Providing coverage of Alaska and northern Canada's oil and gas industry
October 2017

Vol. 22, No. 40 Week of October 01, 2017

There's now a project

Hilcorp gas supply contract opens way forward for Interior Energy Project

Alan Bailey

Petroleum News

The Alaska Industrial Development and Export Authority’s Interior Energy Project has signed a Cook Inlet gas supply agreement with Hilcorp Alaska, thus opening the way for the project to move forward. During its meeting on Sept. 21 the AIDEA board approved the gas supply contract and an associated plan for completing the IEP. The objective of the IEP is to enable a greatly expanded supply of natural gas at a viable price in Fairbanks and the surrounding region of the Interior. In addition to helping alleviate the high cost of energy in the region, the project also hopes to help reduce winter air pollution that results from the widespread use of wood stoves for heating buildings.

The IEP plan involves expanding an existing liquefied natural gas plant near Point Mackenzie on Cook Inlet; beefing up the transportation arrangements for shipping LNG from the plant to Fairbanks; expanding the LNG storage capacity in Fairbanks; and building out the gas distribution pipeline network in the Fairbanks area.

House Bill 105, passed by the Alaska Legislature in 2015, required the AIDEA board to approve an IEP plan that includes an identified source of gas, the cost of the various components of the gas supply chain and the expected delivered price of gas in Fairbanks before additional use can be made of a Sustainable Energy Transmission and Supply, or SETS, loan for the project. With the cost elements in place and a plan approved, the full funding of the project can now proceed.

Meeting the target

The gas supply contract with Hilcorp runs to 2021 and involves a fixed gas price of $7.72 per thousand cubic feet. This is expected to result in an initial gas price for Fairbanks consumers of $19.88 per mcf. The IEP’s target price for gas delivered to consumers is $15 per thousand cubic feet. However, by 2022 the price of gas in real terms is expected to drop below that target level, as gas demand in Fairbanks builds.

Gene Therriault, AIDEA’s IEP team leader, emphasized that the project economics will be driven by the volume of Fairbanks gas usage. In particular, the fixed costs associated with the operation of the LNG plant become spread over a larger gas volume as that volume increases. Therriault told the board that the project is seeking ways to build up the initial demand volume, especially from business customers who tend to use more gas than residential consumers.

“The new (gas) contract also offers a great deal of volume flexibility,” Therriault said, adding that the contract will enable the supply volume to grow without the need for any take-or-pay commitment.

Utility consolidation

AIDEA currently owns Pentex Natural Gas Co., the owner of the LNG plant, the LNG road transportation system and Fairbanks Natural Gas, one of the two current gas utilities in Fairbanks. Part of the IEP plan involves selling Pentex to the Interior Gas Utility, the other Fairbanks gas utility: The consequence will be a consolidated utility in Fairbanks that can efficiently build out and operate the gas supply system.

A resolution passed during the AIDEA board meeting modified the scope of activities that can be funded from the IEP SETS loan, enabling IGU to use loan funding to assist with its costs in the merger negotiations. Part of the funding will cover the cost of filing a request to the Regulatory Commission of Alaska for the approval of the merging of the two Fairbanks utilities, Therriault told the board. Therriault told Petroleum News that the IEP and IGU are close to finalizing the contractual paperwork for the sale of Pentex, and that the two organizations hope to reach closure in the next week or two.

Fairbanks Natural Gas currently supplies gas to some customers in central Fairbanks. The idea behind the IEP and the merger between FNG and IGU is to greatly expand that supply, in terms both of gas volumes and of the size of the area where a gas supply becomes available. Therriault told the board that the new gas supply contract overlaps the existing FNG contract by three months. That will prove a benefit to Fairbanks gas consumers because the existing contract, unlike the new contract, includes a 4 percent annual price escalator, Therriault said.

LNG plant expansion

The planned expansion of the Cook Inlet LNG plant will require some additional front-end engineering and design work prior to a final investment decision. The plan is to approximately double the plant capacity to about 3 billion cubic feet per year of gas. Meanwhile, FNG has taken delivery of new, larger capacity LNG road trailers, to increase the LNG transportation capacity to Fairbanks. The hope is to expand the LNG production capacity by around the time that new LNG storage in Fairbanks has been completed, potentially by the end of 2019.

The timing of the LNG storage expansion through the development of a new 5.25 million gallon Fairbanks storage facility is important because of the need to have the new storage in operation by 2020, so that the storage development qualifies for a state tax credit. FNG hopes to start work on the foundations for the facility in February or March of 2018, Therriault said. And the storage expansion will prove to be of benefit, even if it is completed prior to the expansion of the LNG facility - the availability of more LNG storage in Fairbanks will enable the stockpiling of LNG during the summer, thus enabling more efficient year-round LNG production, Therriault explained.

Distribution expansion suspended

FNG and IGU started expanding the gas distribution pipeline network in Fairbanks in 2015, but had to stop work on the expansion shortly afterwards, following the passage of HB 105. Since then the utilities have been taking advantage of street remediation projects to lay pipework under some streets, but have not otherwise progressed the pipeline system expansion. In addition, the planned merger of FNG and IGU required a rethink of the layout of the distribution system, to maximize the benefits of utility integration. With the new release of SETS funding, the distribution expansion will now be able to proceed.

Project costs and funding

According to the IEP’s approved plan, the expansion of the Cook Inlet LNG plant is expected to cost about $46 million. The IEP estimates the total cost of new LNG storage and regasification facilities in Fairbanks to be $52 million, with the possibility of earning an $18.5 million tax credit.

The project is being funded from a $57.5 million state capital appropriation, $125 million in SETS loans, $140 million in AIDEA bonds and $4.7 million in commercial financing. To date, $15 million of the capital funding has been spent, a significant portion of that on an early version of the project involving a potential LNG plant on the North Slope, while $42.4 million in SETS funding has been used in expansion to date of the Fairbanks gas distribution infrastructure.

The expansion of the LNG plant; upgrades to the LNG transportation arrangements; expansion of LNG storage and regasification facilities; the acquisition of Pentex by IGU; and initial further upgrades to the Fairbanks gas distribution system are expected to cost a total of $164 million. The $59.5 million of this expenditure that is allocated to the Pentex purchase will presumably be returned to the AIDEA revolving fund originally used by the agency to purchase Pentex.

Depending on future gas demand in Fairbanks, the LNG facility may be further expanded at a cost of $25 million, an additional $2.9 million may be spent on further ramping up of the LNG transportation arrangements and a further $96 million may be spent on further expansion of the gas distribution system in Fairbanks, the IEP plan says.

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