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Vol. 22, No. 45 Week of November 05, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

Passing the IEP baton

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AIDEA sends Pentex sale agreement to IGU; questions raised over Titan plant

Alan Bailey

Petroleum News

During its Oct. 26 meeting the board of the Alaska Industrial Development and Export Authority passed a resolution approving terms for the sale of Pentex Alaska Natural Gas Co. to the Interior Gas Utility and giving the IGU board until Nov. 30 to approve the deal. Eventual closure of the deal would then depend on several conditions being met, including an agreement on a plan to expand an existing liquefied natural gas plant operated by Pentex subsidiary Titan Alaska LNG near Point Mackenzie. During the board meeting’s public comment period proponents of a plan to develop a new LNG plant near Houston on the Alaska Railroad raised questions over whether a new plant at Houston would be preferable to the Titan plant expansion.

The proposed Pentex sale comes as part of the Interior Energy Project, or IEP, an AIDEA project to bring affordable energy to Fairbanks and its surrounds and to reduce winter air pollution in the region by instigating a greatly expanded natural gas supply at a workable price.

A consolidated utility

AIDEA purchased Pentex in 2015 to help facilitate the completion of the IEP. Pentex owns the Titan facility, as well as a trucking operation for transporting LNG to Fairbanks, and Fairbanks Natural Gas, a utility that currently supplies gas to customers in central Fairbanks. The idea has been to combine FNG and IGU to form a single Fairbanks gas utility - hence the proposed sale of Pentex to IGU. The consolidated utility would build out the gas distribution network in Fairbanks, construct a new large LNG storage facility in the city, and enlarge the Titan plant for the anticipated expansion of the gas supply.

In January IGU and AIDEA signed a memorandum of understanding for the Pentex sale. However, under the terms of House Bill 105, passed by the Alaska Legislature in 2015, AIDEA has had to approve an IEP plan that includes an identified source of gas for the project, the cost of the various components of the gas supply chain, and the expected delivered price of gas in Fairbanks. Without this approved plan it would not be possible to make additional use of Sustainable Energy Transmission and Supply, or SETS, loans for the project. Consequently the September approval of a gas supply agreement with Hilcorp Alaska has enabled the project to move forward to the point of board approval of the Pentex sale agreement.

Funding for the project comes from a combination of a state capital appropriation, SETS loans and AIDEA bonds. AIDEA used money from a revolving fund to pay for the Pentex purchase: The idea is to recover that money plus a return on investment from the Pentex sale.

Although the AIDEA board has now approved a plan for completion of the IEP, the plan component involving the expansion of the Titan plant does not include a final specification or contract for the plant expansion: The expectation is that IGU, if it purchases Pentex, will issue a request for proposal for the work, with the work being financed from IEP funds.

An alternative proposal

During the public comment period of the board meeting, a group of representatives from Knikatnu Corp. and from industrial manufacturing company Siemens presented a concept for the construction of a new LNG plant near Houston, as an alternative to the expansion of the Titan plant. Knikatnu is the Native village corporation for the Knik and Wasilla area. As reported by Petroleum News in February, the Knikatnu group envisages building the new facility on industrial zoned Native land adjacent to a spur of the Alaska Railroad. The concept is to ship LNG to Fairbanks by rail. A feeder gas line would need to be constructed to the plant from an Enstar gas transmission line about 12 miles away.

Tom Harris, CEO of Knikatnu, told the board that that Knikatnu has been working with Siemens on a proposal for an LNG plant at the Houston site and that the Houston team does not view its efforts as competing with the IEP but as an alternative to the expansion of the Titan plant in meeting the IEP objectives.

“Our multidisciplinary team looked at the Titan expansion plan and we recognized that it had serious critical deficiencies that could put people’s lives in jeopardy,” Kelly Laurel, director for energy and infrastructure for Siemens Government Technologies, told the board. “The current plan is not utility grade. We discovered single points of failure.”

