The Alaska Industrial Development and Export Authority and the Interior Gas Utility, of Fairbanks, have closed on a $59 million purchase of a small natural gas utility owned by AIDEA that serves downtown Fairbanks.

The purchase or Fairbanks Natural Gas by the IGU a includes the small gas liquefaction plant year Port MacKenzie, in the Mat-Su, from where chilled liquefied gas, or LNG, is trucked to Fairbanks. AIDEA is the state’s development finance corporation.

Expansion of natural gas service in Fairbanks is vital to the community’s meeting new air quality standards required by the U.S. Environmental Protection Agency, and also in giving residences and businesses an alternative to fuel oil for space heating.

Sale of the Fairbanks utility is also important to the Matanuska-Susitna Borough because IGU’s plan to expand gas distribution in Fairbanks will also require an expansion, eventually, of LNG plant capacity in the Mat-Su.

Jomo Stewart, IGU’s general manager, said the utility is now looking at two options for new LNG supply from Mat-Su. Stewart is still general manager but Dan Britton, manager of Fairbanks Natural Gas, will be the CEO of the two combined utilities, Stewart said.

One LNG option is a new, larger at the site of the existing plant near Port MacKenzie, he said. A second is new plant at Houston, on the Parks Highway, in a proposal advanced by Siemens, an international technology company, in a partnership with two Alaska Native entities, Knikahtnu Corp. and Knik Tribal Council.

Now that the purchase from AIDEA has closed both options will be considered by IGU’s board, Stewart said.

Building a new plant at the Port MacKenzie site would cost $48 million to $50 million according to estimates put together several years ago by a private lower 48 company which at the time was interested in developing the project. Those numbers would have to be updated, Stewart said.

Siemens has meanwhile proposed a packaged plan to design, build and operate a plant at Houston using a modular LNG technology the company has developed and put into operation in several locations.

The company would also provide financing, and while it has not given IGU a construction cost estimate it has proposed a firm price for LNG and gas delivery to Fairbanks that would be well below the present costs, it said, of delivering LNG by truck to Fairbanks Natural Gas.

Stewart said IGU now has some time to analyze both locations thanks to a new 5-million-gallon LNG storage tank under construction by Fairbanks Natural Gas that will be completed late next year.

Siemens’ modular design is of interest to IGU’s board, he said, because it would allow the utility to operate one unit producing one billion cubic feet per year, essentially meeting current demand with some growth, and then add a second or third module as demand grows.

The current plan for a new Port MacKenzie plant is a 3 bcf/year plant which, if built, would leave IGU with paying for substantial unused capacity, Stewart said. However, that plant could also be designed to be built in increments, but the cost of doing it is unknown.

An LNG plant at either Port MaKenzie or Houston could also be built to be relocated if a large North Slope natural gas pipeline is built someday. Also, Doyon Ltd. is exploring for oil and gas in the Nenana Basin near Fairbanks and while Doyon’s primary target is oil it is possible that natural gas could be discovered.

Meanwhile, having the storage will allow the utility to operate the present small plant more efficiently as demand for gas expands incrementally in Fairbanks, but there is no question that more LNG capacity will be needed at some point.

Both FNG and IGU have installed new gas distribution lines, in IGU’s case about 70 miles of piping in the North Pole area east of Fairbanks, but there’s not yet enough gas to fill the new pipes and start service to customers.

When the LNG storage is finished, and IGU is now looking at a second, smaller storage site near North Pole, more gas will be available and service can be started.

Fairbanks Natural Gas now sells about 700 million cubic feet a year of gas to about 1,100 residential and commercial customers in Fairbanks, mostly in the downtown core part of the city.

That will likely increase to about 1 billion feet and eventually 3 billion cubic feet, at which point a new plant at one of the Mat-Su locations will need to be built.

Expansion of LNG capacity also means more LNG trucks on roads in the Mat-Su and on the Parks Highway to Fairbanks. FNG now operates about three LNG trucks a day up the Parks, which increases to six or more trucks a day in winter.

More demand in Fairbanks could increase this substantially and more liquefied gas trucks on the roads would create hazards, but Siemens and Tikahtnu say shipments of LNG by rail to Fairbanks could be done from the site at Houston, which is adjacent to existing rail tracks as well as an Enstar Natural Gas pipeline.

The Alaska Railroad has already done test shipments of LNG, to demonstrate these could meet federal regulatory requirements.

The sale by AIDEA brings to a close a long, complicated effort by the state authority to assure an expanded natural gas supply for Fairbanks. It has been an expensive one for the state, too.

About $357 million has been appropriated by the state Legislature to support the Fairbanks effort through a combination of $57.5 million in grants, $125 million in low-interest loans and an additional $150 million in bonds that AIDEA can issue to fund further development.

In addition the Legislature has made $15 million in refundable tax credits available to help pay the cost of constructing new LNG storage tanks in Fairbanks.

The AIDEA grant and loan funds have paid for the building of the additional gas distribution lines by both IGU and Fairbanks Natural Gas, but the full development of the system will eventually require the bonds to be used also.

Meanwhile, AIDEA has itself financed the loan with which IGU is buying Fairbanks Natural Gas. The sale price was set at $54 million, which is what AIDEA paid for Fairbanks Natural Gas when it purchased it from the previous owners several years ago, but that price was adjusted upward to about $59 million to give AIDEA a return on its investment in purchasing the utility.

The loan term was set at zero interest for the first 15 years and with no payments due during that period. After that an interest rate of 0.25 percent will be paid for 35 years.

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