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Vol. 18, No. 6 Week of February 10, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Interior LNG requires private capital in addition to state funds

Although the Parnell Administration is asking lawmakers to approve a $325 million financial package this year to truck liquefied natural gas to the Interior, it is imagining a system costing as much as $1 billion, with the difference covered by the private sector.

“We’re not just talking about building the plant. We’re talking about providing a complete integrated system that creates the gas, trucks the gas and distributes the gas,” Alaska Industrial Development and Export Authority Deputy Director for Infrastructure Mark Davis told the Senate Special Committee on In-State Energy at a Jan. 31 hearing.

Although one lawmaker called the $1 billion figure a “what if” number designed to estimate the cost of the project at its largest — including near-complete market saturation in the Interior with excess going to Southcentral — even the smallest version of the project would require at least $30 million of private money beyond the state package.

The Alaska Legislature is currently considering the package as Senate Bill 23 and House Bill 74, which both include three components: a $50 million General Fund allocation to AIDEA, $125 million in AIDEA loans through the Sustainable Energy Transmission and Supply fund and authorization for AIDEA to issue up to $150 million in bonds.

Under the financial outline it presented to lawmakers, AIDEA would help a third party partner pay for the roughly $220 million North Slope LNG plant using the $50 million grant, the $125 million in SETS loans issued at 3 percent interest and a $15 million storage credit already on the books with the remainder coming from the private sector.

“We need SB 23 as a tool to work with the private sector,” Davis said.

Of the 16 responses AIDEA received to its late December request for interest in the project, several came from banks, private equity groups and financial consortiums, Davis said, including Guggenheim Partners, KeyBanc Capital Markets and Northrim Bank.

Local distribution needed

The $150 million in bonding, which AIDEA also expects to issue at 3 percent interest, would go to expand the local distribution system through the high and medium density population centers and to major industrial users in the Interior. Although Fairbanks Natural Gas LLC currently operates a small grid serving some 1,100 customers in Fairbanks, the vast majority of businesses and homeowners in the city rely on fuel oil or wood for space heating, and the Fairbanks Natural Gas certificate only covers the city proper, without reaching the surrounding rural areas or the nearby city of North Pole.

AIDEA expects the two sides of this “first phase” to cost about $400 million.

Because the private sector is unlikely to fund an LNG plant without guaranteed customers and unlikely to fund a distribution expansion without a gas supply, the Parnell administration believes the financial package is the best way to kick-start the project.

“Both the demand side and the production side have to be financed almost in tandem for this to really work. ... This plant will allow you the ability to start building out that distribution system,” AIDEA Executive Director Ted Leonard told the Senate committee.

Once the system is in place, AIDEA believes the Interior could see another $400 million to $600 million in private investment to expand the grid into lower-density corners of the region. Davis compared it to a bank being skeptical about offering an initial mortgage, but willing to offer refinancing once the homeowner establishes a positive track record.

And because the distribution grid will also be necessary should Alaska get a large-diameter gas pipeline, or a smaller in state pipeline, AIDEA sees it as a good investment.

Questions remain

While Interior lawmakers are eager for the project, both to alleviate the cost of heating and to improve air quality, some Southcentral lawmakers have expressed skepticism.

AIDEA currently envisions a 9 billion cubic feet per year plant that could be scaled up to 20 billion cubic feet if demand warrants, but Sen. Peter Micciche, a Republican from Kenai, warned against touting the benefits of a larger plant. While a larger plant would lower the wholesale cost of gas, “the rest of this system does not benefit from scale.”

Unlike a pipeline, trucking comes with fixed labor and transportation costs, he said.

And while AIDEA is presenting a $400 million cost estimate, Micciche believes lawmakers still have “a lot to learn” about the project before they can be confident in the price tag. He pointed specifically to the cost to remove propane from gas on the North Slope, and the cost to move the plant should a future pipeline render it obsolete.

While acknowledging AIDEA can only give a rough estimate for the project until it goes through the responses in detail, Davis noted that the bill before lawmakers would only give AIDEA the ability to move forward, and decide whether to sanction the project.

In addition to questions about the accuracy of cost estimates, Sen. Bill Wielechowski, a Democrat from Anchorage, wanted to know about the likelihood of bringing excess LNG to supply-constrained Southcentral, and made “a pitch” for those hypothetical supplies to be priced on a postage stamp rate — meaning all end users would pay the same price.

And although AIDEA expects the plant to someday be replaced by a gas pipeline, Wielechowski wanted to know what would happen if the plant and the distribution grid were instead replaced by electric power from the proposed Susitna-Watana Dam.

In a cautionary note, Sen. Click Bishop, a Fairbanks Republican, recalled how Interior residents bet money on the proposed Rampart Dam of the Yukon River in the 1950s, only to have the project never come to pass. And Sen. John Coghill, a North Pole Republican, said Interior residents needed cheaper energy long before the 2025 start date of the dam.

What about HCCP?

And what about an infamous AIDEA energy plant of old?

At a Feb. 4 House Energy Committee hearing, Rep. Doug Isaacson, a North Pole Republican, asked about the “elephant in the room,” the Healy Clean Coal Project, the $300 million AIDEA power plant built in the mid-1990s but offline since 2000.

The troubled facility, currently being sold to Golden Valley Electric Association, taught AIDEA some important lessons about “how to structure deals,” Leonard said. Instead of owning facilities outright, “we should be in partnership with the private sector,” he said.

This philosophy guided how AIDEA financed the Endeavour jack-up drilling rig, he said.

—Eric Lidji



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