by IGU, whose service area is outside the core Fairbanks area served by Fairbanks Natural Gas. FNG is also expanding its distribution system although it cannot hook up new customers until there is more gas available.

The conversion costs to gas, and the lower costs of fuel oil, mean it’s unclear whether enough consumers can be persuaded to make the switch to amount of demand for gas that will make the project work.

Local officials are working to develop low-cost loan programs to help finance conversions, a procedure common with utilities in many places, but the programs don’t yet exist.

Stewart, IGU’s manager, believes demand for gas will eventually grow even if oil prices remain near present levels but it will take longer than was previously forecast. Commercial buyers will likely sign up because they have other reasons than just the energy cost, he said. For example, not having to install a large fuel tank for a large retail store is a considerable advantage, Stewart said.

Borough officials have said previously that several potential commercial developers, mainly “big box” retailers, are holding off on plans for building in Fairbanks until more gas is available. Many of these companies have standard designs and engineering for stores that assume availability of gas, it was said.