TIME TO TAKE ALASKA OUT OF THE ICEBOX – Wall Street Journal

TODAY: Another Important Deadline; here is how to easily comment!  Your OCS comment by TODAY’s deadline makes the legal record more supportive of reasonable OCS exploration for Alaska and the benefit of all Americans. A reasonable OCS program will help save Alaska’s economy and protect America’s economic recovery and national security.  Send us your comment and we will post it to make it Internet searchable!  Meanwhile, here are comments from Jason Brune (NGP Photo),Bob Hoffman, Kaye Laughlin and myself.  Others who submitted comments include Mary Ann Pease of Anchorage….  We have not yet seen comment from Alaska’s U.S. Senators or Congressman or from any Alaska legislators.   -dh  (A modest reminder for why we stay motivated!)

Former Canadian Cabinet Minister Stockwell Day provides an insightful view of current northern energy debates and puts them in context of the Mackenzie Valley Pipeline Berger hearings over three decades ago.  His insight should also be appreciated by Alaskan and Washington energy decision makers.  -dh

(Related to the story below, note that the Alaska Gasline Development Corporation (AGDC)  will be making a presentation to the Alaska State Legislature’s House and Senate "In-state Gas Caucus" on the "Alaska Stand Alone Pipeline Project Plan" at 10 a.m. this morning in Anchorage.  You can watch by video conference.  We commend Doug Smith for volunteering to write a detailed update on the Fairbanks Natural Gas’ (FNG) challenge to supply interior Alaska consumers with natural gas.  He posits that FNG’s plans and those of AGDC are not mutually exclusive.  We think you will appreciate Doug’s review.  -dh)

Fairbanks Natural Gas Update

by

Doug Smith

Despite the controversy and uncertainty that multiple, competing ideas create, one company has broken ground on its plan to get an Alaska North Slope (ANS) gas supply to Interior Alaska. I believe Fairbanks Natural Gas and affiliate Polar LNG have put forth a viable plan that will be ready to begin gas deliveries within two years at a reasonable cost and with a volume that will provide benefit to significant numbers of Interior Alaska residents.

FNG sought to remedy its supply issues by seeking an Alaska North Slope (ANS) supply. The company secured a long term supply contract with ExxonMobil in 2008. The deal with ExxonMobil provides much larger gas volumes than Cook Inlet currently provids, and a stable pricing structure that is not subject to the escalation recently seen in the Cook Inlet market. The gas supply on the North Slope requires new facilities to condition and liquefy the gas for transport.

Since concluding the deal with ExxonMobil, FNG has sought financing for new ANS facilities, including an arrangement with the Alaska Gasline Port Authority (AGPA), in which APGA offered to purchase FNG,  and then use its bonding authority to obtain financing for construction of the new facilities. AGPA was stalled in pursuing the deal after the member municipalities (Fairbanks North Star Borough and City of Valdez) required AGPA to obtain voter approval of the project plan before proceeding. The vote is scheduled for October 2011. FNG and AGPA are not currently moving toward closing a deal.

Meanwhile, FNG has obtained financing through its parent companies and private investment, and created affiliate Polar LNG, LLC to own and operate the North Slope plant. Polar obtained state and federal permits for the project throughout the winter of 2011, and broke ground on the project in June this year. It is scheduled to be operational in fall 2013. The ANS facilities needed are:

·         3.8 mile pipeline carrying feedstock gas from the Prudhoe Bay Unit to the Polar site in Deadhorse

·         Gas treatment plant, with a capacity of 30 mmscfd

·         Gas liquefaction plant, with output of 255,000 gallons LNG per day

·         15 MW power plant

·         Truck loading facility

·         29 specialty LNG tanker trailers, to supplement FNG’s existing fleet of 14 tankers

The Fairbanks area electric utility, Golden Valley Electric Association (GVEA) is evaluating a proposal to sign on as an “anchor client” and take deliveries of around 3.4 bcfy to use in its recently constructed North Pole Expansion Plant. If GVEA elects to pursue the LNG supply, a large storage tank and vaporization facility would be constructed near GVEA’s plant.

Fairbanks is the largest city in the United States without a pipeline source natural gas supply. The plan to deliver large quantities of gas by truck is a frequent topic of debate. It is often asked why bother with the LNG trucking plan, when a pipeline is a better, seemingly more permanent solution. The answer is timing. The LNG trucking plan will bring a new source of energy to the Fairbanks area within two years. Even the AGDC plan, with significant pressure from the legislature pushing it, cannot get a pipeline source to Fairbanks before 2019.

The liquefaction plant uses conventional technology composed primarily of “off-the-shelf” components. There is no technology development and little customization required. The process used for liquefaction is nitrogen recycle process, where nitrogen is used as a refrigerant, cooling the methane to its liquefaction point of -260 degrees F. The nitrogen recycle process is very similar to hundreds of air separation plants in service around the US that provide liquid oxygen, nitrogen, argon and other cryogenic fluids. The project is designed in truck-sized modules that will be constructed off-site and set and interconnected at Deadhorse.  This provides for the rapid development timeline.

A report prepared by Steve Haagenson and Jim Dodson (Haagenson, 2011) for the Fairbanks Economic Development Corporation concluded that the net present value of the savings realized from a LNG-truck delivered supply available in two years is more than twice the value of  a pipeline based supply available in 7 years. The report also found that the cost of LNG deliveries to a city gate and pipeline deliveries the same gates are nearly identical, at $11.75/mcf and $11.74/mcf respectively. The AGDC project plan provided additional verification of this, estimating the Fairbanks city gate price of its gas would be $10.45 in 2011 dollars. If this is inflated at a conservative 2% rate to 2019, the price is $12.50.

