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A project with a mission for the state AIDEA official explains the thinking behind the Interior Energy Project and discusses the history and status of the initiative ALAN BAILEY Petroleum News
The Interior Energy Project, an Alaska Industrial Development and Export Authority initiative to bring affordable, clean energy to Fairbanks, is a typical AIDEA project in that the agency seeks to invest state dollars in the program, with an expectation of making an eventual financial return for the state. But the project is also different, in that it was created by state legislation for the purposes of furthering a social policy, Nick Szymoniak, AIDEA energy infrastructure development officer, told the Commonwealth North Energy Action Coalition on July 17. Then Gov. Sean Parnell introduced the legislation in 2013, Szymoniak said.
AIDEA can take on some extra risk at a lower interest rate than can an organization in the private sector when making investments, given that the projects that the agency invests in provide benefits to the state beyond simple economic returns, Szymoniak said.
High energy costs Fairbanks, with its high dependence on liquid fuels for heating buildings and generating electricity, is suffering from extreme energy costs and from air pollution resulting from the use of wood stoves.
“Fairbanks is Alaska’s second largest metropolitan area and it’s paying the highest utility rates in the entire country,” Szymoniak said. The city also has some of the worst air quality in the United States, he added.
The goal of the Interior Energy Project has remained consistent since the project’s inception - the intent is to deliver natural gas or some other suitable energy source to the Fairbanks and North Pole area of the Interior for heating and electricity generation at the lowest cost possible, as soon as possible, and to as many people as possible, Szymoniak said.
Threefold package A threefold state funding package supports the project: $125 million in funding through a program called Sustainable Energy Transmission and Supply Fund; a $57.5 million capital appropriation; and an authorization from the Legislature to issue $150 million in bonds.
SETS is a program under which AIDEA can provide state loans for certain types of internal Alaska energy projects. The Legislature is allowing special terms for the issue of SETS loans for the Interior Energy Project, including loans at a 1 percent interest rate and the possibility of a 10-year deferral for loan repayment for constructing a gas distribution infrastructure in Fairbanks, Szymoniak said.
The idea behind the capital appropriation component of the funding is to make money available for investment as equity in the Interior Energy Project, he said.
Bonds authorized by the Legislature under the third funding tranche would be sold on the bond market, with the state having an obligation to refund the loans should the expected returns from the Interior Energy Project fail to materialize.
History of the project As originally envisaged, the Interior Energy Project would entail buying natural gas on the North Slope, converting this gas to liquefied natural gas and trucking the LNG to Fairbanks for storage and distribution. AIDEA advanced this project concept through engineering firm MWH and reached a point where construction of the required LNG plant was ready to go ahead and negotiations with Fairbanks utilities were well advanced. But in early January 2015 AIDEA called a halt, after the project failed to pass the agency’s due diligence scrutiny.
“At the end of the day the capital cost and even the operating costs for the project just came in too high,” Szymoniak said. “We couldn’t get the utilities to sign up for the gas because the gas was too expensive.”
Szymoniak said that, although AIDEA had spent money on the work leading to the January decision, the cancellation of the North Slope project shortly before moving into a full-scale development illustrates the strength of AIDEA’s due diligence standards in preventing unwarranted expenditure. Just because money is appropriated, AIDEA does not need to spend it - there has to be a commercial project before AIDEA will invest, Szymoniak said.
Cook Inlet gas AIDEA has not given up on the possibility of obtaining gas from the North Slope but has turned its attention to potential supplies from the Cook Inlet region, a region that has seen a significant upsurge in gas exploration and development. Legislation introduced by Gov. Bill Walker in 2015 authorized AIDEA to pursue a Cook Inlet project, and to consider the possibility of shipping gas to Fairbanks by pipeline, rather than as LNG. AIDEA is also allowed to evaluate propane as a potential energy source.
AIDEA’s target price for gas delivered to Fairbanks consumers, the so-called “burner-tip price,” is $15 per thousand cubic feet, with perhaps $3 to $5 of that price representing the cost of gas storage and distribution in the city. The agency recognizes the challenge of reaching this price goal, especially with the high likely level of the capital cost per customer, given the small population of the Fairbanks region, Szymoniak said.
Bearing in mind the agency’s role within the state administration, AIDEA is approaching the project as a financier and investor, asking private companies to propose ways of solving the Fairbanks energy conundrum, while offering state investment to facilitate project success. If an entity has the appropriate business capabilities and has proposed a solution coupled with money to invest, AIDEA will put some state funding at risk as part of the project financing, Szymoniak said.
Two components And the state administration has split the effort into two distinct components: the provision of a gas supply, and the provision of a mechanism for shipping the gas to Fairbanks.
The Alaska Department of Commerce, Community and Economic Development is directing the gas supply component of the project. DCCED, AIDEA’s parent agency, instructed AIDEA to issue a request for information for possible gas supplies from gas producers, because AIDEA has the capability to retain confidentiality over the responses to the request - responses came in on July 16, Szymoniak said.
AIDEA is handling the gas shipment component of the project and has issued a request for proposal for a transportation solution, potentially including a Cook Inlet gas liquefaction plant and LNG shipment by truck or by railroad, or perhaps involving a gas pipeline.
AIDEA has previously said that it wants to move the project proposal to near commercial terms prior to having Fairbanks utilities sign up for gas supplies. The agency would like to reach at least the term-sheet stage of negotiations by the end of the year, so that it will be possible to present a plan to Fairbanks and the state government, Szymoniak said. AIDEA hopes to see first gas arriving in Fairbanks in 2017, he said.
Complex project Szymoniak said that AIDEA anticipates sifting through responses to the request for proposal, to determine whether a Cook Inlet source for gas appears feasible and to narrow down a shortlist of perhaps some four proposals for negotiations leading to best and final offers. But selection criteria will not simply hinge on the lowest cost of delivered gas in Fairbanks, given the complexity of the project, with several different ways of allocating both funds and risks.
“It’s complicated. There’s a thousand different factors,” Szymoniak said.
Pentex In another component of the Interior Energy Project AIDEA is in the process of purchasing Pentex Alaska Natural Gas Co. LLC, the owner of utility Fairbanks Natural Gas, of a small LNG plant near Point MacKenzie on Cook Inlet and of a trucking operation for transporting LNG to Fairbanks. Pentex’s current operations, while supplying some gas to Fairbanks, fall short of the Interior Energy Project’s objectives, in terms of both the volume of gas involved and of the price of the gas. Pentex is in the process of selling its LNG plant and trucking operation to a subsidiary of Cook Inlet gas producer Hilcorp Energy. AIDEA anticipates ending up owning Fairbanks Natural Gas and thus being able to reduce the cost of gas distribution in Fairbanks, in part because of AIDEA’s relatively low business costs and ultimately by facilitating the consolidation of the two existing gas utilities in Fairbanks.
Meantime, those two utilities, Fairbanks Natural Gas and the Interior Gas Utility, with AIDEA funding assistance, are in the process of executing a major expansion of the Fairbanks gas distribution network, in anticipation of an expanded gas supply becoming available.
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