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No deal with Siemens
IGU board votes to terminate MOU for negotiations over potential LNG supply
Alan Bailey Petroleum News
The board of the Interior Gas Utility has opted to end negotiations with Siemens over a possible supply of liquefied natural gas that Siemens had proposed for the Fairbanks utility. During its April 9 meeting, the board passed a resolution by five votes to two to cancel a memorandum of understanding with Siemens, under which the negotiations were taking place. Board members Patrice Lee and Mary Norland voted against the resolution.
As part of the Alaska Industrial Development and Export Authority’s Interior Energy Project, IGU purchased Pentex Natural Gas Co., including its subsidiaries Fairbanks Natural Gas and the Titan LNG plant near Point Mackenzie on Cook Inlet. The consequence is the establishment of IGU as a single, consolidated gas utility for the Fairbanks region of the Alaska Interior. The concept is to greatly expand the availability of natural gas in the region, as an affordable means of heating buildings, and to alleviate severe air pollution resulting from the widespread use of wood burning stoves.
LNG options The base plan for the Interior Energy Project involves the construction of expanded LNG storage facilities in Fairbanks along with a two-stage expansion of the Titan LNG plant. However, Siemens and Knikatnu, the Native village corporation for Knik and Wasilla, have proposed the construction of a new LNG plant on a spur of the Alaska Railroad, on Native land near the city of Houston. LNG would be shipped to Fairbanks by railroad. The concept would involve Siemens financing the plant construction and ultimately supplying LNG to Fairbanks at some workable price. The company had been negotiating a possible gas supply from Cook Inlet for the plant. Siemens would construct the plant using a standard modular design that could be expanded as needed.
The Titan plant, on the other hand, would continue to be owned by IGU. The utility would manage the plant expansion and would fund the expansion project primarily through bonding. The utility would recover the expansion costs through the rates that it charges for gas supplies in Fairbanks.
Based on potential gas uptake rates by Fairbanks consumers, as assessed by an external consultant, and on estimated costs for expanding LNG supplies, IGU has an expectation that the project will prove viable. However, the utility has been considering both potential means of increasing the LNG supply: the Titan expansion and the Siemens proposal. The utility had hoped to reach a point where both options were sufficiently well defined to do a side-by-side comparison of their relative economics.
Siemens MOU In October the IGU board agreed on the MOU with Siemens that would enable confidential negotiations over the specifics of the Siemens plan. The first stage of the negotiations would lead to a term sheet for the LNG supply. The term sheet would enable Siemens to finalize the design of the required LNG facilities, thus enabling the company to make a firm price offer to IGU for the LNG.
However, no term sheet has been agreed thus far. Because of the confidential nature of the negotiations, there is no public information regarding whatever issues have arisen in the discussions between IGU and Siemens. It appears from comments made during the April 9 board meeting, that negotiations had run aground, with contention over the scope of the Siemens system, issues such as accountability for some of the project risks, and questions regarding the potential gas supply for the Siemens plant. IGU General Manager Dan Britton commented that the utility’s counsel, Robin Brenna, had sent a confidential memo to the board, outlining the issues that the IGU team viewed as unresolvable through future negotiations.
Board member views Lee and Norland, in opposing the termination of the MOU, commented that they did not feel that they had enough specific information about the nature of the areas of disagreement between IGU and Siemens. Norland commented that she had heard different versions of what had happened and that there is a need to clarify exactly what Siemens thinks about the project. Lee said that she thinks that there are differences between Siemens’ and IGU’s views of the negotiations.
Other board members expressed views that the negotiations had reached an impasse, with reasons that had been thoroughly discussed. Board member Gary Wilken said that he respects the professional views of Britton and Brenna in recommending an end to negotiations.
Meanwhile, at the beginning of February the IGU board commissioned Braemar Technical Services to proceed with the front-end engineering and design for the expansion of the Titan LNG plant. The FEED project, expected to complete by early November, will pin down a budget and plan for the expansion project.
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