Alaska's Tenuous Rural Fuel Distribution
Tactical infrastructure improvements needed
Alaskans were transfixed by the drama that played out in Norton Sound in early January, as the U.S. Coast Guard Cutter Healy, the nation’s only operating icebreaker, cut a path through several hundred miles of ice so the Russian tanker M/T Renda could deliver fuel to Nome. The successful delivery, the first in mid-winter, caught the imagination of the nation, and comparisons were made to the emergency delivery of serum to Nome by dog team to counter an outbreak of infectious disease.
Nome’s situation wasn’t as serious as had been portrayed in the national media because if it were a true emergency, fuel delivery by air. However, that would have been complex, costly and potentially hazardous because of the large numbers of fuel flights that would have been required. Fuel is routinely supplied by air to a few small villages in rural Alaska, but nothing has been attempted on the scale of supplying the 1.5 million gallons Nome needed, which was ultimately delivered by the Renda.
However, the venture illustrates the tenuousness of the Alaska fuel rural supply network. Western Alaska mainly depends on tugs and barges to make fuel deliveries during summer, which deal routinely with bad weather, shallow water, and tricky winds, tides and currents, often in combination with each other. In many locations there are primitive or nonexistent shore facilities.
WESTERN ALASKA FUEL FLEET
To deal with this, marine fuel suppliers have marshaled a fleet of tugs and barges, some of them very specialized, to take on the seasonal operation. Crowley, the major company in the rural fuel business, employs about 80 in its operations, which generally run from late March through October. One economic problem facing the industry is that much of the equipment is designed for Alaska and can’t be easily moved to other places to work, unlike, for example, cruise ships. That means the equipment can only be used for part of the year, and this built-in inefficiency helps drive up fuel costs.
Weather events and delays are a normal part of this business too. Nome’s final fuel delivery by barge was blocked by a fierce, hurricane-strength winter storm in the Bering Sea, which created the need for the unprecedented mid-winter delivery. The delayed shipment to Nome captured the nation’s attention, but delays of two weeks or more in barge fuel deliveries brought about by fall storms isn’t all that unusual.
Here’s an illustration of the routine complexities of the rural fuel business that drives up costs. The waters off Kotzebue are shallow. Companies bring fuel in large barges as close to shore as possible, then transfer it to smaller, shallow-draft “lightering” barges to get it to shore. For delivery to small communities upriver, fuel must be reloaded again into smaller river barges. Loading and unloading three times is one reason gasoline costs $7 and $8 a gallon in many villages. In some communities the prices are $10 a gallon.
Hooper Bay, in the Yukon-Kuskowkim Delta, presents a different kind of challenge. The river channels providing access to the community of more than 1,000 are so narrow and shallow that fuel must be delivered by smaller barges and in small batches. These are typically spread out across three or four deliveries through a summer. It would be much more economical for the community if one large shipment could be made, but access to the community is too constricted.
In many places there are no docks, and hardly anything else. At Savoonga and Gambell on remote Saint Lawrence Island, and at Diomede in the Bering Straits, a hose must be extended from a barge anchored offshore to the shore and across the beach to the fuel tanks. The barge is double-anchored and is secure, but the hose laid across the beach always presents challenges. In some other locations the fuel barge must be landed directly on the gravel beaches, something the U.S. Coast Guard does not allow anywhere else than in Alaska. Despite these problems, spills and accidents are rare, testimony to the skills of the vessel crews and captains.
Two companies, Crowley and Delta Western, supply most fuel in the region. A new company in the field is Vitus Marine, which coordinated the winter supply and Russian tanker operation to Nome. Much of the fuel delivered to Western Alaska comes from the Tesoro refinery near Kenai, where it is loaded and shipped by barge. Some fuel for Western Alaska also comes from the Flint Hills refinery in Fairbanks and is shipped by rail to Anchorage, where it is loaded on barges. Some also comes from the Petro Star refinery in Valdez, although Petro Star mainly serves the marine fuel markets in Kodiak and Unalaska.
There are “mainline” hauls to communities which are major fuel hubs—near Naknek, Bethel, Dillingham and Nome—and a typical barge load on mainline runs are about 3 million gallons. Crowley, however, has been able to use much larger barges carrying 6 million to 7 million gallons over the past two years, and may be able to do this again in 2012; using larger barges results in economies of scale, which lowers costs. While direct shipments with larger barges are made to near-the-hub communities, shipments onward are transferred onto smaller lightering barges. Lighterage can become necessary for fuel transport for a few hundred yards to much longer distances. In Bethel, for example, the fuel must be transferred and moved 100 miles up the Kuskokwim River. Marine transporters are limited to barges drawing about 12 feet in this part of the river.
CHANGING SYSTEM IN THE INTERIOR
In the Alaskan Interior, the rural fuel distribution system is changing. The M/V Tanana, a towboat built in the 1950s and operated for years by Yutana Barge Lines and later Crowley, was laid up at the end of the 2011 season. Fuel is delivered by truck from the Flint Hills Resources refinery near Fairbanks to Nenana, a 60-mile transit on the Parks Highway. At Nenana the fuel is loaded on barges.
