Fairbanks utility signs deal to buy liquefied natural gas trucked from the North Slope

Amid concerns over future supplies of natural gas from Cook Inlet, a small Fairbanks utility has signed unprecedented agreements with affiliates of Hilcorp to buy gas trucked from Alaska’s North Slope oil fields.

An official with the Interior Gas Utility said that the uncertain outlook for gas from Cook Inlet prompted it to find a new solution.

On Wednesday, the utility inked agreements with Hilcorp North Slope, the operator of the huge Prudhoe Bay oil field, and Harvest Alaska LNG, a subsidiary of petroleum shipper Harvest Midstream, a Hilcorp affiliate.

The agreements call for the construction of a small gas-liquefaction plant near Deadhorse, the industrial town that’s the jumping-off point for North Slope oil fields. At the plant, natural gas will be chilled into a liquid, called liquefied natural gas or LNG.

Truck shipments of LNG to Fairbanks, a distance of 500 miles largely along the gravel Dalton Highway, could begin as early as late 2024, said Elena Sudduth, head of public relations for the Interior Gas Utility.

The utility is small but growing, she said. It distributes natural gas for home and residential heating in Fairbanks and North Pole.

Sudduth said the deal is historic because it will be the first time that North Slope natural gas has been shipped out of the region for sale. A small amount of North Slope gas is already being used by North Slope communities, she said.

She said the costs to customers of the North Slope liquefied gas will be comparable to Cook Inlet gas.

Interior Gas Utility’s current contract with Hilcorp for Cook Inlet gas was not set to end for nearly another decade, Sudduth said. The utility currently gets its gas from a small liquefaction plant at Point MacKenzie along Cook Inlet, known as the Titan plant. But doubts about future Cook Inlet gas supply mean a once-planned expansion of that plant to meet the utility’s future needs, at $60 million, was not a sound investment, Sudduth said.

Shipping the North Slope’s vast quantities of natural gas to outside markets has long been a dream of Alaska leaders. North Slope gas, a byproduct of the oil production, is currently reinjected underground to keep pressure high in reservoirs, helping squeeze up more of the valuable oil.

The proposed plant will be capable of producing 150,000 gallons of LNG daily, enough to meet the small utility’s needs well into the future, Sudduth said.

But that’s just a tiny fraction of the gas that would flow in the state’s $39 billion Alaska LNG project, a long-pursued but still far-off proposal that calls for construction of an 800-mile pipeline to deliver gas to Alaska communities and eventually to Asian markets, if the project can attract investors.

It’s also just a small fraction of the gas currently consumed by utilities from Fairbanks to Homer. Those utilities have been meeting to address the concerns about Cook Inlet gas supply in the coming years. They are weighing future options, including bringing on more renewable energy and even importing LNG from Outside.

[Could oil-rich Alaska be forced to import natural gas? 2 utilities are looking into it.]

For decades, natural gas from Cook Inlet has been the dominant fuel source for power and heat in the so-called Alaska Railbelt. But Hilcorp last spring warned utilities that it did not currently have enough natural gas reserves in Cook Inlet to provide for new gas contracts, though it said it was continuing to drill in hope of changing that.

Officials with two electric utilities said they might look to capitalize on natural gas from the plant someday, if it’s beneficial for the utilities and ratepayers.

John Burns, president of the Golden Valley Electric Association in Fairbanks, said the utility is looking into details of the project.

“We’re studying it to understand impacts and opportunities,” he said. “It sounds like it’s certainly a good move for (Interior Gas Utility). What it means on a broader scale needs to be evaluated.”

Tony Izzo, chief executive at Matanuska Electric Association, based in Palmer, said he could see how occasional shipments of liquefied natural gas trucked from the North Slope could serve as a “bridge” as the utility reduces its reliance on Cook Inlet natural gas and transitions to other fuel sources in the future.

“We’re evaluating that along with lot of other options,” he said.

Arthur Miller, chief executive of Chugach Electric Association in Anchorage, congratulated IGU, Harvest and Hilcorp for the deal in a statement.

“The ability to access North Slope gas sets the foundation for expanded utilization of our extensive in-state resources,” Miller said. “This is a positive development as we look to diversify our sources of natural gas as a key component in meeting Alaska’s future energy needs.”

The Interior Gas Utility has signed a 20-year contract for the gas, with possible extensions.

There is room to expand the plant under the agreements, Sudduth said. It’s possible the currently planned output could triple in the future. The plant could potentially help address other utilities’ needs one day, she said.

“There’s plenty of room for future growth,” Sudduth said. “If we can bring a truck to Fairbanks, we can take it to Anchorage.”

Sudduth said the utility is looking at buying new tanker-trailers to haul the gas, costing possibly $7 million. It expects to contract with a trucking company to deliver the gas, she said.

Interior Gas Utility has about 2,000 residential and business customers, but is extending gas lines to about 600 new customers each year, Sudduth said. It’s helping replace individual heating systems that can consist of wood-burning stoves that have sullied the Fairbanks air.

If regulatory approvals are granted, construction of the North Slope facility is expected to begin in summer 2023, Harvest said in a statement.

Harvest will build the facility. The company declined to disclose the cost.

“We are pleased to be investing in a project that utilizes North Slope gas to bring reliable energy to the Interior,” said Jason C. Rebrook, chief executive of Harvest Midstream. “There is still a lot of work to be done to bring this project to completion, but we are excited about the partnership with IGU that will give Alaskans greater long-term energy security.”