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Can new fuel shipper reduce $7 a gallon fuel prices in Western Alaska?

Alex DeMarban
Loren Holmes photo

A new player with deep Alaska roots has entered the fuel-delivery business in Western Alaska, bringing a rare shot of competition to a rugged edge of the state marked by fuel prices that rank among the nation's highest.

Imagine paying more than $7 a gallon for gasoline, as some villages did this year.

And that's when things go right. When things go wrong and emergency fuel shipments must dribble in by plane, instead of arriving at once by river barge, gas prices soar toward $10 a gallon.

Villagers have long clamored for a new fuel shipper, hoping prices would fall in the vast region extending from the Aleutian Islands to Bristol Bay to Northwest Alaska, a seaboard longer than the Lower 48 West Coast.

How much difference a new company will make has yet to be seen. The world first heard of Vitus Marine this winter when it hired a Russian icebreaker to deliver South Korean fuel to ice-locked Nome in western Alaska.  

Now the upstart is having a quiet but critical impact throughout the region, where it's quickly elbowed its way into a high-risk market long dominated by two goliaths with much more money and much bigger fleets: Florida-based Crowley Marine and Seattle-based Delta Western.

Transportation component falls

Some say the new company, Vitus Marine, has forced the competition to reduce its bids to big fuel buyers. To lower those bids, companies lower the transportation fees they tack onto fuel purchased from refineries. Those savings won't be easily noticed this summer by villagers, who can expect to see higher prices again.

Vitus, based in an Anchorage strip mall, began delivering fuel and cargo late last summer before rivers froze shut. Critical to the firm's success is a long-term contract with one big buyer, the Alaska Village Electric Cooperative, which secured the capital to pay the upfront costs of the two tug-and-barge sets operated by Vitus.  

The cooperative's delivery contract with Vitus, involving about 5 million gallons of fuel, has shuffled the industry, said Bob Cox, a vice president with Crowley Marine's Anchorage offices.

"(The partnership) took a lot of gallons off the table and Delta Western and Crowley are looking at the rest of market and seeing where we want to be," he said.  

Rural fuel costs to rise

Rural fuel costs never seem to decline, and this year may be no different.

Villages buy their fuel in bulk during the months that rivers aren't frozen, so they're usually chained to one price for the entire year.

The global cost of crude oil is the biggest component of those prices. This summer, that global index has fallen. But rural fuel prices will nonetheless rise. That's because the Northwestern U.S. and Alaska have been hit by higher prices due to temporary shutdowns at West Coast refineries. Scheduled maintenance at the Tesoro refinery in Nikiski two weeks ago also limited capacity, said Cox.

The effects are visible at Anchorage gas stations, where prices recently surged past $4.50 a gallon, more than 50 cents higher than last fall.

Rural Alaska can expect much the same, said Kirk Payne, a vice president with Delta Western in Anchorage.

"Look at the cost of gasoline at Chevron in Anchorage this year versus last year, and that is indicative of what will happen in rural Alaska," he said.

Rugged world of Alaska deliveries

Also affecting rural Alaska fuel prices: It's one of the toughest places in the world to operate, according to Payne. Bad weather, shifting sandbars and raw infrastructure mean everyone faces big hazards that can lead to unexpected costs.

By comparison, consider state-of-the-art docks in places such as San Francisco, where fuel deliveries don't require leaving the boat because pipelines come to the water, Payne said.

Villages in Western Alaska usually have no docks, forcing tugs and barges to tie up to alders or trees along muddy banks. A crew of workers may need to slog hose hundreds of feet, struggling up slippery mud banks and down dirt roads to reach a tank farm. Sometimes, the tank farm is so distant that hoses won't reach, so a fuel-loaded truck fills up multiple times at the barge, increasing the  risk of a spill.

Given those factors and bigger market forces like the volatile price of fuel, Payne said he has no idea what another fuel shipper will mean to rural Alaska in coming years.    

"I can't comment on what will Vitus will do to the market. Maybe I can tell you in a year or two," he said.

Lower prices for utilities

Large rural power companies say Vitus has saved them money by lowering transportation costs of delivered diesel fuel. Those savings will be passed onto consumers, representatives said. But because the cost of fuel will rise in rural Alaska this summer, those savings may not be found on electric bills.  

