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Interior Natural Gas Conversion an Empty Pipe Dream for Now

State funded and AIDEA financed Interior Energy Project in holding pattern for hook-ups


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Residents in parts of Fairbanks and North Pole will have to wait a bit longer to get hooked up to natural gas.

In 2015, more than seventy-three miles of pipe were installed in North Pole, the first of three anticipated phases of construction to expand natural gas infrastructure in a wide swath around Fairbanks, north to Fox and south to Salcha.

The construction is part of the Interior Energy Project (IEP), created by the Alaska Legislature in 2013 to bring clean, low-cost energy to communities in Alaska’s Interior. It is financed by AIDEA (Alaska Industrial Development and Export Authority) and overseen by a handful of state agencies.

That pipe will remain empty for now, as the Fairbanks North Star Borough and state of Alaska work to answer questions about the project: the source and cost of the gas, how to get it to Fairbanks, and where to store it, as well as what options homeowners will have to tap into it and possible payment options.

And while there are few answers right now, Jomo Stewart, general manager of Interior Gas Utility (IGU), says the project is proceeding on all fronts. Stewart, who was hired in April, is tasked with developing a business plan for IGU and overseeing the conversion process.

“We’re all rolling the ball forward,” Stewart says.

 

Date Pushed to 2018

Initially, the project was supposed to get off the ground in 2015, but higher costs and missed deadlines have pushed that date to early 2018. In June, Stewart gave the Fairbanks North Star Borough Assembly an update on the project’s progress.

“I told the assembly, ‘This is becoming realer by the day,’” Stewart says. “It became real on the local level. The distribution system to move gas to almost six thousand people is already in the ground. You would just need to put in service lines. It’s within reach of about 5,600 structures. That’s a big deal.

“The fact that we’re actively under negotiations to get that gas, that’s a big deal.

“We’re looking at the LNG [liquid natural gas] capacity to get it here, that’s a big deal and that’s under discussion,” he says. “We are trying to make sure we move as expeditiously as we can so we don’t back up anybody’s timeline.”

The delays have been frustrating for many, though.

Karl Gohlke and Eric Chase are Interior contractors who are both active members of a task force organized to look into the logistics and implementation of the project.

 

Five-Part Puzzle

Bringing long-term natural gas supplies to the Interior is a puzzle with five distinct pieces: a contract to supply natural gas; construction of a liquefaction plant (needed for Cook Inlet gas to be shipped north); transportation options; local distribution; and homeowner conversion.

“There’s been a number of things kicked around, but no particular approach has been established,” Chase says. “For one, we’ve got to get the gas. That’s been one of the issues.”

Gohlke agrees.

“Here we sit for another two or three years,” he says. “Everybody was excited when it kicked off, and now it’s been delayed again, delayed again.”

Complicating the picture is AIDEA’s purchase of Pentex, the parent company for Fairbanks Natural Gas and a gas processing plant in Point Mackenzie, as well as two trucks used to bring the gas to Fairbanks. Fairbanks Natural Gas serves approximately one thousand customers in Fairbanks’ core, with IGU’s territory surrounding it. Stewart says officials are looking at how to integrate the utilities.

“We do have two utilities in a [community] of one hundred thousand, one under municipal control and one under state control,” Stewart says. “How do you bring them together?”

Low oil and gas prices may also complicate the project. When IEP was approved in 2013, heating oil was running about $4 per gallon. The project set a target price for 1,000 cubic feet of natural gas at $15, roughly equivalent to $2 per gallon oil. Since then, the price of oil has dropped below that level, giving many homeowners less incentive to switch to natural gas.

 

No Gas Supplier

So far, though, IGU doesn’t have a gas supplier. The state announced early this year it had chosen to partner with Salix, a subsidiary of Avista Corporation, to build a liquefaction plant for gas in the Cook Inlet region. The Salix deal would deliver gas at an estimated cost of $15.75 per 1,000 cubic feet, but officials were looking at ways to lower the costs. Transportation options include trucking the gas or loading it onto the Alaska Railroad, which is the first railroad in the nation granted permission to ship LNG.

The state and IGU are also keeping an eye on potential gas finds in the Nenana Basin.

In May, lawmakers asked Governor Bill Walker to extend “Middle Earth” tax credits for oil and gas exploration in Interior Alaska for another year. Doyon, Limited sank its third well this summer in the Nenana Basin, with high hopes of finding commercial quantities of gas and possibly oil. The tax credits, which were set to expire in July, would reimburse Doyon for 80 percent of its exploratory costs. If natural gas is found in commercial quantities, Fairbanks would be its target market as early as 2019. Lawmakers were concerned an IGU contract with Salix would hinder Doyon’s ability to find a market for any gas it might find.

Stewart doesn’t see that as an issue.

A Doyon strike wouldn’t preclude IGU from also sourcing gas from Cook Inlet, Stewart says.

“From an IGU and an AIDEA perspective, what Doyon has going on in the Nenana basin and what we have in the IEP, we actually see them as complementary,” Stewart says.

“IEP is designed to be a starter project to give the community a hedge against oil if we go up that trail again,” Stewart says. There’s lots of room to grow.

