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Vol. 19, No. 34 Week of August 24, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

AK-WA Connection 2014: Authority leads oil, gas development

Public corporation flexes financial muscle to jumpstart important energy projects from Cook Inlet basin to North Slope fields

Rose Ragsdale

Alaska-Washington Connection

Under the guidance of the Parnell administration, the Alaska Industrial Development and Export Authority is taking a leading role in driving oil and gas development much in the same way that it has nurtured and helped to finance mining and infrastructure projects across the state during the past 47 years.

The state-owned authority says it recognizes that Alaska has placed a high priority on supporting new mineral and oil and gas projects.

“As AIDEA has reached out to developers both in and outside of the state, it has learned that road and port access to development sites and the availability of needed energy at those sites are the two infrastructure types needed to spur desirable natural resource development,” the public corporation explains on its website.

“These projects are important to economic development because they create jobs, and diversify the economy. As part of its strategic planning process, AIDEA has identified the opening of new mining areas, the diversification of the types of minerals produced, and bringing oil and gas fields into production as important economic development goals,” the agency added.

Interior Energy Project

At the behest of Gov. Sean Parnell and the Alaska Legislature, AIDEA undertook the Interior Energy Project in 2013, an ambitious effort aimed at delivering natural gas reserves from the North Slope to Interior homes and businesses with the goal of reducing high energy costs and improving poor air quality common to Interior Alaska.

The Legislature unanimously passed Senate Bill 23 in April 2013, which provided financing to begin developing a liquefaction plant and natural gas distribution system. The legislation authorizes $275 million in AIDEA bonds and loans. The Alaska Energy Authority is assessing storage, re-gasification and distribution to consumers for the project.

“This project will involve a strong collaboration with the private sector and will build out a distribution system to prepare for a natural gas pipeline,” AIDEA Executive Director Ted Leonard said in announcing the project.

Results from an analysis by AIDEA released in July 2013, showed that a 9 billion-cubic-feet-per-year LNG plant on the North Slope is technically and economically feasible for serving the initial Fairbanks North Star Borough heating demand. The plant was projected to successfully meet the community’s price targets, and reduce the annual heating cost for borough residents and businesses to $14.09-$17.09 per thousand cubic feet at the “burner tip,” which is the equivalent of $1.88-$2.28 per gallon fuel oil.

Since then, the public corporation has moved quickly to advance the project with the goal of delivering first gas and propane to Interior customers during the winter of 2015-16.

MWH Americas group selected

In January AIDEA selected a group headed by MWH Americas Inc. as the commercial participant to develop LNG plant on the North Slope. The group also includes NANA WorleyParsons.

The public corporation also recently purchased a pad from Spectrum Alaska LLC to house the LNG plant on the Slope. AIDEA had originally considered BP Exploration (Alaska) Inc.’s proposed B2 pad but decided to switch when it learned the site would have created some challenges for establishing fuel connections.

The sale gives AIDEA rights to the Spectrum pad, an associated state right of way and key permitting documents.

In April, AIDEA also approved two Sustainable Energy Transmission and Supply Development Fund loans to advance natural gas distribution systems in Fairbanks and North Pole.

The first loan, to Fairbanks Natural Gas LLC, is for $15 million to fund the 2014 initial development and build-out of an expanded gas distribution system within FNG’s certificated service area. The project includes constructing 32 miles of new distribution system. This additional distribution system will allow FNG to connect 100 commercial and 2,500 residential services to their existing service area.

The second loan, to Interior Gas Utility, is for $8.1 million to fund IGU’s initial work needed to develop its distribution system and affiliated infrastructure. This project includes engineering design, permitting and program management. It is projected that the distribution build-out of IGU’s service area will provide natural gas service for more than 11,000 residents.

Cook Inlet gas

AIDEA is also studying a proposal by a Japanese company interested in building an LNG export plant in Cook Inlet.

The company is Resources Energy Inc., an American subsidiary that Japanese-based Energy Resources Inc. created in late 2011 to pursue an Alaska LNG project in the wake of the failure of the Fukushima Daiichi nuclear power plant. According to an outline of its proposal, the goal of the project is to provide additional storage that would help the Alaska energy system better meet peak winter demand, and then to export surplus supplies to the Japanese power market.

In April, AIDEA’s board of directors unanimously approved a resolution to spend up to $240,000 in conducting due diligence on the project, which would export LNG overseas, ship LNG to coastal and road-system communities in Alaska and encourage exploration and production by creating an additional market for Cook Inlet natural gas.

The $1 billion project would construct a new 1 million to 1.5 million metric ton per year plant with associated pipelines, marine facilities, loading facilities and storage tanks.