There is also concern about lost investment in LNG facilities if a pipeline source becomes available during the economic life of the LNG project. There are options for the LNG facilities that preclude lost investment. First, the LNG could continue to be produced at the North Slope, and the product delivered to communities both on and off the road system that are not served by natural gas. The same tankers that haul LNG to Fairbanks now could be redirected to other locales. Villages not on the road system could receive LNG deliveries in ISO containers by barge. The planned LNG facilities are constructed in modules, and could be dismantled and sold to other stranded gas development areas. The build-out of distribution piping and installation of gas appliances is the same regardless of the gas transmission method. This means that Interior Alaska consumers will not be saddled with duplicate infrastructure costs if a pipeline gas supply becomes available.

There is also some concern about the safety of hauling LNG over the highway.  Hauling of LNG in highway tankers has taken place since the 1970’s and has a record of safe operation. A LNG consulting firm, CH.IV has compiled a list of LNG tanker accidents that have occurred since 1971, and the results and magnitude of the accident (CHIV, 2009). Very few of the incidents reported resulted in fire or product leakage. One incident resulted in a fire and explosion, but it occurred in a trailer that was not of the specialty design used by FNG. It occurred in a single walled pressure vessel with external foam insulation. It was not the double wall vacuum-jacketed type that will be used by FNG, and that are widely used in the US.

The tankers are designed with multiple safety systems. They carry double walled tanks and redundant overpressure relief devices. If LNG is spilled, it readily evaporates, leaving no residue. The auto-ignition temperature of LNG vapors is about twice that of diesel fuel. LNG vapors readily ignite, and quickly burn back to the LNG pool they originated from. Although rapid burning might sound like a serious risk, this tendency toward rapid burning is actually beneficial in the control of the vapors. It reduces the likelihood of explosive concentrations of gas occurring. LNG vapors have a narrow explosive band. The vapors are only explosive when mixed 5% to 15% with air in a confined area. So a highway tanker roller that results in an LNG spill is very unlikely to cause an explosion, even though a fire may result. The tanker design includes a rupture disk as a failsafe device to prevent overpressure that could result in explosive conditions.  FNG has been hauling LNG over the Parks Highway since 1998, and has had two tanker accidents in that period. Neither resulted in fire or explosion, and the LNG in the damaged tankers was transferred to other tankers, and any spilled LNG evaporated without incident.

The project plan calls for Polar LNG to own the specialty LNG tankers, but to contract the hauling to firms experienced in traveling the Dalton Highway. At periods of peak demand, there will be an additional 35 trucks on the Dalton daily. The Alaska DOT has stated that this additional load is within the capacity of the highway.

Another topic of frequent discussion about the LNG project is FNG’s status as a regulated utility. FNG currently serves Fairbanks under a certificate from the Regulatory Commission of Alaska. FNG has announced no plans to seek to rescind that status once the ANS supply becomes available.  FNG’s primary business is selling natural gas – not manufacturing LNG. It  manufactures LNG as a means to obtain gas to sell. If any of the Alaska natural gas development plans since Gubik in the 1950’s had been realized, Fairbanks Natural Gas would be distributing that piped gas in the Interior, and not LNG. FNG is poised to leap onto any economically viable gas supply that allows it to expand distribution.

FNG customers are not typically on “take-or-pay” contracts. They can switch to other fuel sources at any time they desire. FNG has several commercial customers on “interruptible” service, due to the supply constraints, where in periods of high demand these customers can be shut-off from gas and must switch to alternate fuels. These interruptible customers maintain dual-fuel equipment. Residential customers are not on interruptible service. Fairbanks area mechanical contractors report that conversion of residential oil fired boilers to natural gas typically runs $1500 to $2000.

The option for Fairbanks to take no action and continue to wait for a gas pipeline is the worst of all alternatives. Waiting only lets costs escalate, drives residents and business investment to less costly locales, and accelerates the downward economic spiral that Interior Alaska finds itself in. FNG and its affiliates are clearly serving the public interest by investing in Alaska to provide an alternative to fuel oil heating. The LNG plan not only provides a lower cost fuel, but cleaner burning fuels that will help Fairbanks address its air quality non-attainment problems.  This project will serve Interior Alaska well in the short term, and can be part of a long term solution for a larger portion of the state.

Doug Smith, PMP is the Alaska Regional Manager for Haskell Corporation and has managed energy projects across Alaska. Since 2010 he has been consulting with Fairbanks Natural Gas and Polar LNG on the development of its project.

Jason Brune of Anchorage commented to BOEMRE:

Works Cited: Doug Smith Commentary

FNG. (2011, July 20). Your utility bill. Retrieved July 20, 2011, from Fairbanks Natural Gas: http://www.fngas.com/calculate.html

Gas, F. (2011, June 14). Fairbanks Gas. Retrieved July 20, 2011, from Fairbanks Heating Oil Prices: http://www.fairbanksgas.com/

Haagenson, D. a. (2011, Feb). Comparitive Analysis of Fairbanks Energy Bridging Projects. Retrieved July 18, 2011, from Fairbanks North Star Borough: http://www.co.fairbanks.ak.us/Mayor/EconomicDevelopment/BridgingprojectComparison2-28-v1.pdf

Liles, P. (2007). Natural gas system grows in Fairbanks: new customer on the North Slope? Alaska Business Monthly.