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

Vol. 23, No.44 Week of November 04, 2018

Chasing parallel paths

IGU board agrees to MOU with Siemens while also moving on Titan expansion FEED

Alan Bailey

Petroleum News

During a work session on Oct. 23 the board of the Interior Gas Utility passed a resolution endorsing a memorandum of understanding with industrial company Siemens for an investigation into the development of a new liquefied natural gas plant near Houston, on the Alaska Railroad. During the same session the board also discussed how to move towards the commissioning of front-end engineering and design for the expansion of the Titan LNG plant near Point Mackenzie.

The overall objective is to expand the supply of LNG for the city of Fairbanks and its surrounds, as part of the Interior Energy Project, an Alaska Industrial Development and Export Authority sponsored project designed to bring an expanded supply of affordable natural gas to the Fairbanks region.

The IGU board seeks clarification of the cost of LNG that would come from Siemens’ proposed Houston plant, and refinement of the estimated cost of the Titan expansion. That could then enable an objective comparison between the two options, leading to a decision on which option to choose. The idea is that both the Siemens investigation and the Titan FEED project would be completed by early summer.

Developments to date

Following the purchase of Pentex Natural Gas Co. from AIDEA, IGU has combined with Pentex subsidiary Fairbanks Natural Gas to form a consolidated gas utility for the Fairbanks area. Pentex also owns the Titan plant and the trucking operation that carries LNG from the plant to Fairbanks. Currently FNG supplies gas to a relatively small number of customers in central Fairbanks. A few years ago, both FNG and IGU made some initial expansions to their gas distribution networks, under the IEP, in anticipation of an expanded gas supply.

Also, as part of the IEP, IGU is in the process of building a new 5.25 million-gallon LNG storage facility in Fairbanks, to support increased gas supplies for Fairbanks consumers. The new tank will enable use to be made of the expanded gas distribution network. However, the IEP plan has assumed that IGU would expand the Titan plant in two stages, to support growing gas demand in Fairbanks.

The Siemens proposal

The Siemens proposal is that, rather than expanding the Titan plant, Siemens would build a completely new LNG plant adjacent to a railroad siding near Houston. The plant would be connected by pipeline to a nearby Enstar Natural Gas Co. gas transmission line - Siemens says that it has a preliminary agreement with a Cook Inlet gas producer for an appropriately priced gas supply. There is also the possibility of a gas supply local to the plant, if a local gas well could be proved out.

The plant would be modular in design, with the capability of expansion in response to rising LNG demand, and would be built on Alaska Native owned land. Knik Tribe has been working with Siemens on the proposal - the idea is that Siemens would build the plant under contract with Knik, so that Knik would own the project. IGU would contract with Knik for an LNG supply delivered to Fairbanks at some agreed price, but with IGU paying for the railroad transportation of the LNG to Fairbanks.

Any contract with Knik would be passed through to Siemens, so that Siemens would be responsible for ensuring the continuity of LNG production. And Siemens would fund the construction of the LNG plant while accepting any risk of construction cost overruns. Essentially, Siemens anticipates making a profit from the sale of LNG processed through its plant.

The Siemens MOU

The MOU now agreed to between IGU and Siemens sets out a two-stage process that would lead to an LNG cost model that IGU could use to make a decision on whether to sign-up for a Knik/Siemens LNG supply.

The first stage involves a negotiation between IGU and Siemens, leading to the preparation and signing of an LNG supply term sheet that would provide a basis for Siemens to finalize the design of the Houston plant and of the systems for the unloading of LNG in Fairbanks and North Pole. That would then enable Siemens to make a firm price offer to IGU for the required LNG supply.

The MOU says that the target date for completion of the term sheet is Dec. 31, and that by that date IGU, with support from Siemens, would also prepare a plan for integrating the existing Titan plant into the future LNG supply arrangements.

The MOU then commits Siemens to making a firm LNG pricing offer to IGU no later than five months after the signing of the term sheet. Assuming that the term sheet is signed by the end of this year, that would lead to a firm price for the Knik/Siemens LNG by June 1.

A credible timeframe?