Shipping companies trying to outbid each other can usually do so by only pennies to the gallon, because the transportation costs tacked onto the price of fuel are relatively small.

That can, however, mean big savings for utilities that buy large quantities. Andy Leman, an Anchorage attorney representing many rural utilities, said his clients are seeing lower bids since Vitus entered the market last year.

Among the utilities Leman represents are those in the Western Alaska Fuel Group, a consortium of relatively large power companies operating in Nome, Kotzebue, Dillingham and elsewhere.

Shortly after entering the market, Vitus won the contract to deliver more than 5 million gallons to the bidding group last year. This year, Delta Western won that contract.

Leman wouldn't disclose exactly how much the utilities have saved since Vitus appeared. But the savings will flow onto customers.

"It's not like you'll look at a bill and see a 50 percent drop, but every little bit helps," he said.

Competition just one factor

 Payne refused to say whether Delta Western lowered its transportation costs to win this summer's contract for the Western Alaska Fuel Group. That's private information that could hurt the company's competitive position, he said.

But Delta Western must have done something right. They apparently secured most of the bid fuel deliveries in Western Alaska this year, grabbing the dominant position formerly held by Crowley, Cox said.  

That includes Teck-Cominco Alaska at Red Dog Mine, one of the world's largest zinc mines and the biggest Western Alaska fuel buyer. They want about 20 million gallons this year, Cox said.

Sometimes Crowley wins the most delivery contracts, sometimes it doesn't, Cox said.

"It fluctuates year to year. Sometimes, some competitors bid more aggressively than others," said Cox.

He said it's too soon to tell whether the appearance of Vitus caused more active bidding.   

Crowley will retain a significant presence in Western Alaska this summer even though it will lay up some equipment and "right-size" its fleet, Cox said. As always, the company will operate tank farms and fueling stations in hub cities such as Bethel and Kotzebue. And it will still ship a lot of product, including under a newly won four-year contract to deliver fuel at the U.S. Air Force station at Shemya Island in the western Aleutian Islands.

Crowley will operate about 10 tug-barge sets in the region, including five that are ocean-going.  

Delta Western will operate at least eight tug-and-barge sets in Western Alaska this summer, Payne said.

A seasoned hand

And then there's little Vitus Marine, with its two new tugs-and-barges. The vessels, built by Sneed Shipbuilding in Channelview, Texas, began arriving in Alaska late last summer.

In the tradition of giving boats in rural Alaska Native names, the tugs have been dubbed Naniq, the Inupiat word for "source of light" and Cavek, the Yupik word for "harpoon" or "metal." The tugs and their barges are scheduled to be blessed and christened in Dillingham in Bristol Bay on Thursday afternoon.  

Mark Smith, Vitus' founder, knows rural Alaska well. He's a third-generation tug-barge operator whose grandfather launched Smith Lighterage Company in the 1930s to send fuel and cargo up rivers in the Bristol Bay region.

Smith-the-younger cut his teeth on those old wooden tug boats and barges, working on them before he was a teen. Later, he moved into management. In the late 1990s, he merged the family company with the Seattle-based freight company, Northland Services, becoming part of their Yukon Fuel subsidiary.

In 2005, Crowley Marine acquired Yukon Fuel. Smith said he loved the people at Crowley, but soon felt like a cubicle-bound cog in the company's widespread hierarchy.

So when Alaska Village Electric Cooperative came looking for a partner about three years ago, offering to front the massive costs for buying the tug-barge sets, Smith, now 51, jumped at the chance to run his own show.

The rural cooperative purchases fuel for power plants in 54 villages. It had long sought a more competitive market to help lower the transportation costs associated with its fuel deliveries, officials there said.  

In a deal worked out with Smith, AVEC agreed to secure the loan for the new tugs and barges -- which came to $15 million -- as long as Smith repaid the company at regular intervals within five years.

No costs associated with the loan will be passed onto AVEC customers, said the cooperative's executive director, Meera Kohler. And thanks to the fuel delivery contract with Vitus, the cooperative expects to save $500,000 a year.

The savings will reach customers, too, she said. But they'll help hold down the cost of power, rather than reduce it, because of this summer's rising fuel cost.

Contact Alex DeMarban at alex(at)alaskadispatch.com