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Interior Alaska Energy

AIDEA banks on ‘bridge’ project


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The Interior Energy Project held a groundbreaking ceremony in North Pole on June 5, 2015, which was attended by about one hundred people, including Governor Bill Walker (center).

Courtesy of Interior Gas Utility

The year was 1976. The United States celebrated its Bicentennial. The two-dollar bill was introduced. Jimmy Carter was elected president. Gasoline cost fifty-nine cents per gallon and Congress passed the Alaska Natural Gas Transportation Act, an effort to build a natural gas pipeline from the Prudhoe Bay to the Lower 48.

Over the next four decades, various efforts would be made to build the pipeline, closely watched by the residents of Alaska’s second-largest city.

Fairbanks sits at the center of a perfect storm for high energy prices: the community of thirty thousand endures long, dark, brutally cold winters; residents rely on high-priced fuel oil; it is hundreds of miles from oil and natural gas deposits and has limited transportation options; and its location in a closed valley helps pool pollution, leading to some of the worst air quality in the nation. The pollution is exacerbated as many residents turn to wood in an effort to lower their heating costs. Burning wood results in PM2.5 particulate pollution, which leaves a smoky haze over many neighborhoods and puts air quality well below EPA standards.

For decades, state and local leaders have touted a gas pipeline through or near Fairbanks as a solution to the community’s high costs and air quality problems. But with the construction of a pipeline now estimated to cost $50 billion and still no plan or time-frame in sight, leaders are looking to smaller-scale “bridge” projects to bring energy relief.

 

Project Creation

In 2013, the Alaska Legislature created the Interior Energy Project. It is an Alaska Industrial Development and Export Authority (AIDEA) vehicle to bring affordable, clean energy to as many Fairbanks-area residents as soon as is feasible. The project is a joint project between AIDEA; the Alaska Energy Authority; the Alaska Department of Commerce, Community, and Economic Development; the Alaska Department of Revenue; and the Alaska Department of Natural Resources.

“AIDEA is really kind of like our banker,” says Mindy O’Neall, communications manager for the Interior Gas Utility (IGU), a natural gas distributor in Fairbanks and North Pole and a wholly-owned subsidiary of the Fairbanks North Star Borough. “In some ways, we’re a partner with them in that they allocate the dollars that we have to use for the project. They say yeah or nay to the expenses that we have. They set the rules and authorize us moving forward with the next phases of the project,” O’Neall says.

Through the Interior Energy Project, AIDEA is working with a wide variety of public and private organizations to accomplish five major points:

 

  1. Develop the supply chain. AIDEA is working with the utilities in Interior Alaska (Golden Valley Electric Association, Fairbanks Natural Gas, and IGU) to build and coordinate the transportation, storage, regasification, and distribution of natural gas in the region.
  2. Negotiate purchase terms. AIDEA is negotiating purchase terms with natural gas suppliers on behalf of the utilities.
  3. Finance a liquefaction capacity. AIDEA plans to work with a private entity to develop LNG (liquefied natural gas) capacity.
  4. LNG transportation options. The logistics and costs of transportation is a key part of AIDEA’s project plan. It is evaluating railroad and road transportation options.
  5. Finance a natural gas distribution network in Interior Alaska. AIDEA authorized $37.5 million to develop the IGU distribution plus another $15 million to expand the Fairbanks Natural Gas distribution system.

 

That’s a lot of moving parts, but in 2015 the effort started to gain traction, and AIDEA is hoping to have major supply, transportation, and distribution plans in place in the coming months.

 

Construction map of the Interior Energy Project.

Source: Interior Energy Project

 

Plans Change

Early on, the project focused on a plan to truck liquefied gas from the North Slope to Fairbanks. But in late 2014, skyrocketing costs shuttered those plans. Instead, AIDEA has expanded its scope to look at Cook Inlet energy sources, as well as Prudhoe Bay.

It also sought proposals to supply natural gas to the project. AIDEA is looking for long-term commercial prospects and hopes to be able to get gas delivered to Fairbanks for about $15 per thousand cubic feet, about half the current cost.

Of the thirteen it received, AIDEA chose five finalists, said AIDEA external affairs officer Karsten Rodvik.

“We expect to make a partner recommendation to our board in early 2016,” he said in an email. “By the end of the first quarter in 2016, we anticipate having commercial terms in place and authorization for our partner to move the project forward.”

