Vol. 22, No. 51 Week of December 17, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

Pentex sale is approved

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AIDEA board decision opens path to consolidation of Fairbanks gas utilities

Alan Bailey

Petroleum News

On Dec. 7 the board of the Alaska Industrial Development and Export Authority approved revised versions of the sale and financing agreements for the sale of Pentex Alaska Natural Gas Co. from AIDEA to the Interior Gas Utility. So, with the IGU board already having approved the sale documents during its Dec. 6 meeting, AIDEA and IGU can now proceed towards closing the sale, potentially before the end of May. The result will be the consolidation of the two existing Fairbanks gas utilities, Fairbanks Natural Gas and IGU, into a single, locally controlled entity, thus enabling optimum efficiency in the delivery of gas to Fairbanks residents and businesses. Pentex owns FNG, the Titan liquefied natural gas plant near Point Mackenzie on Cook Inlet and a trucking operation for transporting LNG from the plant to Fairbanks.

In late October AIDEA had approved a version of the sale documents. But the documents were subsequently revised following negotiations between the chairs of the AIDEA and IGU boards, thus enabling the publication of document versions that could be approved by both boards.

The Pentex sale comes as part of AIDEA’s Interior Energy Project, an initiative to provide affordable, clean energy to Fairbanks and its surrounds. In addition to providing natural gas at a workable price in Fairbanks, the idea is to reduce air pollution that results primarily from the use of wood burning stoves for heating buildings in the region.

State funding

The Alaska Legislature has provided support for the IEP in the form of a capital appropriation and through authorization for the use of AIDEA Sustainable Energy Transmission and Supply, or SETS, loans. The project can also use some AIDEA bonding. AIDEA purchased Pentex in 2015 using $54 million from its revolving fund - the idea is that, upon completion of the sale, IGU will use IEP funding to purchase Pentex at a price that will enable AIDEA to restore the Pentex purchase money plus a standard return on investment to the revolving fund.

AIDEA board Chair Dana Pruhs commented that, prior to AIDEA’s purchase of Pentex, Fairbanks North Star Borough, the City of Fairbanks and the City of North Pole had all passed resolutions supporting AIDEA’s action and the plan for using the Pentex purchase as a vehicle for utility consolidation.

“That was very clearly laid out to the community,” Pruhs said.

With IEP support, FNG and IGU had previously started the expansion of their gas distribution networks in Fairbanks. The idea is that, following the completion of the purchase of Pentex by IGU, IGU will ask for proposals for the expansion of the Titan plant, for an increase to the gas supply to Fairbanks, enabling potential customers with access to the expanded gas network to sign up for gas service. Depending on the level of demand for gas in Fairbanks, further expansion of the LNG supply and gas distribution system could then be possible.

“This represents the culmination of nearly a year of in-depth due diligence and negotiations between AIDEA and IGU,” said Pruhs in response to the AIDEA board decision. “AIDEA welcomes this approval of the sale and financing package that we anticipate will create a unified, locally controlled gas utility for the Interior by next spring.”

Questions raised

A number of questions have been raised over the Pentex sale, with these questions appearing in public comments at both the IGU and AIDEA board meetings. Key issues include whether the purchase price of Pentex is too high, and whether enough people in Fairbanks will be sufficiently motivated to convert their heating systems to gas usage, given the anticipated delivered price of gas in Fairbanks. Fairbanks-based Doyon Ltd. is planning an oil and gas exploration well in the Nenana basin next summer and has suggested that the commitment to purchase LNG through the Titan plant will preclude the possibility of selling Nenana gas to Fairbanks consumers.

Another issue that has been raised is the possibility of building a new LNG plant at Houston next to a spur of the Alaska Railroad, as an alternative to expanding the Titan plant - Knikatnu Corp. has been working with industrial manufacturing company Siemens on this concept, which would involve the transportation of LNG to Fairbanks by railroad rather than by road tanker.

Former Gov. Frank Murkowski appeared briefly during the public comment period of the AIDEA board meeting, arguing for a delay in the Pentex decision until the results of Doyon’s Nenana basin drilling are known.

However, the dominant sentiment at both the IGU and the AIDEA board meetings involved a sense that the IEP needs to move forward at this point, given the opportunity to jack up the Fairbanks gas supplies with funding support from the state.

Pentex valuation

In terms of the purchase price for Pentex, AIDEA board member Fred Parady commented that the purpose of the purchase by AIDEA had been to ensure the formation of a single gas utility in Fairbanks, and that the Brattle Group and Western Financial Group had evaluated the proposed acquisition price, based on data for comparable companies and transactions. Without the consolidation of the utilities, future gas supplies would likely be limited to downtown areas, Parady said.