AIDEA is considering the basic structure and economics of the project, proposed supply and off-take agreements, potential locations for the plant and the interplay between Japanese and Alaska energy needs. The effort was expected to take 90 days, which would have brought it to a conclusion sometime in late July, at which point the public corporation would decide whether to pursue an investment in the project.

The initial phase of the project included an agreement requiring Resources Energy to reimburse AIDEA for 75 percent of the cost of conducting the prefeasibility analysis, up to $180,000. The remaining AIDEA portion would come from money left over from previous projects.

The subsequent phases would focus on crafting appropriate investment arrangements and would likely take another seven months, according to AIDEA, making the entire process of creating and closing the deal take about a year from the initial vote in late April.

Oil development

Far from smooth, the path to increased oil production for AIDEA has seen a few bumps. Recently, Buccaneer, an operator in Cook Inlet, filed for reorganization under Chapter 11. Through a subsidiary, Buccaneer held an exclusive charter of the drill rig Endeavour in Cook Inlet from Kenai Offshore Venture LLC, an entity in which AIDEA invested about $23.6 million to acquire and own the Endeavour drill rig, along with Buccaneer and Ezion Holdings Ltd.

Ezion Holdings’ affiliate, Teras Investments Pte. Ltd., bought out Buccaneer’s stake in Kenai Offshore Venture in January, and the investors were negotiating with a new potential rig manager and operator in June.

AIDEA, meanwhile, is working to spur oil production on the North Slope. In late April, the public corporation entered into an agreement with CES Oil Services Pte. Ltd. to form Mustang Operations Center 1 LLC for the purpose of jointly financing an oil and gas production and processing facility at the Mustang field on Alaska’s North Slope.

The production facility is estimated to cost between $200 million and $225 million. Costs include connecting to the Alpine oil pipeline to transport produced crude oil to the Kuparuk oil pipeline and on to the Trans-Alaska oil pipeline. AIDEA will invest up to $50 million. The facility is expected to be complete by early 2016.

“We are pleased to move forward with this strategic investment in North Slope oil and gas production and development,” said AIDEA Board Chairman Dana Pruhs. “The Mustang facility supports the development of Alaska’s energy resources, and helps advance Gov. Parnell’s objective to increase oil flow through the trans-Alaska Pipeline.”

The 15,000 barrels-per-day facility will process crude oil from the Southern Miluveach Unit (known as the Mustang field). AIDEA and CES Oil Services will own the facility through Mustang Operations Center 1 LLC. Brooks Range Petroleum Co. is the Mustang field operator and will build and operate the facility. In late 2012, AIDEA invested $20 million for the construction of the Mustang road and pad. That project was completed in April 2013.

AIDEA’s overall $70 million investment is estimated to leverage more than $500 million of private investment in Mustang field development.

SPort MacKenzie facility

AIDEA also guaranteed a qualified energy development project loan participation in 2013 to Central Alaska Energy LLC for a project at Port MacKenzie in Southcentral Alaska.

The loan participation is for nearly $14 million (90 percent) of a $15.46 million loan brought to AIDEA by First National Bank Alaska, which originated the loan and is participating with about $1.56 million (10 percent). The purpose of this loan is for construction and permanent financing of a new, 7 million gallon tank farm with truck rack system at Port MacKenzie to transport low-sulfur diesel fuel, via the Alaska railroad extension currently under construction, to meet Interior and North Slope demands. This project includes the purchase of equipment to unload petroleum products from barges, and the construction of a pipeline to move product from the port to the storage facility.

Fuel suppliers have discussed the possibilities of establishing tank farms at Port MacKenzie and then shipping the fuel north by rail and truck. It is estimated that at least 60,000 tons of low-sulfur diesel fuel will be transported north from Port MacKenzie to Interior Alaska, and a similar amount to Southwest Alaska, for a total of 120,000 tons of low-sulfur fuel each year.

In addition, fuel suppliers are considering setting up tank farms at Port MacKenzie and annually transporting 80,000 to 90,000 tons of fuel via the rail extension to North Slope markets.

AIDEA’s Loan Participation Program provides permanent financing, both taxable and tax-exempt, to borrowers through a qualified originator for the purpose of developing, acquiring or enhancing Alaska business enterprises, or for a qualified energy development project. The Loan Participation Program provides the benefit of long-term fixed or variable rate financing on the portion of the loan purchased by AIDEA. AIDEA does not originate loans, but is able to purchase up to 90 percent of a commercial loan to a maximum of $20 million, that is sponsored and originated by an eligible financial institution.

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