Single points of failure include the use of the Titan LNG plant and dependency on a single LNG storage facility in Fairbanks, Laurel suggested.

Use of the railroad

The Siemens team concluded that the optimum means of achieving an HB 105 compliant plan for the IEP would be to build the plant near Houston and to use the Alaska Railroad for the delivery of LNG to Fairbanks. This option, carried out in parallel with the continuing operation of the Titan plant, would eliminate single points of failure in terms of LNG production and transportation. The current backup plan for a failure at the Titan plant involves trucking LNG from Canada, an option that is impractical given the distances involved and the number of trucks available, Laurel said. The proposed Houston plant would be close to the Parks Highway, with road transportation being a convenient alternative to rail, should there be some interruption in the railroad service.

“This Houston LNG plant is not a pie in the sky, but rather is a well thought out, holistic solution that can be implemented quickly, in approximately about a year, and designed in such a way that it can be scaled and evolve to best match the demand of IEP added growth over time,” Laurel said.

The modular design of the proposed plant would enable the plant to be built in stages, in response to LNG demand, perhaps starting with a capacity of 60,000 gallons per day and increasing in 30,000 gallons per day increments, she explained.

Project economics

Laurel said that the Siemens team had modeled the economics of the proposal and had concluded that the system could deliver LNG to an LNG storage facility in Fairbanks at a cost of $16 per thousand cubic feet of gas, or less. The cost would fall as demand for gas in Fairbanks rises. Apparently the estimated cost of LNG transportation by rail is about $1 less per mcf equivalent than the cost of transportation by road. The Houston team is not currently in a position where it can sign a gas supply agreement for its project, but the team has obtained price quotes of $6.50 and $5.00 per mcf from Cook Inlet gas producers, Laurel said.

The current IEP plan involves a signed contract with Hilcorp Alaska for a gas supply at $7.72 per mcf, resulting in an anticipated initial price for gas delivered to consumers of $19.88 per mcf. As with the Siemens concept, the gas price in Fairbanks would drop with increasing demand, but the Fairbanks price is the price at the consumer burner tip, not at the delivery point to Fairbanks LNG storage.

The idea would be to finance the Houston LNG plant development using AIDEA funding, in the same manner as is proposed for the Titan plant expansion, without impacting the use of the AIDEA funds assigned to other components of the IEP, Laurel said.

Laurel said that the Siemens economic model considered several means of expanding Fairbanks LNG demand, including the potential to supply LNG to Department of Defense facilities in the region. The DOD has expressed an interest in the LNG concept but would require supply reliability assured by a utility-grade supplier, she said.

“Energy must be available at all times for the DOD installation to meet its mission requirements,” said John Saams from Siemens Government Technologies.

Road transportation issues

Roger Purcell, a former mayor of Houston and senior partner with East West Pacific Consulting, questioned the capability of the unpaved road system from Point Mackenzie to handle the level of anticipated LNG tanker traffic that would follow expansion of the Titan plant. While the trucks would tear up the road, the state does not have the money to conduct the road repairs that would become necessary, he said. Moreover, the additional traffic in a road system already stretched beyond capacity as a consequence of population growth in the area would trigger an increased traffic accident rate, he said.

Verne Rupright, former mayor of Wasilla and also a member of East West Pacific Consulting, commented that the Point Mackenzie road is already in bad shape because it is sinking into the tundra. Rupright also said that the Houston site has a better safety rating than the Titan site, a factor that would impact insurance rates for an LNG facility.

Purcell later told Petroleum News that AIDEA had known about the Houston proposal for nearly a year but that the AIDEA staff had not put the proposal into the agenda of a board meeting. Hence the Oct. 26 move to present the Houston plan in the form of public comments to the board, Purcell said.

