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North Slope Gas to Heat Interior Alaska

by May 15, 2023Magazine, Oil & Gas

Kerry Tasker

 

The first pipeline to take natural gas off the North Slope has wheels. After decades of hopes and dreams, plans and schemes, the route to marketing the state’s stranded gas wealth runs not through Canada, Valdez, or even Nikiski but through Fairbanks. And it’s coming on trucks.

Interior Gas Utility (IGU), a natural gas distributor owned by the Fairbanks North Star Borough, is breaking the North Slope gas deadlock thanks to a confluence of constrained supply amid growing demand.

“Interior Gas Utility is in a rather steep growth trajectory,” explains Elena Sudduth, IGU’s Director of Public Relations and Customer Service/Marketing Manager. “In the last couple of years, we have pretty much doubled the number of customers that we have. We currently have about 2,200 customers, and we plan to continue adding customers at a rate of 600 customers per year for the foreseeable future.”

In 2022, IGU installed 635 service connections to new customers. However, one new customer on the horizon could ramp up demand considerably. As a result of the publication of the final draft Environmental Impact Statement for revamping the US Army’s oldest power plant—Fort Wainwright—it now appears very likely that IGU’s production demand will more than double within the next few years.

All of this is a business dream come true, right? Well, it would be—assuming an available supply of liquified natural gas (LNG).

Currently, IGU trucks its gas from the Matanuska-Susitna Borough, drawing from the same resource that powers much of Southcentral Alaska. In April of last year, however, Hilcorp notified its customers that, due to dwindling reserves, it might not be able to renew contracts for drilling in Cook Inlet after 2032. As IGU General Manager Dan Britton explains, “They indicated that they did not have a line of sight beyond their current contractual commitments that they have to us, ENSTAR [Natural Gas Co.], Chugach Electric [Association], Matanuska Electric [Association], and others, how they would meet the total demands that they are today, in the future.” Given that Hilcorp supplies upwards of 80 percent of natural gas to the region, this was a cause for immediate concern, even though contracts won’t expire for years to come.

“Because we needed that additional liquefaction capacity, we needed to make a decision now,” Sudduth explains. “So we started looking at our options.”

At a board meeting in January, Britton gave a lengthy presentation of the different options available, including either expanding Titan, which is IGU’s existing liquefaction facility in Point MacKenzie, or adding a modular, temporary liquefaction facility there, called Titan II, at an estimated cost of $60 million. These expansions had first been considered in 2019 but became less likely after Hilcorp’s announcement because they would do nothing to solve the Cook Inlet gas slowdown.

“We’ve evaluated barging out of the Vancouver area into a port in Alaska, and then either trucking or railing the LNG from there,” Britton explains, but these options would have increased costs to IGU customers and increased the company’s exposure to potential future cost volatility.

Instead, Britton encouraged the board to look for gas from a new direction: north.

For decades, natural gas, a byproduct of oil production, has been stranded on the North Slope, as it has not been economically feasible to transport it to other markets. The high cost of building and operating a liquefaction plant, combined with the limited size of the Alaska market and an uncertain regulatory environment for exports, also made it uneconomical to build a plant in Prudhoe Bay. The supply pinch in Cook Inlet and IGU’s interest in trucking gas south changes the math.

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Poor Air Leads to More Gas

Demand for natural gas in the Interior has grown in large part due to efforts to improve air quality. Especially during winter, Fairbanks can be one of the most polluted cities in the nation due to a trifecta of causes: high levels of particulate matter from wood-burning stoves gathers into the air, then that air is trapped close to the ground due to cold temperatures, and the mountains surrounding the valley prevent wind from carrying the pollution away. This phenomenon has had a direct impact on many businesses’ bottom lines through negative impacts on productivity, employees’ health, and the ability to retain top talent in the area.For these reasons, the US Environmental Protection Agency (EPA) has been working to improve air quality in Fairbanks by steering homeowners and businesses toward the use of natural gas through a variety of programs. Incentives and rebates are provided to switch to cleaner-burning heating sources, and the EPA has also taken enforcement actions against companies and industries that violate emissions standards or fail to comply with EPA regulations.

Air quality is also a key factor motivating the replacement of Fort Wainwright’s coal-fired power plant with a new gas-fired plant. The existing power plant at Fort Wainwright is more than fifty years old and is one of the largest sources of air pollution in the area.

