Natural gas system grows in Fairbanks: new customer on the North Slope?

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For years, many Alaskans have hoped for a North Slope gas pipeline project, longing for the related economic boom and for the cheap fuel that could be available to the rest of the state.

While North Slope producers and Alaska government leaders focus on the long-discussed, large-scale gas pipeline project that many desire, a Fairbanks-based, privately owned gas distributor is seeking to jump-start the process of commercializing North Slope gas.

Fairbanks Natural Gas has been negotiating with North Slope producers to purchase up to 1 billion cubic feet of natural gas a year, as a new feedstock for the company's growing gas distribution system in Fairbanks.

As envisioned, the company would build small liquefaction facilities on property it has acquired in Deadhorse, trucking LNG the 400-plus miles south to Fairbanks. Anticipating purchasing about 1 billion cubic feet of gas annually, Fairbanks Natural Gas expects to invest between $20 million and $50 million on the project, according to company president Dan Britton.

"One of our primary drivers in our North Slope project is to get into a stable-priced market," he said. "It's a huge investment for a company of our size, but it will provide some stability and security."

Already, the company has spent about $250,000 on the project, including land acquisition and permitting work. Fairbanks Natural Gas received its development permit from the North Slope Borough in November 2006, a lease from the state for land at Deadhorse, an exemption from the Environmental Protection Agency for completing a storm water pollution prevention plan and a determination from the Federal Aviation Administration that the project will not constitute a hazard to air navigation.

As soon as negotiations with the producers are complete and taxation issues are resolved, Fairbanks Natural Gas will order equipment and begin the construction project, anticipated to be a 16-month process.

Trucking liquefied natural gas down the Dalton Highway--a mostly gravel, industrial route with significant driving and road hazards--will be more expensive and add to maintenance costs for the company's existing fleet of 16 tanker trailers, Britton said. But those increased transportation costs will likely be offset by savings in North Slope gas prices, compared to the ever-increasing Cook Inlet gas costs, he said.

ESCALATING PRICE FOR EXISTING COOK INLET FEEDSTOCK

Currently, Fairbanks Natural Gas buys its feedstock from the Beluga River gas field in the Cook Inlet region. The gas is liquefied at the company's Point MacKenzie facilities, trucked to Fairbanks using special tractor-trailers, re-gasified at one of two storage centers and sent to the company's 1,100 customers in Fairbanks via the ever-growing pipeline network the company is building.

Fairbanks Natural Gas has grown substantially each year since starting up in 1997, adding main distribution pipe and feeder lines each summer. In 2000, the company started gas service to its 100th customer. Now, Fairbanks Natural Gas supplies gas product to more than 1,000 residences and nearly 100 businesses through its 70 miles of distribution pipeline.

In past years, Fairbanks Natural Gas was competitive with conventional markets, sometimes as much as 30 percent less expensive than oil-based heating fuels in Fairbanks. But a recent tightening of natural gas supplies in Cook Inlet has transformed that traditionally, low-price fuel into a highly sought after product.

In 2006, the company's supplier of Cook Inlet feedstock, Aurora Gas, gave the Fairbanks-based distributor about a month's notice that it would stop providing gas. Scrambling, Fairbanks Natural Gas ended up signing a short-term contract to purchase gas from Enstar Natural Gas Co., at a commercial rate. Feedstock costs have doubled in the last year, Britton said. Currently, Fairbanks Natural Gas customers are paying roughly 10 percent more than comparable oil-based heating fuels, he said.

TAXATION, VALUE CALCULATIONS POTENTIAL 'DEAL BREAKERS'

Development of the North Slope LNG project has progressed slowly. Britton described efforts that Fairbanks Natural Gas has completed to date during a September meeting of the Alaska Miners Association.

Negotiations with North Slope oil and gas producers, who control the flow of gas from existing infrastructure, are still in the process, Britton said.

"We're dealing with large producers who have a different focus than we do," he said. "Our project, in comparison to the scale of their business, is nothing. With all the issues to work out, it seems to be difficult for them to allocate the resources to our project."

In addition, the state's profits-based taxation system has some detrimental impacts on the proposed LNG project. Because the prevailing value for natural gas is currently tied to the price of crude oil, selling for more than $80 per barrel in September, North Slope gas is being valued at more than $8 per million cubic feet, Britton said.

Taxing North Slope gas at 22 percent of $8 per million cubic foot "... instantly kills our project," Britton said.

The company is working with the Alaska Department of Revenue and the Legislature to identify the issues and work out a solution. Historically, small amounts of natural gas have been sold on the North Slope to Deadhorse customers for slightly more than $1 per million cubic foot, Britton said. Those long-term contracts will likely increase, he said, possibly up to $4 per million cubic foot, but still well under the current system for establishing a taxable value for North Slope gas.

"Obviously we view it as an abundant gas supply with little market, so it should be priced to reflect the abundance," Britton said.

Fairbanks Natural Gas hopes to finalize negotiations with producers for a gas supply contract by the end of 2007. If so, the company can begin ordering equipment for the LNG plant, with a possible June 2008 construction target.

LNG STORAGE IN FAIRBANKS INCREASES

Meanwhile, the company continues to grow its Fairbanks system. Fairbanks Natural gas is a wholly owned company of Pentex Alaska Natural Gas Co. and Pentex is a privately held company with limited shareholders, with financial commitment from the Harrington Partners.

In 2006, the company acquired about 22 acres of land in southwest Fairbanks, next to the Tanana River levy, for its new storage facility. The company installed two 50,000-gallon storage tanks in late 2006 and new vaporization equipment, with a total cost of $3.2 million for the project.

