With the Alaska Legislature holding the purse strings for an Alaska Industrial Development and Export Authority project to bring affordable natural gas to Fairbanks and the surrounding area of the Alaska Interior, recent convulsions in the project have been causing angst among some lawmakers. And a Feb. 12 meeting of the House Legislative Budget and Audit Committee called in various people involved in the project, called the Interior Energy Project, to explain how the project had arrived at its current situation and talk about the strategy for moving the project forward.
In early January AIDEA called a halt to a project to build a liquefied natural gas facility on the North Slope, for the trucking of LNG to Fairbanks. In mid-January the authority approved funding for a study into alternative ways of establishing a feasible Fairbanks gas supply. Then, later in January, AIDEA announced an agreement for the purchase of Pentex Alaska Natural Gas Co., the holding company for utility Fairbanks Natural Gas, an LNG facility at Point MacKenzie on the Cook Inlet and a trucking operation for transporting LNG from Point MacKenzie to Fairbanks.
The gas price
The potential price of natural gas in Fairbanks became a core topic of discussion during the meeting, with the success of the Interior Energy Project apparently hinging on appropriate pricing that would encourage sufficient Fairbanks gas demand for project viability while also enabling the economics of the Fairbanks gas supply chain to work.
In fact, the project revolves around two price points: the “city gate” price of gas arriving in Fairbanks, and the price of the gas at the burner tip of a gas consumer. Essentially, the burner tip price would be the city gate price plus the cost of LNG storage and gas distribution in Fairbanks.
Ted Leonard, executive director of AIDEA, told the committee that AIDEA has understood that the target burner tip price for Fairbanks gas is $15 per thousand cubic feet. Two years ago, prior to feasibility studies required for the Interior Energy Project, that $15 target had translated to a projected city gate price of $11 and a storage and distribution cost of $4, Leonard said.
But, as the project has progressed, those cost estimates have changed, he said.
North Slope LNG
In January 2014 AIDEA selected engineering firm MWH to manage the construction of the North Slope LNG plant. A concession agreement between AIDEA and MWH would have given MWH subsidiary Northern Lights Energy exclusive rights to build and operate the facility while AIDEA would retain ownership of the plant. The concession agreement required financial close for the project by Dec. 30, 2014, but with provisions for a 90-day extension to that deadline.
During 2014 MWH made significant progress in contracting a design and a cost estimate for the LNG plant, and in coordinating other aspects of the Interior Energy Project with Fairbanks power utility Golden Valley Electric Association and gas utilities Fairbanks Natural Gas and the Interior Gas Utility. However, the project did not reach financial close by the end of 2014. AIDEA offered an extension to the concession agreement subject to a number of conditions, including the cancellation of Northern Lights Energy’s exclusive rights over the LNG plant. MWH declined the extension, saying that it could not accept the conditions that AIDEA wanted to impose. And, thus, the concession agreement terminated.
Meantime, in anticipation of expanded gas supplies, the two Fairbanks gas utilities have been moving ahead with plans to build out their gas distribution systems, with financial assistance from AIDEA under the Interior Energy Project.
MWH says viable
Rick Adcock, managing director of MWH Infrastructure Development, told the committee hearing that, with a firm project cost and construction agreement for the LNG plant, and with access to a reliable gas supply from the North Slope, MWH did have a viable project that could deliver gas to Fairbanks at a city gate price around $13, a price well below that of gas from any other potential source.
“We have a project that can deliver natural gas from the North Slope at a competitive price, significantly reducing the cost of energy in the Interior,” Adcock said.
Adcock said that he understood that the North Slope LNG project had come to a halt because of a lack of community alignment behind the project. MWH is willing to continue working the project, he said.
Leonard said that AIDEA remains in contact with MWH and at this point has not discounted the North Slope LNG option for Fairbanks gas.
“It’s more to say that, based on where the costs came in, based on risks associated with the North Slope, and based on different conditions from when we were here (in the Legislature) two years ago … we have taken a pause to definitely look at all sources of gas and how we provide the lowest cost energy gas supply to Fairbanks,” Leonard said.