AIDEA says it anticipates increased demand for gas in Fairbanks as more residents switch to the cleaner fuel. Initially, AIDEA estimates demand will triple over the next decade, from about 3.44 bcf (billion cubic feet) per year in 2017 to 9.25 bcf in 2016. Of that, 2.6 bcf will come from Golden Valley Electric Association for power generation.

North Pole residents noticed activity in summer 2015, as the IGU worked to build out infrastructure to the community. The utility received a $29.8 million construction loan from AIDEA, which enabled it to move ahead on the first three phases of construction, says IGU’s O’Neall.

“We installed about seventy-three miles of pipe this summer [2015] in about one hundred days,” she says. “We had about seventy-five thousand man hours in the field this year [2015] to do that. One of our big milestones is we didn’t have any lost-time incidents in our first major field season. That’s a pretty big milestone.”

 

AIDEA’s Pentex Purchase

In June, AIDEA bought Pentex, the parent company of Fairbanks Natural Gas, the natural gas distributor for Fairbanks. The $52.5 million sale also included a gas processing facility in Point MacKenzie and two trucks used to transport the fuel to Fairbanks.

Fairbanks Natural Gas had a base of about one thousand customers, and AIDEA says the sale will likely bring about a 13 percent reduction in their fuel bills this winter. It says its ownership is short-term and AIDEA is in talks to transfer ownership to another utility or municipality.

In the meantime, IGU’s O’Neall says the utility is taking another look at how a potential integration with Fairbanks Natural Gas may change its service area. While lower fuel prices may have reduced the economic urgency of the Interior Energy Project’s goals, air quality is equally important, she says.

“The cost of heating a home in such an extreme atmosphere is one thing,” she says. “There are the air quality issues. We’ve already had a week of air advisories and we’re at the very beginning of winter. That’s a component of why this is such an important project for Interior Alaska.”

Despite the summer construction efforts, O’Neal says the project was in an “evaluation phase” in mid-November 2015 as the utility waits to hear which company AIDEA chooses on the supply and transportation side. Storage options are still being worked out. Many questions remain.

“When can we expect natural gas for real to be delivered to the community?” she asks. “How much empty pipe do we put in the ground? We want to make sure we’re doing this in a method that is safe for the community and is strategic so we can get as many people as possible onto natural gas.”

 

Stockpiled natural gas pipe for the Interior Energy Project.

Courtesy of Interior Gas Utility

 

Transporting LNG by Rail

On the transportation end, the Alaska Railroad received approval to move LNG by rail, making it the first railroad in the nation to do so.

The railroad started working on the process a couple of years ago while AIDEA was focused on a North Slope option, says Bill O’Leary, Alaska Railroad president and CEO.

“We wanted to make them aware that we were out there,” O’Leary says. “When it became clear that AIDEA was going to go back out and take a look at what the other options were from the original project, we wanted to make sure we were ready. We’d been working with a number of other prospective suppliers of LNG and wanted to make sure we had all of our ducks in a row on this.”

The railroad started looking at what the supply chain would be from its perspective and on getting the necessary permits from its regulatory agency, the Federal Railroad Administration.

The railroad put in its application to move LNG in February and worked with the Federal Railroad Administration over the ensuing months, which culminated in the railroad getting unprecedented approval in October. However, the initial amounts approved were too low to meet AIDEA’s projections for Fairbanks demand, so the Alaska Railroad went back to the Federal Railroad Administration and was successful in getting the letter revised to provide commercial quantities.

“The new letter allows us to move larger numbers and it’s graduated and allows us to move up as demand increases,” O’Leary says. In addition, if something changes, such as higher demand, the railroad can go back to the Federal Railroad Administration to ask for further adjustments.

O’Leary doesn’t anticipate any capital outlay to ship the LNG as the shippers would likely own the ISO tanks. Depending on which supplier is chosen, shippers may access the railroad at various sites, such as Seward or Anchorage, although they may have to truck the LNG short distances as the project gets underway. He says the railroad can start shipping as soon as the shippers are ready and once the storage and distribution networks in Fairbanks are set up.

LNG will help fill a hole in the railroad’s operations created when the Flint Hills refinery shut down in 2014 and Usibelli Coal Mine exports declined.

“It’s a good start,” O’Leary says. “We think LNG fits into the railroads model very nicely. As I like to say, it ticks a couple of boxes. We certainly have the capacity and we certainly have the need to move more freight products and it also really meets a big part of our statute, our mission statement: that’s just really to help with the economic development of Alaska.

“So a big part of that is we can be a part of lowering energy costs to the Interior. That’s a huge deal. So it’s good for us and good for the state; hey, what’s not to love.”

 

 

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

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