The upgraded plant will be able to generate the same amount of energy using less fuel while producing fewer emissions and having a smaller impact on air quality.

“If Interior Gas Utility is to sell natural gas to the Army, as it is described in the final Environmental Impact Statement [released in February], we will double the amount of natural gas that we sell. This fiscal year, we have sold about 1.1 billion cubic feet [bcf], and the contract with Fort Wainwright would be about 1.5 bcf,” says Sudduth. “So that’s a considerable amount of liquified natural gas that we would be able to bring to the community and sell to the Department of Defense.”

To fill this demand, IGU must increase capacity to 150,000 gallons of liquified natural gas per day—tripling its current rate of 50,000 gallons daily.

“We have signed two twenty-year contracts—each with two five-year renewal clauses—so they could be up to thirty-year contracts,” Sudduth explains. “Harvest Alaska is going to construct and operate a 150,000-gallon liquefaction plant in Deadhorse. Hilcorp is going to sell us the gas, then give it to Harvest to liquify, and then we are going to transport it south to Fairbanks and North Pole.”

This is a significant milestone for the Alaska LNG industry, and it is expected to pave the way for further investment in natural gas liquefaction facilities in Prudhoe Bay and other parts of Alaska.

The decision to build the liquefaction facility was not without its challenges. IGU had to secure financing for the project, which was ultimately provided by the Alaska Industrial Development and Export Authority. The company also had to navigate complex regulatory requirements and environmental permitting processes.

Despite these challenges, the construction of the facility is now underway and is expected to be ready for operation in 2025. Once operational, the facility will have the capacity to produce up to 5 million gallons of LNG per day, enough to meet the natural gas needs of the Fairbanks area for many years to come.

“Harvest Alaska is going to construct and operate a 150,000-gallon liquefaction plant in Deadhorse. Hilcorp is going to sell us the gas, then give it to Harvest to liquify, and then we are going to transport it south to Fairbanks and North Pole.”

—Elena Sudduth
Director of Public Relations and Customer
Service/Marketing Manager, Interior Gas Utility

How Much Will It Cost?

From a business perspective, the best part of the option to move liquefaction capacity to the North Slope from Cook Inlet is that costs will not significantly increase and customers will be able to budget for known expenses over the long term.

According to Sudduth, “There are three portions of cost to IGU that are blended into the overall cost. First is the cost of natural gas itself. The gas feed on the North Slope is significantly less expensive than it is in the Cook Inlet, for a comparison basis.” That savings offsets the higher cost for Harvest Alaska to liquify the gas and the more expensive transport over a greater distance. “But all in all, the cost to our customers is going to get modest increases, if any. So, it’s a very, very comparable cost,” Sudduth says.

Not only will IGU customers gain predictable pricing with these twenty-year contracts, but the stability lends itself to new opportunities for other businesses, as well. Along with increased demand for LNG supply comes increased demand for trucking to move that gas down the Dalton Highway, from Prudhoe to Fairbanks. Sudduth says, “Right now, from Cook Inlet, we bring about five trucks a day. Just for our regular customers [excluding the potential of servicing Fort Wainwright], we are going to have about six trucks going each direction at the beginning. By 2032, that will be twelve each way.”

As a result, the company is looking for competitive bids for trucking services for the North Slope, anticipating fifteen new LNG trailers. “The great part about it is, because this is such a long-term project, a company could amortize an entire fleet in the five years that the contracts are going to be set for, so it gives predictability of the amount of business that a trucking company can have,” Sudduth says.

If and when a full-scale pipeline is built to carry natural gas off the North Slope, or if efforts to ship the gas out via the Arctic Ocean are successful, those projects would exist alongside IGU’s trucking operation. There is plenty of gas to sustain any or all of those routes. But in the race to bring the gas to markets off the Slope, the Fairbanks utility is leaning ahead to break the tape.

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Welcome to the June 2024 issue, which features our annual Transportation Special Section. We've paired it this year with a focus on the Pacific Northwest and Hawai'i, as Alaska has close ties to both that reach far beyond lines of transportation. Even further out past our Pacific Ocean compatriots and our Canadian neighbors to the east, Alaska's reach extends to India and Singapore. Enjoy this issue that explores many of Alaska's far-flung business dealings.
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