By Tim Bradner
Alaska Journal of Commerce

The Alaska Natural Gas Development Authority has forged an agreement with a Prudhoe Bay producing company to purchase limited amounts of propane for possible resale to a private distributor who could truck the fuel to Fairbanks for use in regional markets.

It's also possible for the fuel to be shipped by barge from Prudhoe Bay to Kotzebue and other coastal communities in Western and Southwest Alaska, according to Harold Heinze, the authority's executive director.

The identity of the producer cannot be divulged at this time and the sales price for the propane is still being worked out, Heinze said. While the final amount is not known, it is likely to be "in the tens of cents" per gallon, he said.

"We made them an offer on the price, and they accepted it," Heinze said.

The propane would still need to be processed and trucked to Fairbanks, or shipped by barge, and then unloaded and stored at a regional distribution point. But if the project proceeds, which depends on a private-sector partner stepping up to the plate, it could substantially reduce the cost of energy in Fairbanks, he said.

The outline for the propane project was laid out at a June 17 workshop sponsored by the state gas authority in Fairbanks. Propane suppliers, trucking companies and barge operators who might be interested in the project attended, as well as financial groups who could help finance the infrastructure needed.

The project would extract propane from the 7 billion to 8 billion cubic feet a day of natural gas being produced at Prudhoe Bay along with crude oil. The gas, which is rich with natural gas liquids like propane, is now mostly injected back underground to maintain the pressure in the reservoir that supports continued oil production.

Heinze said he believes a project could start out relatively small, producing in the range of 2,000 barrels per day, and then grow to several times that if the propane can capture additional markets in the state.

Scott Goldsmith, an economics professor at the University of Alaska Anchorage's Institute of Social and Economic Research, has examined the proposal and believes propane could be delivered to Fairbanks by tank truck for $1.16 per gallon, a price that compares favorably with the $2.63 per gallon being paid for fuel oil in the Interior city and $1.85 per gallon for naphtha, a fuel used by Golden Valley Electric Association to generate electricity.

The scenario Goldsmith developed for his analysis involved 10 trucks a day carrying propane down the Dalton Highway from Prudhoe Bay.

Switching Golden Valley's generators from naphtha to propane could potentially save the Fairbanks-based utility $5.12 million a year in fuel costs, Goldsmith estimated. If propane were to displace much of the fuel oil used for space heating by residents and businesses in Fairbanks the annual savings could reach $17.6 million, he said.

Propane is now used for cooking and space heating in Alaska when other fuels are not available or as efficient. Alaskans used about 17 million gallons of propane in 2007, according to U.S. Energy Information Agency data.

Even the initial 2,000 barrel-a-day plant would produce about 30.6 million gallons of propane, substantially more than the amount of the gas now imported to Alaska from the Lower 48.

If the fuel can be produced and trucked from the North Slope for lower costs, however, propane use would expand sharply, Heinze said.