Can be considered

During board discussion of the Houston plan, Jerry Juday, assistant attorney general, Alaska Department of Law, commented that, although the Pentex sale documentation specifically references the expansion of the Titan plant as the means of expanding the Fairbanks LNG supply, the document did not preclude the possibility of the Houston group submitting its alternative LNG plant proposal in response to the anticipated RFP for Titan plant expansion.



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Gas utility CEO expresses Pentex concerns

During public comments in the Oct. 26 meeting of the board of the Alaska Industrial Development and Export Authority Jomo Stewart, CEO of the Interior Gas Utility, expressed his concerns about an ADIEA resolution to authorize the sale of Pentex Natural Gas Co., including its subsidiary Fairbanks Natural Gas, to IGU. Later in the meeting the board passed the resolution, approving documentation for the sale. The IGU board has until Nov. 30 to decide whether to agree to buy the company.

The idea is to combine Pentex and IGU to form a single gas utility in the Fairbanks region of the Alaska Interior, with IGU also operating an LNG plant near Point Mackenzie and a trucking operations for transporting LNG to Fairbanks.

Stewart questioned some of the provisions within the sale documentation, in particular some covenants, which, if violated, would trigger a major escalation in the interest rate that IGU would have to pay for AIDEA financing. He pointed out, in particular, that one of the covenants requires IGU to operate as a utility-grade business. Moreover, the gas price that AIDEA has currently approved for Fairbanks consumers does not comply with the rate setting provisions of the sale agreement because the rate is artificially low as a consequence of not including in the rate calculation the cost of AIDEA’s investment in Pentex, he said, suggesting that the low rate had been set for political and public relations purposes.

“You are right now, today, in violation of the covenant you are asking me to sign,” Stewart said. “If I signed this, before the ink is dry on the paper I would be in violation of the operating covenant and subject to acceleration of the loan.”

Although there has been much progress in the process of consolidating the Fairbanks utilities, several significant issues still need to be resolved in order to complete the consolidation deal, Stewart said.

Single points of failure

Stewart also commented to the board that Pentex’s safety record has taken a hit since 2015, with a high rate of recordable safety incidents. There are also compliance issues relating to the design of the facilities in Pentex’s Titan LNG plant at Point Mackenzie, he said. Moreover, a lack of schematics for the plant would give rise to problems if equipment has to be fixed, he said.

Stewart later commented to Petroleum News that one particular concern is that a utility grade utility normally requires redundancy in its energy supplies, to avoid single points of failure and the associated risk of a supply failure. It is not apparent that Pentex has the required redundancy in its supply chain, he said, adding that the Pentex sale agreement should include a transition period, to enable time for achieving utility grade status.

Pentex response

In response to Stewart’s comments on Pentex’s safety performance, Dan Britton, CEO of Fairbanks Natural Gas, has told Petroleum News that Pentex provides the training, tools and safety equipment necessary for employees to carry out their tasks in a safe manner, and holds regularly scheduled safety meetings.

“A safety culture that empowers employees, increases visibility, and begins with the belief that all accidents and incidents are preventable is paramount to reaching safety goals,” Britton said. “Pentex enables these safety concepts by first empowering any employee to stop work should a safety concern arise. In addition, Pentex encourages all employees to bring forward to the president any safety concerns they have, or suggestions for improvement.”

A need for urgency

The AIDEA board is clearly anxious to complete the sale of Pentex as soon as possible. Board Chair Dana Pruhs said that the use of revolving fund money for the AIDEA purchase of Pentex in effect is causing the price of Pentex to rise by $200,000 for each month that AIDEA continues to own the company. Board member Fred Parady commented on the generous terms of the AIDEA financing on offer to IGU, including a 50-year loan, interest free for 15 years and with a subsequent interest rate of 0.15 percent.

“We have been hard at work in good faith with a process that has brought forward an agreement that reflects most of the concerns of each party,” Parady said. “At some point it’s time to bring closure and get to the finish line and that time is now.”

—ALAN BAILEY


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