Fairbanks Natural Gas LLC has worked for more than three years to develop a new supply of natural gas from the North Slope, as the costs for the company's current Cook Inlet gas source has increased dramatically in recent years.

Now, Fairbanks Natural Gas says its estimated $250 million project to tap North Slope gas and supply two large industrial energy consumers in North Pole is too expensive for private investment. The energy project could benefit from state-backed bonding through the Alaska Industrial Development and Export Authority.

"The challenge is how to finance the project. In two years, we've acquired land, acquired permits and signed a gas contract, so we've got a shovel-ready project," Dan Britton, president of Fairbanks Natural Gas, said during a Feb. 27 presentation to the Fairbanks chapter of the Alaska Miners Association. "With all the uncertainty in the energy industry, private investors require too much return for the risk. We've looked at scenarios for state involvement in an energy infrastructure that can benefit Alaskans."

Compared to financing the $250 million project through state-backed bonds at five to 5 1/2 percent, Britton said, private funding for the energy project would likely carry debt costs of 10 percent to 12 percent interest.

"The amount of return that investors are looking for is significantly higher," he said.

Under the state bonding proposal with a 10- to 20-year financing term, FNG estimates customer rates would range between $10 and $12 per million cubic foot if Alaska North Slope crude is selling for $50 per barrel. Those estimated gas rates would go up as crude oil prices increase.

Previously, FNG had estimated capital costs for its North Slope gas project at $20 million to $50 million, an investment that the company could bear. But now, the project has grown in scope to include large-scale energy consumers in North Pole: the Flint Hills oil refinery and the oil-fired power plant operated by Golden Valley Electric Association.

Together, those two North Pole industrial customers would consume about 8 billion cubic feet of natural gas a year, a large portion of the estimated 17 BCF per year supply that FNG recently signed with ExxonMobil.

FNG's current network of about 1,100 gas customers in the Fairbanks area consumes less than 1 billion cubic feet of gas per year, Britton said.

Energy cost savings by converting Flint Hills and GVEA's power plant from oil-based fuels to natural gas could financially help Interior residents who aren't already on the FNG gas distribution system through lower retail prices, he said.

FNG's North Slope natural gas project could also help Interior Alaska in two other areas: providing more consumers with a choice on heating fuel sources and helping to lower air emissions in the Fairbanks area.

In winter months, when wood stove and oil-fired heaters are in heavy use, the Fairbanks North Star Borough frequently surpasses federal recommendations for emissions of fine particulate matter. Finding ways to meet those federal emission recommendations is a dilemma that local officials have been wrestling with.

"Natural gas is the most likely solution," Britton said

Currently, FNG purchases natural gas from Cook Inlet suppliers, liquefies it at a small plant near Point MacKenzie and trucks it north on the Parks Highway in specialized tankers to the company's south Fairbanks industrial site.

There, the LNG is regasified and put through the growing network of gas distribution lines that cover most of the core area of Fairbanks, including the recently developed retail area on the northeast side of town.

Tightening supplies of natural gas in Cook Inlet have driven up the price of that energy source since FNG began operating in 1998, Britton said.

"No longer can we buy gas low enough," he said. "We're paying about $10.50 per thousand cubic foot, and that's before we liquefy it, truck it north, store it, revaporize it and distribute it."

As an alternative to Cook Inlet gas, FNG has been looking at the abundant North Slope supply. More than a year ago, FNG signed a 10-year supply contract with ExxonMobil to purchase up to 17 BCF per year.

The Fairbanks utility also negotiated in late 2006 lease terms with the state for a 17-acre parcel of land northeast of the Deadhorse Airport to build the required LNG plant.

Because FNG is a licensed public utility, state land managers were able to negotiate a long-term lease at fair market value, rather than going out to competitive bidding, according to Chris Milles, northern region manager of the Alaska Department of Natural Resources.

While the final land lease has not yet been signed, Milles said, FNG is holding the rights to the North Slope land parcel through a land use permit and by paying monthly rent, which in a year's time equals the appraised annual lease fees of $83,500.

The design of the proposed LNG facility is modular, Britton said, so it could be moved to other locations, should a gas pipeline project in the future make it obsolete.

"Glennallen has some power generation, as does Delta," Britton said. "It could be moved to tidewater to provide service to southeast Alaska or to export LNG. There's also a strong potential for significant growth in the transportation field, with heavy duty trucking fleets."

Transporting LNG from the North Slope to the Fairbanks area would likely require about 30 trucks a day on the Dalton Highway, each direction, Britton said. The company already has a fleet of the specialized tanker trailers that haul LNG on the Parks Highway.

The proposed project would also produce up to 30,000 gallons of propane per day, which could be distributed in rural Alaska, Britton said.