This year, Fairbanks Natural Gas installed two 75,000-gallon storage tanks, each with a $1 million price tag. The second tank was installed in September, with electronics, piping and final installation work being completed at the end of the month.

The new property allows for future expansion, as the company's gas distribution pipeline grows. Up to 16 large LNG storage tanks can be installed on the property, Britton said.

The four new tanks, totaling 250,000 gallons, add to the company's existing storage of 92,000 gallons located off of Van Horn Road. At the peak demand in winter, the total storage provides a six-day supply of gas for the existing customer draw, Britton said. In summer months, as consumption drops, the in-town supply increases to about 25 days for peak draw.

"That's one of the biggest challenges to our business--we have such a big capital investment for the short peak," Britton said.

In addition, the company continues to expand its network of distribution pipe throughout Fairbanks, illustrated during Britton's power point presentation. The company started in 1997 with just a few customers in the south industrial part of Fairbanks.

Expansions continued north, including a large project crossing the Chena River to offer gas to the recently expanding retail and commercial district growing on the northeast side of Fairbanks.

In 2006, Fairbanks Natural Gas installed 14 miles of new distribution pipe and hooked up 150 new customers, for a capital cost of $1.6 million.

REPLACEMENT WORK FOR OIL TRANSIT LINE CONTINUES

On the North Slope, oil and gas producers are more focused on replacing transit line pipe, suffering from unexpected corrosion due to low flows of crude oil. The problems were identified more than a year ago, when operator BP temporarily shut down the transit line moving crude oil from the Eastern Operating Area.

Analysis of data from smart pig inspections completed in July 2006 identified 16 anomalies in 12 different locations in the oil transit line located between Flow Stations 1 and 2, according to BP's Web site. Follow-up inspections indicated corrosion-related wall-thinning appeared to exceed BP criteria for continued operation.

After a spill reported in early August of four to five barrels of crude, BP announced they would ramp down production from about 1,000 wells during a three- to five-day period and ultimately replace 16 miles of transit pipeline, according to the Joint Pipeline Office. In March 2006, 200,000-plus gallons spilled from the Western Operating Area transit line due to corrosion, according to JPO.

Last winter, construction crews began replacing 8 miles of old transit line, ranging in size from 30 to 34 inches in diameter, with 16-inch diameter line.

"Lower diameter pipe ensures that the flow rates remain high enough so that small volumes of sediment within the crude oil stream will not settle out and accumulate in the lines," said Spokesman Daren Beaudo, in an e-mail response to questions about BP's pipeline maintenance and construction project.

This winter, crews will continue replacing eight more miles of transit lines. Total cost on the two-year project is about $250 million, Beaudo said. "It is not a replacement as much as it is a renewal of the system in order to address the production needs for decades to come," he added.

In addition to pipelines, the project includes installation of pigging facilities, corrosion-inhibitor-injection facilities and leak-detection and metering facilities, and affiliated electrical and emergency systems, Beaudo said. "We also replaced pipeline lines in the Lisburne Field, Milne field and others in Prudhoe as part of our ongoing inspection, mitigation and repair program in 2007," he added.

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According to BP's Web site, the company spent $71 million in 2006 for its corrosion-monitoring and mitigation programs on the North Slope, an increase of 15 percent from similar spending in 2005 and an 80 percent increase form spending in 2001.

As part of its ongoing inspection program, BP inspects about 100,000 locations on pipelines in Prudhoe Bay each year, including 60,000 locations for internal corrosions and 40,000 locations for external corrosion. "To make sure lines are fit for service, we make modifications and repairs to 250 to 300 sections of pipe a year," Beaudo said. "Most of those cases involve small-facility piping."

Each year, BP runs more than 370 maintenance pigs, he added--devices that clean the inside of pipelines and remove sediments. Cleaning pigs are being run weekly, Beaudo said.

The company "... believed the corrosion inspection and monitoring program it had in place was effective," Beaudo said, adding that BP has revised and improved its corrosion management processes.

"We have doubled the size of our Anchorage-based corrosion staff and we have approximately tripled the number of people engaged in inspection activities on the North Slope," Beaudo said. "Our integrity-related spending will increase threefold with a total spending of about $200 million this year and $250 million in 2008."

BP also retained three leading corrosion and infrastructure experts to independently review and make recommendations for improving the corrosion inspection, monitoring and prevention program, he added.

NEW PIPELINE CONSTRUCTION BY CONOCOPHILLIPS

ConocoPhillips, responsible for operations on the western part of the North Slope, has built some short pipelines in recent years through its satellite field developments.

Fiord, a roadless drill pad north of Alpine, and Nanuq, three miles south of Alpine, are connected via pipeline to Alpine production facilities. Construction of the two satellites involved more than 1,400 people and required an investment of $675 million, according to ConocoPhillips.

ConocoPhillips and its partner, Anadarko Petroleum, are also working on the Qannik accumulations, which overlies Alpine. Plans call for developing Qannik from the Alpine CD2 drill site with the first production anticipated in late 2008.

Alpine, located on the western side of existing North Slope infrastructure, pumps its oil to the Kuparuk pipeline and ultimately to the trans-Alaska oil pipeline through a 34-mile-long pipeline system. The Alpine pipe has an outside diameter of 14 inches, transporting about 90,000 to 100,000 barrels of crude daily, according to the company's Web site.

ConocoPhillips uses corrosion inhibitors, which are injected into the production system and form thin barriers to corrosive fluids. Water-injection lines are also treated with chemicals to reduce internal corrosion, and they are cleaned regularly using pigs, the company stated.