Wednesday, August 3, 2011

State's Slope gas pipeline plan moves ahead, a step at a time

By Tim Bradner
Alaska Journal of Commerce

Plans for a 24-inch natural gas pipeline built from the North Slope to Southcentral Alaska are moving forward a step at a time. A 430-mile state right-of-way was granted for the $7.52 billion project July 25 and a draft environmental impact statement is due out in August, Dan Fauske, president of the Alaska Gasline Development Corp., a state corporation, told state legislators in a briefing.

Fauske said he hopes for a final EIS for the 737-mile pipeline by early 2010, but it will still be a while before dirt is turned. More engineering and technical studies are needed before cost estimates will be reliable enough so an "open season" can be held for potential customers, he said. If the project stays on schedule that will be in mid-2013, but it probably won't be known until early 2014 if enough gas shippers have signed up for the project to proceed.

A key assumption in the financial planning for the project is that state ownership and financing, with the actual construction and operation done by private firms, would be the least-cost option, Fauske said, because financing costs would be less expensive because of the state's strong financial condition.

Private ownership is still an option, Fauske said, but potential private owners would likely not have as strong a credit rating as the state, and thus financing costs would be higher. Also, the return on equity required for private investors would result in a higher cost of the gas delivered to consumers than would be the case if there were no equity and no required returns paid to investors, Fauske said.

Meanwhile, the state is laying out considerable sums to have the 24-inch pipeline available as an option. About $40 million has been spent so far on the planning by the Alaska Gasline Development Corp. and another $28.2 million has been appropriated for the current year, Fauske said. An additional $320 million will be needed for additional engineering and cost studies that will be sufficiently detailed for the open season planned in 2013.

Those estimates will have a 20 percent confidence level, meaning they should be accurate enough that the final cost will be either 20 percent above or below the estimate. At present, with $40 million spent on preliminary engineering, with confidence level is at 30 percent, either high or low. In addition to the $28.2 million appropriation for state fiscal year 2012 work by AGDC the Legislation set aside $200 million in a reserve fund to help pay for work needed in 2013.

The 24-inch pipeline is being pushed by the state as a fall-back in case a large 48-inch pipeline also planned doesn't go. Fauske said the state needs to ensure North Slope gas gets to Alaska communities. If the pipeline goes ahead it would employ about 8,000 in construction and could be delivering 500 million cubic feet of gas to Interior and Southcentral Alaska by 2019, he said. The cost to consumers would not be that much higher than gas now being supplied to utilities by gas producers in Southcentral Alaska.

The need to get affordable energy to Alaska communities is growing urgent, as natural gas fields in Southcentral Alaska are being depleted. Utilities are now planning to import liquefied natural gas as early as 2014 to the region.

A consultant study done as part of the AGDC work showed that imported LNG would cost $14 to $18 per mmBtu, Fauske said, which with utility distribution costs added would increase the price to $16 to $21 per mmBtu. That is more than twice what AGDC believes North Slope gas delivered through its 24-inch pipeline would cost gas customers in the Southcentral region.

The state's 24-inch pipeline is a small-sized version of the larger gas pipelines planned from the North Slope to Canada. Open seasons for two 48-inch pipelines were held in 2010, but one has dropped out, the BP-Conoco Denali pipeline, citing insufficient interest by gas shippers. The second project, led by TransCanada and Exxon- Mobil, is still active, with the benefit of state financial backing, but results of the 2010 open season still aren't known a year after it was held.

If the large pipeline is built, a 24-inch spur line to Southcentral Alaska would still be needed, Fauske said, so the southern half of the 737-mile project being planned now by the AGDC would provide for that. If the big pipeline proceeds, the northern half of the AGDC's pipeline would simply not be built, he said.

The bullet plan

Fauske and his staff laid out some key aspects of the project in the briefing. AGDC's report on a project, a year in the making, was released July 5, and July 25 was the first opportunity for legislators to ask more detailed questions after having had the report for a few weeks.

The key finding is that gas delivered to the Anchorage area through the project would cost consumers about $9.63 per million British thermal units (mmBtu) including the local utility distribution cost, which is not much higher than the $8.85 per mmBtu that Enstar is now paying for some of its gas, Fauske said. Gas would be delivered to Fairbanks for about $10.45 per mmBtus, well below what homeowners and businesses there are paying for heating with oil.

Fauske said AGDC's report validated most conclusions reached a year earlier by state geologist Bob Swenson and his team. An important finding of the earlier study was that the Parks Highway route from Interior Alaska south was superior to a route to the east, through Delta and Glennallen.

Although both routes served about the same number of people and faced similar numbers of river crossings and terrain challenges, the eastern route via the Richardson Highway was 93 miles longer and would add about $500 million to $600 million to the project costs.

Studies of a Richardson Highway route have been done by another state corporation, the Alaska Natural Gas Development Authority, which considered it superior if built as a spur line off a 48-inch line in Delta. One advantage of a Richardson Highway route is that it would leave open the possibility of another spur being built from Glennallen to Valdez, where a liquefied natural gas project could be built.

"We continue to look at the Richardson Highway route but we have basically concluded that the earlier decision, for the Parks Highway route, is the proper one. The AGIA project (TransCanada and Exxon- Mobil) have a Valdez option in their base case that would deliver from 1 (billion) to 3 billion cubic feet a day and compared to that our project delivering 500 million cubic feet a day is just a nuisance factor. It's not enough of an advantage to justify spending another $500 million," to build via the Richardson Highway, Fauske said.

However, the Parks Highway route planned by AGDC is encountering some criticism in Fairbanks because the 24-inch pipeline route would be through the Minto Flats west of the city and a 30-mile, 12-inch spur would be still needed to bring gas to the Interior city. That would add to costs, to the point that the expense of delivering gas to Fairbanks would be higher than to Anchorage, about 400 miles farther south. That rankles community leaders in Fairbanks.

Fauske said the 12-inch lateral line to Fairbanks could deliver up to 60 million cubic feet of gas per day to the Interior city, but that appears to be three to four times the amount of gas the community could absorb. He also said that Fairbanks North Star Borough Mayor Luke Hopkins had told him that another $51 million would be needed to build a gas distribution system in Fairbanks.

There is currently a small gas distribution system in Fairbanks owned by Fairbanks Natural Gas, which relies on gas from Cook Inlet trucked as LNG up the Parks Highway.

Republished with the permission of the Alaska Journal of Commerce