During the IGU board meeting Jomo Stewart, CEO of IGU, commented that, given the exceptionally advantageous terms of the AIDEA SETS loans, the net present value of the loans that IGU would use for the Pentex purchase would be just $38.7 million, a figure well below the purchase price.

Conversion is key

Gene Therriault, IEP team leader, told the AIDEA board that he agrees that conversion to natural gas usage by Fairbanks consumers is key to success for the IEP.

“It’s a volume exercise,” Therriault said. “The more customers we can get hooked up, you’re able to spread your fixed costs. That drives down the per-unit cost and makes it more appealing to the next customer.”

He said that the last revision to the estimate of consumer conversions had indicated the possibility of a 50 percent conversion rate for residential consumers, assuming an oil fuel price of $2.75 per gallon; IGU is assuming a lower conversion rate of 35 percent. The current price of fuel oil in Fairbanks is $2.80, a price equivalent in energy terms to natural gas at $21.03 per thousand cubic feet, a price slightly above FNG’s current rate of $20.08, Therriault said. Moreover, gas heating appliances produce heat at an efficiency 5 to 10 percent better than do oil burning heating systems, thus further reducing the effective cost of gas heating. And gas appliances require significantly less maintenance than do oil appliances, he said.

Commercial interest

Given the efficiency and low maintenance costs of gas burning heaters, local businesses in Fairbanks have already been asking about gas availability, even at current gas price levels, Therriault said. Also, gas use eliminates the need for businesses to maintain underground oil storage tanks. And commercial and industrial businesses would use significantly more gas for heating than would individual residential consumers. Dan Britton, CEO of FNG, also commented that developers see benefit in the availability of natural gas when constructing new buildings, given lower construction costs when using gas-fired heating.

However, the cost of converting from fuel oil to gas for heating could be high for residential customers, perhaps $10,000 to $13,000, Therriault said. One solution, albeit with lower efficiency, would be just to swap out the burner system rather than the entire boiler. In addition, Fairbanks North Slope Borough, AIDEA and IGU have been investigating ways whereby the conversion cost impact could be eased, through initiatives such as EPA clean air grants or in-gas-bill repayments for the conversions.

Gas supply flexibility

Therriault commented that during negotiations for a new gas supply for the Titan LNG plant, IGU had requested only a medium term commitment to the gas supply, to enable future flexibility in the gas supply arrangements. The result had been a three-year gas supply commitment with Hilcorp Alaska, with a fixed price and flexibility over increasing supply volumes, Pruhs said.

The upshot is that there is scope for Doyon to enter the Fairbanks gas supply market, if the corporation finds gas in the Nenana basin and if the gas is competitively priced, Therriault said. If Doyon does find gas, the gas resource will take time to develop - in the meantime the IEP has secured a relatively short term gas supply.

“We have always taken the position that we wish the best for Doyon,” Therriault said. “We hope they find gas. A resource that much closer to the consumer can’t help but be a good thing.”

The relatively short term nature of the new Hilcorp gas supply agreement presumably also accommodates the possibility of considering the proposal for a new Siemens LNG plant in Houston as an alternative to the Titan plant expansion. Although the Pentex sales documents specifically refer to the Titan expansion, it was made clear during the October AIDEA board meeting that the proponents of the Houston plan will be able to submit their plan in response to IGU’s anticipated request for proposals for the Titan expansion.

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AIDEA approves funding for Fairbanks LNG storage

The board of the Alaska Industrial Development and Export Authority has approved the use of up to $45.5 million in Sustainable Energy Transmission and Supply, or SETS, loans for the construction of a new 5.25 million gallon liquefied natural gas storage facility in Fairbanks. The facility is needed in anticipation of an expanded LNG supply for Fairbanks, an outcome of AIDEA’s Interior Energy Project.

The IEP is anxious to move ahead with the storage tank construction, to ensure that the tank can go into operation by Jan. 1, 2020, to qualify for a state tax credit of up to $15 million. The financing plan for the IEP assumes award of the tax credit.

Prior to a vote on the SETS funding approval during the AIDEA board’s Dec. 7 meeting, Dan Britton, CEO of FNG, told the board that the planned storage facility will perform a crucial role for both the community and for the IEP. The idea is to be able to hold 30 to 40 days of LNG supply to manage gas availability, ensure security of supply and handle peak demand. The ability to store summer produced gas for winter use will enable substantially increased LNG production from the Titan LNG plant near Point Mackenzie, thus upping the gas supply to Fairbanks, Britton said.

The plan for the development envisages the award in mid-December of a contract for tank construction, with foundation construction to start at the beginning of March. The plan envisages the new tank being ready for commissioning at the end of June 2019.

FNG issued a request for proposals for the construction project and has identified a likely contractor for the work, Britton said.


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