Providing coverage of Alaska and northern Canada's oil and gas industry
September 2018

Vol. 23, No.35 Week of September 02, 2018

IGU gets Houston LNG proposal from Knik, Siemens for new plant

Alan Bailey

Petroleum News

On Aug. 21 Knik Tribe and industrial manufacturing company Siemens presented to the board of the Interior Gas Utility a proposal for the construction of a liquefied natural gas plant near Houston, next to a spur of the Alaska Railroad. LNG would be transported to Fairbanks by rail in support of an expanded supply of natural gas for the city and its surrounds. The plant would be built on Native land zoned for industrial development and owned by Knikatnu, the Native village corporation for Knik and Wasilla.

The proposal comes as an alternative to expanding the existing Titan LNG plant near Point Mackenzie. The increased LNG supply is planned as part of the Interior Energy Project, an Alaska Industrial Development and Export Authority project to bring affordable natural gas to Fairbanks and its surrounds. Fairbank gas utility, Interior Gas Utility, will need the expanded LNG supply to support an anticipated increase in the number of gas consumers in the Fairbanks region.

Siemens under contract to Knik Tribe

Siemens would build the proposed plant under contract to Knik Tribe, which would own the project. Knik Tribe with assistance from Siemens would capitalize the project. IGU would sign a liquefaction services agreement with Knik Tribe, paying for this service through a service charge coupled with a volume-based liquefaction fee for LNG delivered to an IGU storage tank in Fairbanks. As currently envisaged by Knik Tribe and Siemens, IGU would pay for the transportation of LNG to Fairbanks by railroad.

Thus, rather than funding the capital cost of the LNG plant, as is envisaged for the Titan plant expansion, IGU would pay Knik Tribe a fee for the production and delivery of LNG to Fairbanks. This arrangement would presumably enable IGU to avoid taking on additional debt in conjunction with expanding the LNG supply. And Knik Tribe, as a federally recognized tribe, would have access to federal programs that could minimize the cost of capital for the project, explained Kelly Laurel, director for energy and infrastructure for Siemens Government Technologies.

When the LNG plant goes into operation, the contract between Knik Tribe and Siemens would result in the liquefaction services agreement obligations for the plant to, in effect, flow through to Siemens.

Siemens officials said that Siemens has already completed the front-end engineering and design for the proposed project. If IGU is interested in moving forward with the project, there are a number of details around the interface between IGUís operations and the LNG supply arrangements that would need to be negotiated, Laurel explained. That would lead to a memorandum of understanding that would enable Knik Tribe and Siemens to confirm the LNG pricing model and move towards a contract.

Three potential gas sources

The Siemens proposal includes a pricing model using three potential sources of natural gas for manufacturing LNG: the gas supply assumed by IGU in its modeling of the Titan plant expansion; an alternative gas supply agreement negotiated by Knik Tribe and Siemens; or a new gas supply from a wellhead gas resource adjacent the proposed Houston LNG facility.

Knik Tribe and Siemens say that, with regard to their own pipeline gas supply, they are conducting confidential negotiations with current suppliers of gas to Enstar Natural Gas Coís pipeline system (a main Enstar gas transmission line runs not far the proposed Houston LNG plant site). IGUís own assumed gas price for the LNG supply for the Titan expansion is $7.72 per mcf, the proposal says.

The proposal provides no information about the potential wellhead gas resource at the Houston site but says that this option is being actively pursued, with a potential cost of supply in the range of $3 to $5 per mcf.

ďAs far as wellhead gas, we are investing in proving out the well right now,Ē a Siemens official told the board.

In 2004 Evergreen Resources drilled several shallow stratigraphic test wells or core holes, testing for coalbed methane resources in the Matanuska-Susitna Borough. At least one of those wells was to the immediate northwest of Houston. The coalbed methane exploration program came to an end shortly after the drilling, following a political uproar from local residents over land access and concerns about potential pollution.

Siemens officials told the IGU board that it sees its involvement in the proposed Houston LNG plant as an anchor project for more involvement by the company in Alaskaís evolving economy. And the industrial park where the plant would be located has ample space for further industrial development, should the LNG plant come to fruition. Moreover, additional LNG processing at the site for applications other than the Fairbanks gas supply could significantly reduce the unit cost of the LNG.

Range of price possibilities

Thus the proposal presents a range of possible prices for LNG delivered to Fairbanks, depending on the nature of the gas supply and the extent of the LNG development. Modeling using IGUís assumed future gas demand profile for Fairbanks and IGUís assumed gas supply pricing results in an anticipated price of $17.98 per mcf for LNG delivered to the Fairbanks storage tank. That price could drop to $15.02 per mcf, depending on what alternative pipeline delivered gas supply Knik Tribe and Siemens may be able to negotiate. The use of an on-site wellhead gas supply could drop that price to $13.93. A pipeline gas supply in combination with increased industrial activity at Houston could drop the price to $12.04, while a wellhead supply with increased industrial activity could drop the price to $10.96.

And rather than assume a single price model for the entire period that the Houston plant would be in operation, there would likely be opportunities to progressively bring the costs down as, for example, further industrial development takes place or the gas supply opportunities change, Laurel told the board.

The pricing includes an assumed cost for the transportation of LNG by railroad from Houston to Fairbanks. However, a determination of the burner-tip price of gas for Fairbanks consumers would require the inclusion of LNG storage and gas distribution costs in Fairbanks.

Modular design

The LNG plant would be constructed using a modular Siemens design that can be scaled up in increments to meet climbing LNG demand. An initial plant could be shipped and assembled for operation within 12 months of a contract with IGU being signed. And the contract would include a not-to-exceed cost that would eliminate IGUís exposure to construction cost overrun risk, the proposal says.

In terms of security of supply, the proposal says that the potential Houston LNG plant would have the capability to load LNG into LNG trucks for transportation to Fairbanks by road, should some problem arise with the use of the railroad. Moreover, the efficient shuttling of LNG containers on the railroad requires more containers than are actually in use at any specific time - the excess containers in Houston, coupled with LNG storage capabilities there, could provide contingency storage of up to 720,000 gallons, to back up the storage that IGU will have available in Fairbanks.

Knik Tribe and Siemens have suggested a program of negotiations that they think could lead to the signing of a contract by the end of this year. That could lead to the LNG plant going into operation at the beginning of 2020. IGU board members indicated that they want to conduct a side-by-side comparison of the two LNG expansion concepts, the Titan expansion and the Siemens option, to be able to make a considered decision on which option to choose. In addition, AIDEA, as financier for IGUís LNG expansion project, would need to be involved in any decision.


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