The announcement by Golden Valley Electric Association and Flint Hills Resources Aug. 5 that they will pursue a liquefied natural gas trucking operation from the North Slope may complicate the state’s proposal to build a 24-inch natural gas pipeline from the slope. The pipeline, being planned by the Alaska Natural Gas Development Corp., or AGDC, would pass near Fairbanks en route to Southcentral Alaska. The state’s gas pipeline couldn’t be built and delivering gas until 2019, however, assuming a very aggressive schedule. The LNG trucking operation, however, could be delivering gas by 2014, Golden Valley and Flint Hills said.

Flint Hills, a Koch Industries subsidiary, operates a refinery at North Pole, near Fairbanks. Golden Valley is the regional electric cooperative for Interior Alaska. Golden Valley says the LNG trucking would reduce Fairbanks-area electric rate by about 10 percent. The utility now generates much of its power with oil, which is very costly. Flint Hills needs less expensive energy for its refinery, which now uses costly crude oil to power the refinery and to heat the oil so that it can be refined. Lowering the refinery energy costs will help keep the plant economically viable, and likewise a smaller nearby refinery operated by Petro Star. The two refineries supply Interior Alaska with products including heating oil and gasoline, and Flint Hills also makes jet fuel.

The complication for the state’s 24-inch pipeline is mainly political. The pipeline project will require significant continued state funding for engineering and planning, an estimated $250 million in FY 2013. Part of what is now driving the state’s project is the urgent need to lower energy costs in the Interior as well as to assure a gas supply for Southcentral Alaska, where reserves are being depleted. If the LNG trucking plan removes the sense of urgency for the Interior legislative delegation, it may be more difficult for Gov. Sean Parnell to muster continued legislative support for the funding.

The same thing could happen in Southcentral Alaska if regional utilities there proceed with a plan to import LNG by 2014 and if new gas discoveries are made in Cook Inlet. Also, if the state proceeds with work on the 600-megawatt Watana dam on the Susitna River, new hydropower could take away about half the regional electric utilities’ demand for gas to generate power, the Alaska Energy Authority has estimated.

Meanwhile, the LNG proposal will require approvals by the Regulatory Commission of Alaska, which will have to approve Golden Valley’s passing on to Interior ratepayers its share of costs for engineering and building the LNG plant at Prudhoe Bay and a regasification plant near Fairbanks. The cost is estimated at $180 million but that will be refined as engineering continues. Fairbanks Natural Gas LLC, the small gas utility that now serves Fairbanks with LNG trucked from Southcentral Alaska, is studying a similar North Slope LNG trucking plan and has estimated costs at $160 million.

The venture is not connected, at this time, the LNG trucking project being pursued by Fairbanks Natural Gas. FNG has site preparation underway for its proposed plant, which could make about 250,000 gallons of LNG daily for trucking, but has said it needs contracts with large customers like Flint Hills and Golden Valley for its project to proceed. Golden Valley said a decision was made to proceed in a partnership with Flint Hills and not the local gas utility, at least at this time.
“Several years ago Golden Valley’s announced that it was considering a deal with Fairbanks Natural Gas. However, we ultimately decided to pursue a partnership with Flint Hills because it delivers gas at cost. The expense of liquefying, trucking and regasification operations would be shared and neither party would profit from these activities. That means lower costs to our customers.” Golden Valley said in a press release.

The two companies said they have secured a gas supply contract with a North Slope producer but declined to identify the company. For its project, Fairbanks Natural Gas has a contract with Exxon Mobil Corp., one of three major North Slope producers. ExxonMobil has agreed to supply up to 17 billion cubic feet yearly to FNG but the gas utility said it would take about 7 billion cubic feet of gas, at least initially. Golden Valley said its project would take a similar volume of gas from its supplier.

Flint Hills and Golden Valley estimate their costs for the LNG plant on the North Slope and the regasification plant near Fairbanks at $180 million, while Fairbanks Natural Gas has estimated its project, which would be similar, would cost about $160 million. The timetables of the two projects are different. Golden Valley and Flint Hills say they want to be in operation in 2014, which would require construction starting in 2012, while FNG said its construction would be underway in 2013 and its plant in operation in 2015.

Fairbanks Natural Gas has work underway this summer to expand a six-acre pad at Deadhorse, the industry service area adjacent to Prudhoe Bay. The company has also a right-of-way application filed with the state Department of Natural Resources for a 3.8 mile, eight-inch pipeline from Flow Station 1 in the Prudhoe Bay field to the site of the LNG plant.

Obviously these two proposals will combine into one. While FNG is not a part of the joint Flint Hills-Golden Valley deal now, that could change. FNG has assets that could be contributed, such as its pad and lease at Deadhorse, and the pending pipeline right-of-way, and engineering and planning it has done to date. Golden Valley told us it is interested in taking advantage of the work FNG has done at Deadhorse.

Also, the natural of the Flint Hills- Golden Valley venture has yet to be defined. Golden Valley told us that the engineering work being done now is with resources internal to both partners (Flint Hills has experience with LNG elsewhere), but that soon a third-party engineering contractor will be retained. At that time a cost-sharing arrangement, and possibly the outline of the joint venture itself, will have to be worked out. It’s an unusual arrangement because Golden Valley is a regulated utility and Flint Hills is a private company. Its owner, Koch Industries, is very private with financial information, and a partnership with a public entity where finances are exposed in regulatory proceedings may be a new experience.

One way this could work is for Flint Hills to just own and operate the plant with Golden Valley and FNG being customers, but a key part of the current deal, according to the press release from the two parties, is the concept of  “at cost” gas delivered to both, meaning no profit margin. This implies that Golden Valley will contribute some share of capital and will share operating costs.

FNG now serves about 1,100 commercial and residential customers in Fairbanks and trucks LNG about 400 miles from a small liquefaction plant in Southcentral Alaska, in the Matansuka-Susitna Borough north of Anchorage. The company has operated since 1998 and now purchases gas from Aurora Gas LLC, an independent Cook Inlet gas producer. On average FNG ships about 3 truckloads a day of LNG to Fairbanks, but this varies from one to two truckloads daily in summer and four to five truckloads daily in winter.

However, constraints in gas supply from Cook Inlet limits the ability of the Fairbanks utility to take on new customers and prompted the company to pursue trucking LNG from the North Slope. Oil is also used widely for heating parts of Fairbanks not now served by Fairbanks Natural Gas, and the cost of home heating has become a serious economic problem for the community, Fairbanks North Star Borough Mayor Luke Hopkins said. Also, the inability of FNG to expand service has caused delays in new retail expansion in Fairbanks because large out-of-state firms planning new stores prefer not to use oil for space heating because of the expense and liabilities associated with construction of underground fuel storage.