AIDEA mulling three LNG proposals

The public corporation will get a recommendation from staff in December; all three proposals imagine different financing structures

Eric Lidji

For Petroleum News

The Alaska Industrial Development and Export Authority is considering three proposals for a turn-key North Slope liquefied natural gas facility to serve Interior markets.

The board of the public corporation heard proposals from MWH Americas Inc., Pentex Alaska Natural Gas Co. LLC and Spectrum Alaska LLC at a meeting on Nov. 19.

A fourth entity, Golden Valley Electric Association, presented the conditions under which it could participate in such a project, both as a consumer and as a partner.

AIDEA must now decide which proposal best fulfills the goal of the project, which lawmakers funded earlier this year with some $332.5 million in grants, loans and bonds.

AIDEA staff will make its recommendation to the board at a meeting on Dec. 18.

“Today’s board meeting was a productive exchange of ideas on a very complicated subject,” AIDEA spokesman Karsten Rodvik said. “We appreciate our potential partners’ hard work, and their taking time today to present information that will help us make the decisions necessary to move the Interior Energy Project forward in the best way. … Our goal remains the same: Get affordable energy to Interior Alaska as soon as possible.”

The Interior Energy Project aims to provide a long-term supply of natural gas to the Interior at prices 40 to 50 percent below fuel oil, plus propane for rural communities.

The project involves a 9 billion-cubic-feet North Slope LNG facility, a trucking operation to the Interior, storage and re-gasification facilities in the Fairbanks North Star Borough and relationships with local heating and electric utilities, as well as industrial customers.

The project also requires at least $20 million in matching funds from any private partner.

All three proposals meet the requirements for the project, according to AIDEA consultant Western Financial Group. The decision will rest largely on the terms of each proposal.

MWH: Largest contribution

Using AIDEA estimates, the firm expects the plant to cost some $217 million, which it would finance using a $125 million low-interest loan from the AIDEA-managed Sustainable Energy Transmission and Supply Development Fund and up to $85 million in private investments funded through a mix of 65 percent debt and 35 percent equity.

The annual operating costs would be some $9 million, in addition to the variable cost of gas to be liquefied and fuel to run the facility, both of which must still be contacted.

The capital and operating cost estimates are the highest of all three proposals, but MWH is also proposing to make the largest private contribution of any of the three proposals.

The funding also includes revenue from an AIDEA site and equipment lease and a $10 million reserve to cover cost overruns, but would leave most of the potential AIDEA equity on the table. The proposal seeks “utility-type returns for taking utility-type risks,” as the company phrased it, or a roughly 12 to 15 percent return for investors.

The MWH proposal also requires GVEA to consider buying all its LNG requirements from the facility in a take-or-pay contract between 1.5 bcf and 3 bcf per year in return for a $10 million AIDEA grant to fund storage and re-gasification facilities in North Pole.

The global company claims 35 years in Alaska and a local staff of 35, but also boasts of $5 billion in available capital companywide, including $500 million for infrastructure.

Pentex: lowest return

The parent company of Polar LNG LLC and Fairbanks Natural Gas LLC, among other associated businesses, expects to use only $115 million of the available SETS fund, some $40 million in AIDEA leasing revenue and up to $50 million in private investment. Of its private stake, Pentex expects to provide $20 million in equity — minus $5 million already spent on the project — and raise the remaining $30 million from third parties.

The financing also includes a $10 million “completion reserve” to cover overruns.

Under its proposal, Pentex would earn a 12.5 percent rate of return on its investment, which is the lowest of all three proposals. By linking the plant and the distribution grid, some of the project would be subject to state rate regulation scheduled to start soon.

Fairbanks Natural Gas would commit to purchase LNG from the plant, and would commit to building out its system to increase the local market. Aspects of the build-out are currently before the Regulatory Commission of Alaska. Even if regulators deny Fairbanks Natural Gas’ request to expand its service area throughout the borough, the utility can — and in some sense must — still expand within its existing service area.

The Pentex proposal also makes LNG available to electric utilities such as GVEA, as well as for transportation, which is currently limited to fleets but could grow.

Fairbanks Natural Gas currently serves some 1,100 customers in Fairbanks and currently has a long-term gas supply agreement with ExxonMobil for North Slope supplies.

Spectrum: lowest costs

For starters, Spectrum envisions a direct-drive and mixed-refrigerant plant, which has a lower capital cost but different operating profile than the electric-drive and nitrogen refrigerant plant proposed by MWH and Pentex. An AIDEA feasibility study “favors” a nitrogen refrigerant process, but the Spectrum proposal meets the project requirements.

Spectrum is also proposing to distribute LNG beyond the Fairbanks North Star Borough, while configuring a specific cost structure and volume commitment for the Interior.

And instead of selling LNG, Spectrum is proposing to sell liquefaction. In other words, Spectrum would act as a middleman between consumers and North Slope suppliers.

The Spectrum proposal imagines a $145 million plant, which is the lowest cost estimate of the three proposals. Spectrum would finance the plant using the entire $125 million SETS loan, at least $20 million in equity and would turn to third parties only if needed. The proposal also includes a $10 million completion reserve to cover cost overruns.

The Spectrum proposal includes the highest return on investment — 25 percent.

To protect the company should the deal fall through, the Spectrum proposal includes a $2.25 million “break-up fee” to cover certain costs and a clause allowing the company to purchase up to 20,000 gallons per day from a future plant at the lowest price available.

Spectrum also expects AIDEA to bear demand risk for expanding the plant. If the project fails to meet projections after five years, Spectrum could transfer all its assets in the project to AIDEA in return for a $72 million credit against the outstanding SETS loan.

Alternatively, the proposal also gives Spectrum the option to transfer its existing project leases and permits to another player for $2.85 million plus fees for certain costs.

The principles behind Spectrum are responsible for the Point Mackenzie LNG facility that is currently used to fuel the Fairbanks Natural Gas system, among other LNG projects.

What GVEA brings

The electric cooperative originally planned to construct a trucking project on its own, but began to pull back as public officials suggested a willingness to help finance the project.

Still, GVEA remains one of the largest consumers in the region, which would bolster the market case for any project. GVEA also has a long-term agreement with BP to purchase North Slope gas supplies. And GVEA has existing engineering and permitting work.

The cooperative told AIDEA it is willing to contribute any or all of those assets, as well as project managers responsible for some of the larger Alaska infrastructure projects of the past decade, including the Northern Intertie and the North Pole Expansion Plant.

GVEA also expects to purchase between 1.5 bcf and 2.5 bcf annually from any plant, although the exact amount would depend on a “commercially reasonable” fixed price.