AIDEA cancels North Slope LNG concession agreement with MWH

On Monday Jan. 5 the Alaska Industrial Development and Export Authority formally canceled the concession agreement with engineering firm MWH for the construction and operation of a North Slope liquefied natural gas facility for the supply of gas to Fairbanks and the Alaska Interior, AIDEA spokesman Karsten Rodvik told Petroleum News in a Jan. 6 email. The concession agreement had been scheduled to terminate at the end of December, but with the possibility of a 90-day extension. Apparently MWH had requested a possible extension of the deadline but has now withdrawn that request.

“MWH had previously withdrawn its request for a 90-day extension of the concession agreement,” Rodvik said. “Monday’s action was the formal termination necessary for AIDEA to move forward with investigating alternatives for bringing natural gas to Interior Alaska.”

Under the terms of the concession agreement, MWH had been trying to achieve financial close by Dec. 30 for the plan to construct the North Slope plant. However, during an AIDEA board meeting on Dec. 16 it became clear that some of the project deliverables required for that close were not complete. Participants in that meeting also expressed concerns about the projected cost of liquefied natural gas in Fairbanks, based on estimated costs for the various components of the supply chain for delivering the LNG from the North Slope.

The plan was to sell LNG to Fairbanks Natural Gas, Interior Gas Utility and Golden Valley Electric Association, the gas and electrical utilities in Fairbanks.

According to a Dec. 22 letter from Ted Leonard, executive director of AIDEA, to Chris Brown, MWH Alaska regional manager, on Dec. 15 Brown had asked the AIDEA board about a possible extension to the Dec. 30 deadline for the concession agreement. Leonard, in his letter, encouraged MWH to achieve the original deadline but offered an extension to March 30, subject to certain conditions. Those conditions included a requirement that MWH subsidiary Northern Lights Energy would no longer have an exclusive concession to build and operate the plant. The conditions also included specific target dates by which final pricing for the project must be submitted and by which service agreements with Fairbanks gas and power utilities must be completed.

In a letter to AIDEA dated Dec. 30, Brown said that MWH was withdrawing its concession agreement extension request because of a lack of utility consensus on the direction of the project; because of the AIDEA stipulated conditions for extending the agreement; and because the firm contracted to build the plant was standing down its team that has been working on the plant design. Presumably referencing Kiewit, the company slated to build the plant, Brown said that the contractor had notified MWH that it was re-assigning its engineering team and archiving its design work, given the political risk facing the project and given the uncertainty over continued AIDEA funding.

Brown said that significant progress has been made in the execution of the project, including the development of a cost estimate for the LNG plant, the award of an operations and maintenance contract for the plant; and the execution of an agreement for private investment in the plant.

But the stand down by the construction contractor could now cause financial close for the project to take longer than 90 days, Brown said.

A key factor in the project is the potential cost of gas in Fairbanks, with a target cost of $15 or less per thousand cubic feet for Fairbanks residents. In his letter Brown said that MWH had offered to supply the Fairbanks utilities with LNG at a preliminary price of $13.

During the Dec. 16 board meeting an MWH presentation on the estimated costs of the LNG supply chain pointed to a total cost in the range of $18 to $20.50 per thousand cubic feet of gas, including the cost of storing and regasifying the LNG in Fairbanks, and distributing the gas to consumers. Golden Valley Electric Association and Fairbanks Natural Gas told the board that they were willing to continue pursuing the project, but the Interior Gas Utility expressed a view that the time had come to seek alternative ways of supplying gas to Fairbanks.

Rodvik told Petroleum News that AIDEA will now need to consider all possible options for achieving the project objectives.

“AIDEA is fully committed to the goal of bringing affordable energy to the Interior, and we appreciate the effort that MWH put into helping bring the North Slope LNG plant closer to reality,” Rodvik said. “MWH achieved a great deal during 2014, and we thank the entire MWH team for all of their hard work.”

- Alan Bailey