Vol. 22, No. 31 Week of July 30, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

IGU takes a pause

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Stops work on Interior Energy Project following disagreement over funding

Alan Bailey

Petroleum News

The Interior Gas Utility told a meeting of the Fairbanks North Star Assembly on July 20 that the utility had stopped all meaningful work on the Interior Energy Project as a consequence of a disagreement with the Alaska Industrial Development and Export Authority over AIDEA funding for some of the work involved in the project. IGU told the assembly that it projects a funding shortfall of $41,838 in the current budget cycle if the utility continues its IEP activities.

The funding dispute dates back to February of this year and relates to the interpretation of a state statute spelling out how AIDEA can issue loan financing for the IEP. AIDEA says that it cannot legally provide money from an AIDEA Sustainable Energy Transmission and Supply, or SETS, loan for the IEP for the IGU work in question.

Enlarged Fairbanks gas supply

The IEP has an objective of greatly expanding the supply of natural gas at an affordable price to the city of Fairbanks and the surrounding Interior, to help address the high cost of energy in the region and to reduce winter air pollution that results from the widespread use of wood burning stoves. The idea is to obtain natural gas from the Cook Inlet basin; convert the gas into liquefied natural gas in an expanded version of an existing LNG facility near Port MacKenzie; ship the LNG to Fairbanks by road trailer or rail; hold the LNG in expanded LNG storage facilities in Fairbanks; and distribute gas to consumers through a greatly expanded gas distribution pipeline network.

Also as part of the plan, AIDEA and IGU have signed a memorandum of understanding, setting a goal for IGU to purchase Pentex Natural Gas Co., a company which AIDEA currently owns. Pentex owns the Port MacKenzie LNG facility, the current trucking operation for shipping LNG to Fairbanks, and Fairbanks Natural Gas, a utility that currently supplies gas in central Fairbanks. The prime objective of the Pentex purchase is to consolidate IGU and FNG as a single Fairbanks gas utility, thus enabling operating efficiencies and economies of scale through the operation of a single gas distribution system.

Funding for the project comes from a $42.5 million state capital appropriation, $135 million in SETS loans, and $150 million in AIDEA bonds.

IGU is owned by Fairbanks North Slope Borough and receives a grant from the borough to cover some of the utility’s costs. The utility does not currently have an operational gas supply.

Legislation in 2015

The original concept for the IEP had been to obtain LNG from the North Slope. However, when the economics of that concept did not pan out, the Legislature passed a bill in 2015, House Bill 105, authorizing a change of direction for the project. That change ultimately led to the current concept of a Cook Inlet gas supply.

But the project has become delayed in trying to firm up an appropriate gas supply from a Cook Inlet gas producer. The price of the gas needs to be low enough to result in a workable delivered gas price in Fairbanks, while supply volumes need to be flexible, given major uncertainty over future gas demand growth in the Fairbanks region.

The dispute between IGU and AIDEA revolves around the legal interpretation of the language in HB 105. IGU wants to use SETS funding to fund the $850,000 cost it is incurring in its work on the required gas supply, conducting due diligence for the Pentex purchase, planning the integration of the two Fairbanks utilities and working on Pentex purchase agreements.

In June Jomo Stewart, IGU general manager, sent a letter to John Springsteen, AIDEA executive director, requesting clarification of the loan agreement between AIDEA and IGU, and requesting an amendment of the loan documentation to incorporate up to $600,000 in Pentex acquisition costs and up to $150,000 in costs involved in establishing a gas supply. Springsteen responded that, under the terms of HB 105, AIDEA cannot currently change the terms of the loan agreement with IGU. Stewart responded by claiming that the terms of the loan agreement do not preclude the requested changes.

However, during its June 29 meeting the AIDEA board did pass a resolution to allocate up to $150,000 in funding for IGU’s gas supply negotiations, with that money coming from AIDEA’s approved capital budget for the IEP. The board also approved $1.5 million in capital funding for the front-end engineering and design for LNG storage expansion in Fairbanks - AIDEA is anxious not to miss a Jan. 1, 2020, deadline for obtaining a state LNG storage construction tax credit for the project.

Plan required

Gene Therriault, AIDEA’s IEP team leader, has told Petroleum News that HB 105 requires AIDEA to prepare an IEP plan that is approved by the AIDEA board. That plan, informally referred to as the 105 plan, must include an identified source of gas for the gas supply, the cost of the various components of the gas supply chain, and an expected delivery price for gas in Fairbanks. AIDEA has taken advice from the state’s Department of Law and understands that HB 105 prohibits any AIDEA approval of further IEP SETS funding until the 105 plan has been completed and approved, Therriault said.

Thus, in the absence of a contract with a Cook Inlet gas producer for a gas supply, further SETS funds cannot be released to IGU for the work activities in question. Moreover, the purchase of Pentex by IGU also requires access to financing that cannot be released until a gas supply contract is in place, Therriault said.

Meanwhile AIDEA is considering further capital funding that might be released to IGU.

“We’re working with IGU now to figure out which costs fit into which category, and the timing of when they could be paid,” Therriault said.

And Therriault characterized the question over the release of SETS funding to IGU as essentially a timing issue relating to the completion of a gas supply contract. AIDEA is now taking the lead position on establishing that contract.

“We’re getting close,” Therriault said.

Report to the Legislature

On July 15 the IEP team published its latest quarterly report on the project to the Alaska Legislature. That report comments that the team anticipates establishing a new Cook Inlet gas supply contract that would start in early 2018. Pentex’s current gas supply agreement with Hilcorp Alaska for obtaining gas for Fairbanks Natural Gas’s current customers expires in April 2018.

The report also says that by the end of July Pentex will take delivery of two of three new, large capacity LNG trailers that the company ordered to improve the efficiency of its LNG transportation to Fairbanks. Delivery of the third trailer is expected by the end of August, the report says.

During its June 29 meeting the AIDEA board approved a 2018 budget for Pentex: The new budget involves a 3 percent gas rate increase for FNG’s existing gas customers. However, after AIDEA purchased Pentex in 2015 it was able to reduce FNG’s gas rate by 13.5 percent for residential customers.

The IGU work stoppage was first reported by the Fairbanks Daily News-Miner.

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