Following the Tanana’s retirement, fuel will still be delivered from Nenana but by the Rampart, a newer towboat. However, Crowley, which supplies the region, will also bring fuel to communities on the lower Yukon from the Bering Sea. This is made possible by new Crowley towboats and barges which can navigate very shallow waters such as those in the channels at the mouth of the Yukon. While this means less fuel will be shipped from Nenana, a loss of business for Flint Hills, it also means the barges pushed by the Rampart can go down the river fully loaded, supplying villages along the way. They can then refill in the lower Yukon and come upriver full, serving other communities. By cutting out an empty “backhaul” of barges there will be lower costs, and customers along the Yukon will benefit.
FUEL STORAGE ECONOMICS
Crowley has large terminals in Bethel, Nome and Kotzebue. Through an agreement with the state other fuel transporters can use these terminals. The company also pays for storage in bulk tanks owned by others in Naknek and Dillingham, and also operates smaller terminals along the Yukon to serve customers in the Interior river region. There are costs in addition to the lightering that occur all along the chain of delivery, however, including fuel flowage fees at municipal docks and terminal service fees charged at the bulk storage facilities.
The larger customers on the rural fuel chain buy in bulk and enjoy economies. These are typically utilities, schools, local resellers like village stores and other large government fuel users. Commercial and government fuel customers who buy wholesale typically store their fuel in large tanks, and these buyers enjoy economies of scale.
At the retail level in villages, however, these economies are lost because purchases are usually small, and labor and infrastructure costs for the retailer are very high. There is a high cost of inventory—the cost of buying the fuel for storage and carrying the cost until the next delivery, which is typically through a winter. There is also a high credit risk in the retail customer base—people who don’t or can’t pay their bills on time.
Getting the money together to make the annual fuel purchase is always a challenge for small communities, and a community bulk fuel loan program operated by the Alaska Energy Authority, a state agency, plays a crucial role in helping small villages finance their purchases. However, each year’s loan must be paid back to the AEA before a new loan can be made. AEA operates the program as a revolving loan fund, which means the annual repayments maintain the liquidity of the fund. Getting the application in on time is important, and after a few small communities missed their fuel deliveries because the loans weren’t approved on time, the AEA now monitors things closely, working with the communities to ensure the paperwork gets in. Barge operators’ schedules are very tight, and on occasion, partial deliveries have been made to communities that couldn’t get the cash together to make the full purchase.
Meanwhile, the timing of the fuel buy plays a critical role in the final price paid by the customers because the price paid for fuel when it is loaded into the barge in Kenai or Anchorage is the price that must be paid typically all winter by the final customer, after delivery and handling costs are added. If oil and fuel prices happen to be high when the fuel is purchased and loaded, the customers are stuck with the high price until the next delivery. On the contrary, if fuel prices happen to be low when the purchases are made, the customers benefit.
Purchases are made periodically through the summer, of course, because there are several deliveries to western Alaska and fuel is purchased as each loading is made. There is a belief that fuel prices usually soften a bit in mid-summer, and that prices for gasoline tend to drop later in the summer or early fall. This creates a temptation for some customers to try and time their purchases to catch these dips in price, if they occur. There’s always a risk that a delayed fuel purchase, in the fall, for example, can risk hitting bad weather and a delayed delivery or even a cancelled delivery, as happened at Nome. It’s all a gamble.
AVIATION IN THE SUPPLY CHAIN
Fuel delivery by air offsets some problems but creates others. It occurs regularly now for a few communities now cut off on river delivery, such as in Northwest Alaska where river water levels have been dropping. There are also emergencies, where the barge delivery is not made because of weather or other problems.
There is a large cost of transportation—flying is more expensive than barging—but one advantage is that because the fuel is purchased in smaller increments as it is delivered through a winter, the customer doesn’t have to pay for the entire year’s supply at once, as happens with barges. Fuel delivered by air is on a “just in time” basis, and there is less working capital required. There are still problems, however. In a small number of villages where air deliveries are routine the equipment and piping has been installed so that fuel can flow directly from a tanker aircraft to the fuel tanks. However, where there are emergency deliveries by air, there is no such infrastructure: Fuel is typically pumped into trucks and then re-pumped from the trucks to the storage tanks. It works, but it is inefficient and costly.
Another problem is that there are only a handful of air operators with planes equipped with tanks for such deliveries. The planes are not large, as they mostly serve remote mining operations or small communities. A fuel emergency in Nome, which would have required a delivery of over a million gallons of fuel, would have outstripped the available capacity of tanker planes. It would have required a large number of flights, too, which always raises concerns for safety.
EFFICIENCY IS FEASIBLE
However, it is possible to make the marine fuel system more efficient with selective and strategic improvements in infrastructure, such as docks. What is particularly needed are docks with deeper drafts to reduce the need to use small barges for lightering. Selected dredging of channels, to allow deeper-draft barges, would also help. Combined storage on a village level, having the community store fuel for all users, would reduce costs and the risk of small spills. Improvements in purchasing procedures, with more bulk fuel purchases, would help.
Many of these improvements are relatively simple, and not hugely expensive. For example, in one coastal community one piling that was installed with a chain allowed the fuel barge a place to tie to securely, eliminating the need for the tug to push the barge against the shore with power on to keep it stable.
Gov. Sean Parnell has recognized the importance of basic facility improvements in rural coastal communities to provide better access to offshore fisheries. Selective improvements in fuel infrastructure should be added to the list.