The Golden Valley Electric Association expects that the natural gas storage legislation approved on the last day of the legislative session will reduce the overall cost of the natural gas trucking project by about $30 million, improving the economics of the plan.
I met with GVEA President Brian Newton and GVEA Vice President Gene Therriault Tuesday for an update on the project.
They said negotiations are continuing with Flint Hills on proposed details of a gas trucking deal, with the expectation that a contract could be ready by the end of the year or early in 2013. That would allow GVEA to go back to the Legislature with a specific plan showing how additional state funding to a trucking operation could be used to lower the cost of electricity and space heating in the Fairbanks area through expansion of natural gas.
Nothing has been signed off on, but this is how I understand the current situation.
Flint Hills has made it clear, lawmakers say, that it wants to own the production facilities on the North Slope that would be needed for the project.
GVEA would own the storage facilities. The logic for GVEA owning the gas storage tanks is that the bill approved Sunday would have the state paying $15 million each on the North Pole storage plant and the North Slope storage plant. The full cost of the two storage plants could be upwards of $80 million, so this would bring that portion of the tab down to $50 million or so.
GVEA and Flint Hills would split the cost of the production facilities, according to the discussions taking place now.
GVEA would be first in line to receive natural gas from Flint Hills under contract. One of the many points of debate is the time period for that contract and whether it would be for the life of the plant or a set number of years.
If Flint Hills sold the LNG plant, the obligation would still be in place for whoever takes it over. That would assure GVEA a supply of gas and it would give Flint Hills an incentive to keep costs down.
Newton said he expects GVEA to go back to the Legislature next year and to show how if the state pays $100 million toward the GVEA construction costs, the benefits of that action would accrue only to GVEA and be reflected in its cost of gas, not in the cost of gas to Flint Hills. The key task for GVEA, it seems to me, is to present a clear plan to legislators detailing the costs and benefits.
The Fairbanks delegation managed to get a $3.75 million appropriation to help fund the engineering and design work that GVEA is doing. The delegation also received $3 million to continue the work by the Fairbanks Economic Development Corp. on natural gas infrastructure.
The GVEA portion of the gas trucking plan is a sensible move to reduce the cooperative's dependence on oil, the fuel it uses to run its North Pole generators. Natural gas promises to be much cheaper as a source of energy for GVEA. How much cheaper will depend on the level of state involvement.
If Fairbanks is to move in a significant way away from dependence on oil for space heating, the natural gas infrastructure has to be expanded.
One of the major community questions facing Fairbanks is just how and when an expansion would be financed. If it is done by a private company, the utility would earn almost a guaranteed rate of return on investments it makes to run more pipes here and there.
If the expansion is paid for with government funds, however, the private utility would not be able to earn a similar healthy return because its capital investment upon which rates are based, would be lower.
Fairbanks Natural Gas, the existing natural gas utility in Fairbanks with about 1,000 customers, would be able to purchase gas from GVEA at cost under the GVEA/Flint Hills plan now being worked out, Newton said.
FNG has said that it wants to make it own arrangements, however, and it has again applied for a proposed right of way lease on the North Slope to have an affiliated LLC build its own 3.5-mile pipeline to supply its own LNG plant on the North Slope and truck gas to Fairbanks.
FNG said last summer that it would have its own tranker trucks to haul LNG and its own storage, etc. The company was also active in Juneau this year seeking state assistance.
Both projects won't be built. It's still not clear if FNG is actually going ahead with its own work or if the application is a way of keeping its options open. It first talked about this project four years ago.
The company is controlled by Harrington Partners LP, a private investment firm from Minnesota.
The Regulatory Commission of Alaska granted a certificate of public convenience and necessity for the proposed Polar LNG pipeline March 9.
Polar LNG, the company under the same ownership as Fairbanks Natural Gas, says in its application for a state right of way that it will start construction this summer on a $10 million pipeline and begin operating the pipeline to supply a North Slope LNG plant in Deadhorse by Sept. 1, 2013.
Last summer Polar LNG said it wanted to install vertical supports this past winter, with the above-ground pipeline to follow next winter.
The pipeline would be from near Flow Station No. 1 to the site formerly known as "Child's Pad."
The eight-inch pipeline would start off carrying 36 million cubic feet of gas per day, rising to 50 million in the future, the state application says.
The updated version of the right of way application has not been checked carefully, however, as there are some dates that have not been corrected from the old application last July.
For instance, there is a comment that says construction is to take place in the "tundra travel seasons" of January through April 2012 and January to May in 2013.
Regarding the buyers for its gas, the founder of Fairbanks Natural Gas wrote last November that "any expert" would be able to tell the RCA that the FNG trucking option won't work unless it has GVEA and Flint Hills as customers.
Ray Lathchem, the former FNG executive, said that "high oil prices that have become the norm and the stranded gas in Prudhoe have combined to created a market that no one ever thought of a few short years ago, including myself."
As studies continue on options to expand natural gas distribution systems, the analysis needs to include details on how rates to consumers would be affected if the expansion of the system is made by a private entity, which would factor the expansion into its long-term rates, or a cooperative that could have a goal of keeping rates as low as possible.
The preliminary report issued Feb. 14 about the gas distribution situation in Fairbanks said that FNG's statements filed with the RCA show that the company had $26.7 million of assets in 2010 and generated $3 million of net income on $16.1 million of revenues.
"This is an income margin of 18.6 percent, which indicates FNG is a profitable company," the report states.