Hence the new study that AIDEA has embarked upon, to assess alternatives for a feasible Fairbanks gas supply.
Cost figures
Robert Shefchik, who until recently was chair of the board of the Interior Gas Utility, has been appointed as AIDEA team leader for the Interior Energy Project, including leadership of the new Fairbanks gas supply study.
Shefchik told the committee hearing that the lowest Fairbanks city gate price that he had seen from the MWH North Slope LNG project had been $13.42, with an upper price range around $14.50. And the projected cost of the plant had increased from an early estimate of $170 million to a final estimate of $280 million. Then, with a fixed amount of state financing available through AIDEA to support the entire supply chain for delivering gas to Fairbanks consumers, an increase in the cost of the LNG plant would translate to a reduced amount of funding assistance for the gas distribution system, and hence an increase in distribution costs. That increased cost would come on top of an already higher cost of gas than originally anticipated, he said.
Thus, the higher cost of the LNG plant moved the estimated burner tip price of gas to somewhere in the $20.50 to $22 range, Shefchik said.
Shefchik said that the Interior Gas Utility would have signed up to a gas supply agreement with a city gate price tag of $10 to $11 per thousand cubic feet. The possibility of an agreement would have been uncertain at a price in the region of $11 or $12, and would have been much more difficult above $12.
AIDEA’s new study would look at all possible options for bringing gas to Fairbanks, including options for obtaining liquefied natural gas from Cook Inlet, Shefchik said. Two companies, Resource Energy Inc. and WesPac Midstream, for example, have proposed building LNG plants near Point MacKenzie for the production of LNG from Cook Inlet gas, with possibilities for shipping LNG from a new plant by truck or rail to Fairbanks.
“We will winnow down to a narrow range of specific options which we can compare,” Shefchik said.
A quirk in AIDEA’s proposed purchase of Pentex is that Pentex already has an agreement to sell its Cook Inlet LNG plant and its LNG trucking operation to Harvest Alaska, a subsidiary of Hilcorp Energy, a major Cook Inlet gas producer. Harvest has announced its intent to expand the plant. And, in association with the purchase of the plant, Hilcorp has a proposed gas sales agreement with Fairbanks Natural Gas. The Regulatory Commission of Alaska is currently reviewing that agreement. The agreement would involve the delivery of LNG to Fairbanks at a city gate price of $15 per thousand cubic feet.
Motive for Pentex purchase
Leonard told the committee hearing that AIDEA’s motive for purchasing Pentex is the acquisition of Fairbanks Natural Gas, a move that would enable a reduction in gas pricing for Fairbanks residents as a consequence of AIDEA’s relatively low cost of capital and the authority’s ability to work with the Interior Gas Utility to streamline the design of the Fairbanks gas distribution system. The acquisition of Fairbanks Natural Gas would result in an immediate consumer gas cost reduction in the range of 8 to 14 percent, with a 15 to 20 percent reduction possible in 2019, Leonard said. The ultimate objective would be to develop an integrated Fairbanks distribution system that could be sold to some appropriate entity in the future, he said.
“It’s not the goal of AIDEA to own this project for the long term,” Leonard said.
Meantime, a takeover of Pentex by AIDEA would not impede the proposed sale of Pentex’s liquefaction plant and trucking operation, he said.
Due diligence
Concurrent with its study into Fairbanks gas supply options, AIDEA is embarking on a due diligence study for its proposed Pentex purchase. The purchase, which is not at this point binding, should close in June or July, Leonard said.
House Legislative Budget and Audit Chair Mike Hawker questioned the $15 city gate gas price in the proposed gas supply agreement between Hilcorp and Fairbanks Natural Gas. That price is substantially higher than what appears to be acceptable to the Fairbanks utilities, he said.
The gas supply earmarked under that supply agreement represents 100 percent of Fairbanks Natural Gas’s current gas supply capacity but would be just 20 percent of that capacity once the utility has completed expansions to its distribution network, Leonard said. The concept is that the $15 price would ultimately be blended with lower prices from cheaper gas sources, he said.
