Vol. 23, No.39 Week of September 30, 2018
Providing coverage of Alaska and northern Canada's oil and gas industry

Siemens says it has new gas supply for Fairbanks LNG production

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Alan Bailey

Petroleum News

During its meeting on Sept. 18 the board of the Interior Gas Utility in Fairbanks continued a discussion of a proposal by Knik Tribe and Siemens to build a new liquefied natural gas plant for an increased LNG supply for Fairbanks and the surrounding Interior. The board is figuring out how to further the objectives of the Interior Energy Project, an Alaska Industrial Development and Export Authority project to enable an increased supply of affordable natural gas in Fairbanks.

Long term supply

Kelly Laurel, director for energy and infrastructure for Siemens Government Technologies, told the board that, in a recent development, Siemens has an offer of a gas supply from a Cook Inlet gas producer, involving a long term fixed and competitive gas price. Siemens has previously said that a key motivation for building an LNG plant is that the plant could form a foundation for Siemens to create an expanding business in Alaska, serving customers beyond just IGU. Laurel indicated that the proposed gas contract fits with that vision, and that the prospect of serving a wider customer base was a driver in achieving attractive terms for the supply.

“I think we have really found a great partner who is very interested and aligns their goals and objectives and sees a vision for helping all of Alaska, not just the Interior,” Laurel said.

However, given that Siemens does not have any agreement with IGU for the supply of LNG, the proposed gas supply contract has not yet been signed: Details of the contract, including the gas supplier and the gas price remain confidential.

Supply for GVEA

Siemens representatives also commented that, as a potential first step towards establishing an industrial LNG demand beyond the supplies needed for IGU, they had discussed with Fairbanks electric utility Golden Valley Electric Association the possibility of supplying LNG to GVEA. In particular GVEA may be able to purchase LNG in the summer, when IGU’s gas demand will be low. GVEA has in the past had an interest and involvement in the Interior Energy Project: Originally the utility had been a key potential customer for LNG delivered to Fairbanks, but later, when the price of fuel oil in Fairbanks fell, reduced its interest to the possible purchase of gas during the summer.

The quandary that the IGU board now faces is how to compare the Knik/Siemens proposal with a plan developed by the IEP, to expand an existing LNG plant, the Titan plant, now owned by IGU, near Port Mackenzie on Cook Inlet. Either of these projects would provide the required LNG supply expansion, but each involves a completely different value proposition for IGU. And each has its associated risks and uncertainties.

The Siemens concept involves the construction of a new, relatively small LNG plant on Native owned land adjacent the Alaska Railroad near Houston. LNG would be transported to Fairbanks on the railroad. The plant would be of modular design, expandable as LNG demand increases. Feedstock gas would come via a nearby Enstar Natural Gas Co. gas transmission pipeline, through a connecting spur pipeline that would need to be constructed. Siemens would build the proposed plant under contract to Knik Tribe, which would own the project. Siemens would capitalize the project, at no cost to IGU. IGU would then buy LNG from the plant at an agreed price.

Siemens wants MOU

At this stage, Siemens wants to sign a memorandum of understanding with IGU, before proceeding any further with the project. That MOU would involve an agreement on a term sheet for an LNG pricing model, Siemens officials explained to the board. There would be a penalty payment, as compensation for work conducted by Siemens, if IGU subsequently backed out of the project. Ultimately, work done under the terms of the MOU could lead to a liquefaction services agreement, based on which the LNG plant would be built and go into operation,

The signing of the MOU would not preclude IGU from continuing to investigate the Titan plant expansion option.

Having purchased Pentex Natural Gas Co., the owner of the Titan plant, from AIDEA earlier this year, IGU operates that plant, would capitalize any expansion to the plant and would continue to operate the plant after expansion. AIDEA would provide financial assistance through Sustainable Energy Transmission and Supply, or SETS, loans, AIDEA bonds and a state appropriation for the project. LNG is shipped from the plant to Fairbanks using road LNG trailers.

As provider of much of IGU’s funding under the Interior Energy Project, AIDEA has financial oversight of major IGU expenditure.

Comparison needed

The IGU board now wants to conduct a side-by-side comparison of the two LNG supply options, in order to be able to make an objective decision over which option to choose. But making this comparison will not be straightforward, given the major differences between the two business models. Ultimately the decision will presumably revolve around the relative cost to consumers of gas in Fairbanks, and the reliability of the gas supply. But, given the status of the two projects, there are some significant risks and uncertainties involved. Uncertainty over future gas demand in the Fairbanks region also complicates the situation.

At this stage, IGU has not conducted the front-end engineering and design for the Titan expansion. And so the cost of the expansion, and the resulting cost of the delivered LNG, remain somewhat uncertain. Dan Britton, IGU general manager, told the board that there is a contingency of plus or minus 30 percent for the estimated cost of the expansion.

Siemens said that its modular LNG plant design involves an existing, proven modular technology with well understood costs, and that it has cost estimates from Alaska contractors. However, further plan refinement is required for the civil work and infrastructure construction at Houston - work on this refinement would proceed following the signing of an MOU with IGU.

Board member Gary Wilken said that he had conducted a comparison of the cost models for the Titan expansion and the Siemens proposal, and that it appeared to him that gas delivered from the Siemens system would be more expensive. Laurel responded that the MOU between IGU and Knik Tribe/Siemens would clarify the LNG pricing associated with the proposed Houston plant.


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Cost increases for Fairbanks LNG storage tank

The projected cost of a large, new liquefied natural gas storage tank, being constructed in Fairbanks by the Interior Gas Utility, has increased from $48.7 million to $54.2 million, IGU management reported to the IGU board on Sept. 18. The tank is being constructed to support an enlarged gas supply for residents and businesses in the Fairbanks region, as part of the Alaska Industrial Development and Export Authority’s Interior Energy Project.

It appears that a major reason for the cost uptick was a discovery, during excavation of the foundations for the tank, that additional refrigeration would be needed of soil outside of the area of the tank itself. Deeper excavation is required than originally planned, and there has been an increase in the cost of steel required for the project, Dan Britton, IGU general manager, reported to the board.

The board passed a resolution approving the change to the storage tank budget but also expressed significant concern about any budget overrun. Additional money spent on the tank could impact funding availability for other aspects of IGU’s efforts to expand gas supplies for Fairbanks. Moreover, the cost of developing the infrastructure that supports the gas supply impacts the cost of gas delivered to gas customers. This cost, in turn, would impact the demand for gas in Fairbanks — the level of gas demand is a critical factor in the economics of the expanded gas supply.


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