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Alaska Micro LNG Market Assessment

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Project Summary

This study investigates the viability of small-scale LNG (liquified natural gas) distribution as an alternative to diesel fuel in Alaska’s remote coastal villages.

Project Background

As diesel prices fluctuate and escalate, Alaskans continue to look for alternative methods for generating electricity and producing heat, especially in smaller, poorer rural communities where energy costs can make up a substantial share of a family’s monthly expenses.  

The uncoupling of North American gas prices from their historic relationship to the crude oil complex in recent years has increased potential economic opportunities for LNG to displace diesel. The concept of using LNG as a viable replacement in Alaska is gaining traction.  Understanding the logistic and transitional costs, and the size of the potential market, is critical to assessing the potential viability of LNG in the state. 

In Alaska’s very small markets, commercial parties assume that micro-LNG will first be used where entry is least complicated, commercially, and the amount of incremental capital investment to enter those markets is comparatively small.  This study investigates the economics of transporting and storing LNG in ‘isocontainers’ by barge for use in small, coastal Alaskan power plants as an alternative to diesel power.   While large-scale bulk transport of LNG and the economic feasibility of LNG for natural gas distribution service may prove commercially preferable, it is not part of this study as the volumes required to achieve the economies of scale generally exceed the needs of Alaska's coastal electric utility markets.

Project Description

The analysis focuses on questions a potential vendor would need to understand to determine if aggregation of utility demand from remote coastal villages, by themselves, represents a viable market as well as elements a community or State agency should investigate to determine if LNG is a practical option to meet their energy needs.

A screening analysis of key component costs - including natural gas liquefaction, isocontainer, shipping, regasification and powerhouse conversion costs - will be performed at a high, conceptual screening level. Translation of these total costs to per-unit bases that match the very small markets in Alaska will be performed.

This analysis will also investigate scale issues associated with the size and complexity of the potential Alaskan coastal market.  Looking only at need associated with existing diesel use for power, the minimum number of reasonable candidate communities that might be combined to permit an LNG project to move forward will be assessed. Candidate communities for conversion will be determined by understanding dock and transport limitations, costs and efficiency of power plant conversion from diesel to natural gas and the likely voyage time of shipping considering location and quantity of reasonable candidate communities.

Economic feasibility will be assessed from two perspectives. First, economics will be determined at the community level, assuming full PCE funding. Only kWh that are not PCE-eligible will receive economic benefits of feedstock conversion. This will indicate whether local utilities would have incentive to convert to LNG.  Second, total statewide benefits – including savings associated with displaced PCE expenditures – will be assessed. This will indicate whether the State might have incentive to provide help to communities to make the conversion to LNG feedstock.

A basic risk analysis of the economics of conversion will be performed. Sensitivity of economic viability to changes in relative commodity prices, the costs of conversion, and other costs will be assessed.

Results

Commercial parties suggested that annualized demand of roughly 10,000 MMBtu per day would be needed to keep such a barge fully occupied. However, aggregate annual load was perhaps 4,000 MMBtu per day on an annualized basis for all communities that are: a) located on or within 3 miles by road of the coast; b) eligible to receive PCE payments; c) south of mouth of the Yukon River. Accordingly, a key project discovery was that coastal community power loads are almost certainly insufficient to support a dedicated ship to haul ISO containers from liquefaction facilities at an ice-free port in British Columbia. This does not foreclose small scale LNG from being an option for coastal Alaskan communities. However, it does indicate that utility demand for LNG will likely need to be coupled with industrial needs to support the initial infrastructure build out.

The fact that utility demand was significantly smaller than expected complicated assessment of shipping costs. Shipping costs on a per MMBtu basis are significantly affected by volume and distance traveled. However, sources and volumes of potential industrial demand for LNG cannot be ascertained from publicly available sources. Accordingly, assessment of potential LNG delivered costs presumed the reasonableness of figures that have been publicly suggested for ISO container delivery of LNG – roughly $2.50/MMBtu.

Substantial attention was devoted to the cost per MMBtu of ISO containers on an annualized basis. Costs differ substantially depending upon whether year-round access is possible – which reduces the number of required ISO containers needed to meet total demand – or whether the community becomes “ice bound” and inaccessible by barge during winter months. Costs differ, too, according to whether ISO containers are to be prices associated with the average costs of meeting aggregate demand across ice-free communities, according to a community’s contribution to coincident peak needs for ISO containers, or some other rate design mechanism.

In general we find that for ice-bound communities ISO container costs may be sufficiently great to make LNG an uneconomic option. The combined demand of Naknek, South Naknek, and King Salmon, as well as the total demand in Dillingham, may offer an exception as load is sufficiently large to support more efficient LNG storage options. For ice-free communities, the “rate design” associated with need to meet peak ISO-container demand may significantly affect viability for a given community.

Photo 1: Applied Cryo Technologies (ACT) model ACT-LNG-12115-ISO is optimized specifically for transporting Liquefied Natural Gas (LNG) worldwide by rail, sea or road and is also ideal for onsite LNG storage.  Courtesy of appliedcryotech.com.

Photo 2: Dutch Harbor.  Photo courtesy of http://www.mooseintheyard.com.