The current IEP plan calls for about 4.5 billion cubic feet of natural gas, but when the infrastructure buildout is complete, the demand could be 7-plus billion cubic feet, not counting local military bases, he says.

“Either way, the answer is there’s market that is going to be available [for Doyon gas],” he says. “Based on a normal development timeline, if they struck it big even today, it would be a couple of years before they would be able to move that gas out of the basin. We encourage their project. We don’t see them as conflicting, we see them as complementing.”

Despite the delays, Stewart says he’s confident the project is moving forward.

“Plans evolve,” he says. “What’s the military saying—no plan survives first contact with the enemy. These are just the negotiations themselves. These are long-term agreements, so working on them takes time. There are certain milestones to be met and meeting them is what allows you to move to the next one.”

 

Conversion Process

The other big piece of the puzzle is the process of conversion: getting the gas to the consumer.

IGU’s consumer-side task force has been meeting for months, talking with contractors, boiler manufacturers, building inspectors, banks, and local and state officials about the best process for the conversion.

To tap into the natural gas infrastructure that’s already in place in North Pole, for example, homeowners will need to find someone to run a feeder line from the main line to their house and install a meter. That might cost a couple hundred dollars, Gohlke says.

The biggest appliance, and the biggest cost, will be for the homeowner to swap out an oil-burning furnace for a natural gas furnace. That could run between $10,000 and $15,000. In some cases, the stack would need to be modified and some homeowners may opt for separate water heating systems.

“The thing we would not be tackling under this project is, let’s say, putting in a gas burner for a fireplace or putting in a gas clothes dryer,” Chase says. “Those would all be things left up to the homeowner to do independently of the contract.”

The IGU task force has identified a couple of banks that expressed a willingness to provide low-cost loans, Gohlke says. However, the process in which a homeowner would sign up for the swap has not been decided.

Currently, there are two proposals on how to approach the conversion. With the gas lines reaching 5,600 potential customers, there are questions of timing, supply, expertise, and manpower, Gohlke says.

Swapping out a full boiler system is time-consuming and can only be done during the four or five months temperatures in North Pole stay above freezing.

Ideally, IGU could do two thousand conversions each season, which seems to be the highest number feasible given the limited time-frame and the most cost-efficient for contractors, the utility, and suppliers, Chase says. That number was reached after talking with various sources as well as third-party outfits that have done similar conversions in other parts of the country.

“[The utilities] need large numbers of conversions to make it feasible for them to bring that gas in to that area,” he says.

Homeowners would be surveyed about the type of home heating system, the boiler type, and serial number. In many cases, Chase says, they’re finding that only the burner would need to be converted, instead of the whole boiler system. That lowers the cost significantly, to about $3,000 to $5,000, and could be completed in just few hours.

 

An Open Question

How to sign up and schedule the conversions is an open question. Stewart envisions a process similar to one set up for a home energy rebate program. The program may offer credits for swapping out the boilers, a program similar to one used to encourage people to install cleaner-burning woodstoves. IGU would open an office staffed with people who could answer questions and help with the paperwork. The onus would be on the homeowner to go through the process of finding a contractor to do the work.

Gohlke and Chase, both of whom are local contractors, say they don’t think that process would work, considering the scale of the conversions.

“IGU is trying to avoid being hands-on,” Chase says. “They want to be a guiding entity and not be directly involved. I told them this would just not be feasible—you’re not going to be able to muster together enough small contracts and make sure it’s all done.”

The task force recommends a block strategy in which IGU would contact all the residents within a certain area, find out what they need in terms of boilers and construction work, and put that block out to bid.

“So the contractors would already be lined up,” Chase says. “They know how many homes they can do, so you can be as efficient as possible.

“These contractors would likely have larger workgroups and the logistical background to handle the project. The feeling was, if you go bid the project early enough, you can be ordering the equipment and staging it in preparation for the warmer weather when you’d be doing this conversion.”

The conversion task force has already spoken with a number of boiler and burner manufacturers, who say they don’t see any problems supplying the necessary equipment. They are working local building inspectors to make sure any new equipment is up to code.

The block concept also makes sense from a safety point, Chase says.

“[The larger contractors] are geared up to do those types of magnitude of projects,” he says. “They have safety officers.”

While some people have expressed concern that a block concept might squeeze out smaller contractors, Chase says the project offers plenty of opportunities for everyone. “But if you don’t engage some of the larger entities, I don’t see how you’re going to pull it off. If it’s going to be successful, it needs to be done in a way that ensures success.

“Do it at the right scale and get it done right.”

Right now, the conversion project is in a holding pattern.

“A lot of issues have been addressed that we know are out there, but no decisions have been made on the items that have been addressed,” Gohlke says.

But the project as a whole is still on target, and the crux of it hasn’t changed, Stewart says.

“It’s about reducing and stabilizing the cost of energy that you use,” IGU’s Stewart says. “We are ready to play and open for business to try to reach that goal for the community.”

 

 

This article first appeared in the August 2016 print edition of Alaska Business Monthly.

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