Vol. 22, No. 34 Week of August 20, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

AIDEA approves IGU funding

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Board increases reimbursement to utility for the work involved in seeking new natural gas supply for Fairbanks and Interior

Alan Bailey

Petroleum News

During its Aug. 10 meeting the board of the Alaska Industrial Development and Export Authority approved an increase to $345,000 in funding to the Interior Gas Utility, to cover the utility’s costs incurred in trying to establish a new gas supply from Cook Inlet for Fairbanks and the surrounding Interior. The funding comes from the capital budget for the Interior Energy Project, or IEP, a project to bring an increased supply of affordable natural gas to Fairbanks and its surrounds. During its June 29 meeting the AIDEA board had approved $150,000 in capital funding for IGU - the new resolution increased that funding to $345,000.

The funding comes in the wake of a misunderstanding between AIDEA and IGU over the appropriate use of an AIDEA Sustainable Energy Transmission and Supply, or SETS, loan for the IEP. IGU has been engaged in several tranches of work as part of the IEP, including negotiations with Cook Inlet gas producers for a new gas supply. The utility had assumed that it could use SETS funding for its work but AIDEA says that, under the terms of legislative authority for the use of the loan, the scope of work fundable under the loan cannot currently be changed to include the activities that IGU has been conducting. Instead, to keep the IEP moving forward, AIDEA is allocating IEP capital funding to IGU’s efforts.

Project components

In addition to acquiring a new gas supply from Cook Inlet, the overall plan for the IEP involves expanding a liquefied natural gas facility near Point Mackenzie on the Cook Inlet; ramping up the transportation arrangements for shipping LNG to Fairbanks; expanding the LNG storage facilities in Fairbanks; and building out the gas distribution network in Fairbanks. AIDEA currently owns Pentex Natural Gas Co., the owner of the LNG plant, the LNG trucking operation and Fairbanks Natural Gas, a utility that supplies gas to customers in central Fairbanks.

The intent is that IGU will ultimately purchase Pentex, thus enabling Fairbanks Natural Gas and IGU to consolidate their operations, an arrangement that can improve efficiency in gas distribution and achieve economies of scale. Funding for the IEP comes from a combination of a state capital appropriation, a SETS loans and AIDEA bonds.

Gene Therriault, AIDEA’s IEP team leader, told the board during its Aug. 10 meeting that, to help resolve the IGU funding issue, he had asked IGU to segregate its costs into three categories: costs associated with negotiating a gas supply, costs associated with figuring out how to integrate the two Fairbanks gas utilities and costs associated with due diligence for the IGU purchase of Pentex. The new capital funding will only be used for the first of those categories, the gas supply. And, having checked out IGU expenses that fall into that category, $345,000 is appropriate funding for that work, Therriault said.

Depends on gas supply

At this stage, the key issue that has emerged for the IEP is the establishment of a Cook Inlet gas supply at a price that will encourage Fairbanks businesses and residents to convert from oil-fired heating of their buildings to the use of natural gas. In addition to the need for a workable gas price, the gas supply contract needs to allow for flexibility in supply volumes, given the considerable uncertainty over future Fairbanks gas demand. Gas consumers will need to be motivated to spend the money necessary to convert their existing heating systems to the use of gas.

The original concept for the IEP involved the development of an LNG plant on the North Slope, to enable Fairbanks to establish a gas supply from the Slope. In anticipation of the gas supply becoming available, FNG and IGU began using AIDEA SETS funding to build out the gas supply infrastructure in Fairbanks. But, in 2015, after it had been determined that the original North Slope plan was not viable, the state Legislature passed House Bill 105, a bill that enabled the IEP to consider a broader range of gas supply options. The upshot was the current project for obtaining gas from the Cook Inlet basin.

HB 105 requirements

But HB 105 required the AIDEA board to approve an IEP plan that includes an identified source of gas, the cost of the various components of the gas supply chain and the expected delivered price of gas in Fairbanks before additional use can be made of the SETS funds. Work on the Fairbanks distribution infrastructure stopped. And, following advice from the state’s Department of Law, AIDEA informed IGU that the utility cannot use SETS funding to offset costs incurred in connection with activities such as seeking a viable Cook Inlet gas supply.

Therriault told the AIDEA board that ultimately IGU’s due diligence costs could be rolled into the final project costs for the merging of the two Fairbanks utilities and that the financial arrangements that have now been made will enable IGU to remain solvent.

“So we think we have proposed something that is reasonable from both sides, to get past the current accounting problem that we have between the two entities,” Therriault said, referencing the misunderstanding between AIDEA and IGU over the use of SETS funds.

Project activities

Pentex is taking delivery of some new large-capacity LNG trailers to beef up its LNG transportation arrangements. However, work associated with expanding Pentex’s LNG plant is currently on hold, pending resolution of the gas supply issue. The AIDEA board is allowing access to some capital funds for the detailed engineering of expanded LNG facilities in Fairbanks, in anticipation of an expanded gas supply for the city - there is some urgency in moving ahead with the storage project, because potential state tax credits for LNG storage construction sunset on Jan. 1, 2020.

One potential factor in pushing up natural gas demand in the Alaska Interior is the passage this year by the Alaska Legislature of Property Assessed Clean Energy, or PACE, legislation. The PACE system can enable businesses to obtain low-cost financing for energy conversions. Therriault said that the Alaska Energy Authority is currently working with communities to figure out how best to implement PACE in Alaska. He also commented that some businesses and light industrial companies in Fairbanks have expressed to him an interest in converting their facilities from oil to gas heating, in particular to enable the removal of underground oil storage tanks.

Gas rate increase

During its Aug. 10 meeting, the AIDEA board also approved new gas pricing for FNG’s existing customers - in June the utility had proposed a 3 percent gas rate increase. Dan Britton, president of FNG, told the board that there had been no public comments on the proposal. After AIDEA purchased Pentex in 2015 it was able to reduce FNG’s gas rate by 13.5 percent for residential customers.

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