By Tim Bradner
Alaska Journal of Commerce

The Alaska Natural Gas Development Authority, or ANGDA, hopes to finalize an agreement with private firms by late October to bring propane from the North Slope to Interior and Western Alaska communities.

The proposal is to develop a small propane processing plant on the North Slope and to market the fuel in those communities.

"We see propane as a 'bridge' fuel until a natural gas pipeline is built. Even after that, propane delivered to rural Alaska can be a very economical alternative to conventional fuel oil and diesel," said Mary Ann Pease, the authority's manager for the project. "This is not a government-controlled initiative. We will serve as the facilitator of the project, but the ultimate responsibility is with the private sector."

Under the plan, ANGDA would finance the connection with the field and metering facilities. The extraction plant would be privately owned and operated, as would marketing activities.

There is some skepticism that the fuel will be a practical alternative to conventional diesel in rural communities, at least on a large scale.

Meera Kohler, general manager of Alaska Village Electric Cooperative, which operates electric utilities in rural communities, said delivery of propane containers entails logistics problems and that using the fuel is challenging in low temperatures.

Pease said the initiative has attracted serious interest from major companies, however. EnerFlex and CH2M Hill, among others, are separately looking at the propane extraction plant as a venture. Major distributors Amerigas Propane and Suburban Propane are studying the distribution and marketing of the fuel in Alaska, as is a joint venture of Crowley Maritime Corp. and NANA Development Corp.

A financing plan is to be developed by late October, as well as an agreement among companies that would wish to participate.

"At that time, people will have to put up some earnest money to show they are serious," Pease said.

ANGDA has contracted with NANA Worley Parsons to compile engineering and cost estimates of a technical connection with the Prudhoe Bay field gas processing plant and metering facility to measure the volume of natural gas diverted to a propane extraction plant.

North Slope companies produce about 8 billion cubic feet of gas as a part of oil production operations, but the gas is being injected back underground until a gas pipeline is available. The gas contains considerable quantities of natural gas liquids like propane, some of which could be extracted from the stream of produced gas before it is injected back into the producing reservoir.

If 1 billion of the 8 billion cubic feet of gas produced at Prudhoe Bay each day were processed, it could make between 5,000 barrels to 10,000 barrels per day of propane available. The rest of the gas would be returned to the oil field operators for injection underground.

A North Slope producer, which has asked to remain unidentified for now, has offered to sell propane to the authority for a price that would be about 30 cents a gallon when crude oil prices are at $60 per barrel, Pease said.

After processing, the propane could be trucked down the Dalton Highway and delivered to Fairbanks for about $1.16 per gallon, according to estimates prepared for the gas authority by Scott Goldsmith, an economist with the University of Alaska's Institute of Social and Economic Research. The equivalent cost for fuel oil would be $2.13 per gallon at a $60 per barrel oil price, Goldsmith's study indicated.

If oil prices were to increase to $100 per barrel, propane becomes an even better bargain. Under that scenario, propane could be delivered to Fairbanks for about $1.34 per gallon, comparing favorably against a $3.18 per gallon delivery cost for fuel oil, the ISER study said.

Propane could also be an attractive alternative fuel for Golden Valley Electric Association, Interior Alaska's electric cooperative, to use in power generation. Propane likely would be less expensive than naphtha, which Golden Valley now purchases for its North Pole oil-fired power plant.

If the utility used 2,000 barrels per day of propane instead of naphtha to fuel power generation, the savings would be $5.1 million per year, ISER said.

Pease said the fuel could also benefit Western Alaska communities. Bulk quantities of propane could also be shipped by barge from the North Slope to Northwest Alaska.

The Red Dog Mine and Kotzebue Electric Association could substitute propane for diesel to fuel power generation. Propane could also be used for home heating, again substituting for diesel.

No estimates of the cost of moving propane by barge from the North Slope are publicly available, but Crowley Maritime Corp. is studying the idea, Pease said. Crowley now operates barges to distribute fuel in rural Alaska.

If a gas pipeline is built, that would be the most efficient way to supply energy needs in Fairbanks and possibly Anchorage, but many communities around the state are too dispersed for economical service with natural gas. For these, propane could be an attractive fuel.

"There are many rural villages that will never be able to get natural gas service. But propane is something they use now, and they're used to it," said Scott Heyworth, chairman of the gas authority's board.

Pease said propane is already widely used in Alaska for cooking and in some cases heating. There are distributors that sell propane and manage storage and distribution facilities in many larger communities. "It's a known, well-understood fuel," she said.

AVEC's Kohler says propane might well be useful in home heating or cooking, but rural electric utility operators like her cooperative would be cautious about changing over from a system based on diesel, which is known to be workable.

In terms of logistics, the propane would be moved in containers as deck cargo on barges, and that takes valuable deck space away from other cargo, such as construction equipment and materials, she said.

ANGDA's propane project has been developed within the last year.

"Our efforts have been focused mostly on delivering gas from a spur line from a big pipeline when that it built. That's still the major part of our work, but last year we realized we don't have to wait to get a part of the gas delivered - the propane. It is available now," Pease said. "We could have this project up and running in two years."

The project will require a capital investment of less than $200 million. The authority would pay about $25 million of that for the connection with the Prudhoe Bay gas facility and the gas metering systems. That funding will likely be raised from sales of revenue bonds by the authority, Pease said.

Private companies would invest the remainder, and would own the facilities and equipment.

The authority's only requirements of its private-sector partners is for some of the propane to be supplied to rural communities, and that it be sold to communities at sizeable discount compared to diesel.

"We wouldn't want to see all the propane sold to industrial customers, and we don't want to see it sold for a penny or two under the price of a competing fuel. We want to see a substantial savings for Alaskans," Pease said.