Much discussion during the IGU work session revolved around the credibility of Siemens’ proposed timeframe, in particular the feasibility of completing the term sheet by the end of December. An overrun in the Siemens schedule would create complications for the board in making its development decision and could delay the expansion of the LNG supply for Fairbanks.

IGU CEO Dan Britton commented that Siemens had originally proposed completion of a term sheet by the end of November, but that the IGU team had pushed back on that seemingly unrealistic expectation - hence the Dec. 31 date. Robin Brena, counsel to IGU, commented that the Dec. 31 date appeared feasible, but was qualified as being a target rather than a firm commitment. Brena also commented that the term sheet would be needed in order to conduct a side-by-side comparison of the Knik/Siemens and Titan expansion projects.

Board member Gary Wilken, who had previously been involved in the IEP as a member of the AIDEA board, expressed skepticism over what appeared to him to be a highly optimistic project schedule. A process conducted in the IEP, similar to the development of the term sheet, had previously taken seven months to complete at a cost of $391,700, without any resulting project, Wilken said. To bring all these pieces together in two months, including the two weeks of the Christmas period, based on what appears to be a more expensive project than the Titan expansion, seems unrealistic, he said.

“What is going to change tomorrow that has not happened in the past, to arrive at what is called the LNG supply contract term sheet?” Wilken asked.

Parallel projects

Board Chair Pamela Throop responded that the FEED for the Titan plant expansion would proceed in parallel with the Siemens project and would not, therefore, be delayed. The full results of the FEED would not be known until after Siemens has completed its work, she said. Britton clarified that the FEED was expected to complete around May 15, but that some of the cost estimating for the Titan project would not be finished until after that date.

Throop also commented that the board has a duty to the public to consider all reasonable options for the LNG supply.

Board member Jack Wilbur expressed his skepticism about Siemens’ anticipated time to reach a firm price proposal for the LNG supply. If there is an overrun of several months in the completion of the Siemens work, would the board delay its decision regarding how to achieve the expanded LNG supply, he asked.

Ultimately the board passed a resolution authorizing the MOU with Siemens by four votes to two, with Wilken and Wilbur voting no.

Titan expansion

When it came to the proposed FEED for the Titan plant expansion, much of the discussion revolved around how to achieve sufficient security of gas supply for Fairbanks gas consumers, who would be dependent on the gas for the heating of buildings during severe Fairbanks winter conditions.

The current proposal for the first Titan expansion, originally developed by AIDEA’s IEP team in conjunction with IGU, is to add a single 100,000 gallons per day LNG production train to the existing 50,000 gallons per day train at the plant. Britton has proposed to the board to commission Braemar Technical Services to conduct the FEED for this expansion project. Britton said that the improved project definition resulting from the FEED would reduce the uncertainty in the cost estimate for the project from around plus or minus 30 percent to around plus or minus 10 percent.

Having Braemar conduct the study would minimize the cost of the study because, with Braemar having been involved in investigating the Titan expansion in an earlier stage of the IEP, the company is already familiar with the project, Britton told the board. Moreover, the use of a single source award for the project would save time in putting the project underway, Britton said.

Two new LNG trains?

A lengthy discussion over what is meant by a firm gas supply for Fairbanks, and what would be required to achieve supply security, led to discussion over the possibility of adding two 50,000-gallon trains rather than a single 100,000-gallon train to the Titan plant. This would presumably reduce the vulnerability of the system to an LNG train failure.

Britton commented that a requirement to be able to contend with the extended loss of a single LNG train would represent a significant change to the project and the project’s capital structure. The approach to date, by FNG and the IEP, has been to ensure a high level of reliability in the LNG plant, thereby balancing an acceptable level of supply security with an efficient capital structure. Going from the addition of a single 100,000-gallon train to two 50,000-gallon trains might increase the capital cost from, say, $50 million to $70 million, Britton suggested.

Britton also commented that the security of supply is inherently linked to the amount of LNG storage capacity in Fairbanks in relation to the rate of gas demand increase in the region. Low demand enables the storage facility to deal with an LNG supply interruption for an extended period. As demand increases, additional LNG production can be added to ensure continued supply security.

With a need to provide Braemar with a clear specification of the LNG plant requirements as a basis for conducting the plant FEED, Britton undertook to research information that would enable the board to resolve its quandary regarding the number of LNG trains required.

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