|
IGU defers LNG plant expansion decision
Collapse in oil price because of COVID-19 raises uncertainties over gas demand in Fairbanks and questions over project economics Alan Bailey for Petroleum News
The Interior Gas Utility has decided to postpone a final investment decision for the proposed expansion of the Titan liquefied natural gas facility near Point Mackenzie on Cook Inlet. The plant expansion forms part of the Interior Energy Project, an Alaska Industrial Development and Export Authority sponsored initiative to bring increased supplies of affordable natural gas to Fairbanks and its surrounds. Gas competes with fuel oil for heating buildings. And the economics of the gas supply expansion depends critically on projected rates of conversion to the use of natural gas for powering furnaces.
Gas is delivered to Fairbanks in the form of LNG, carried by road tanker from the Titan plant. As a next step in the expansion of gas supplies, IGU has planned to increase the capacity of the plant from 50,000 gallons per day to 150,000 gallons per day, with the possibility of a subsequent further 100,000 gallons-per-day expansion. The Fairbanks based utility had commissioned a front-end engineering and design study for the expansion, with that study leading to a final investment decision for the first stage of the expansion.
Following completion of the FEED project, the IGU management had recommended that the IGU board should proceed with the investment. And AIDEA had approved the issue of bonds that would be required to fund the project.
Changed recommendation The IGU board scheduled a special meeting on April 21, to determine whether to agree with the IGU management’s FID recommendation. But before the formal start of the meeting Dan Britton, IGU general manager, announced that he is now recommending that the FID needs to be deferred as a consequence of uncertainties relating to the COVID-19 pandemic. The board has concurred with Britton’s assessment of the situation.
Britton told the board that his original FID recommendation had been based on certain assumptions and information that were known at the time. Since then there has been a sustained drop in the oil price coupled with challenges in the economy that together will likely impact IGU’s forecasts for future gas demand in the Fairbanks region, Britton said. He said that he still believes an expansion by IGU of the LNG plant represents the best long-term solution for IGU’s customers but that it is not possible to ignore the short-term realities relating to an unprecedented situation.
Potential costs There are potential costs associated with the decision delay. Britton commented that, although a short delay of around a couple of weeks would not trigger significant impacts, the likely delay beyond that could raise a series of issues. For example, the vendor selected for the Titan plant expansion has priced the components required for the Titan plant expansion - that pricing expires at the end of April. There is a construction cost inflation risk and an interest risk for the project funding. IGU’s bond rating expires in June: There is risk and cost associated with the rating renewal.
Another issue relates to an expectation that some of the money raised through new bonding would be used to fund expansion of the gas distribution infrastructure in Fairbanks North Star Borough. The cost of a smaller bond placement, just to cover these expenses, would be high in relation to the amount of bonding when compared with the relative cost in conjunction with a substantially larger bond issue, Britton commented.
Britton said that he also needs to determine whether project approvals by the impacted boroughs will remain valid for an extended period of time.
Concerns over the delay Board members Gary Wilken and Jack Wilbur commented that, while they support the need for a decision delay in the light of current uncertainties, they are also concerned about the potential to lose an opportunity to move ahead with the project.
“I’m bullish on the project,” Wilken said. “I do not want to use this (situation) as an excuse not to do this project until there is such evidence that it is clear that we should not.”
At the end of last year IGU completed the construction of a new 5.25 million-gallon LNG storage facility in central Fairbanks. The utility is also in the process of installing new storage facilities in North Pole. The additional storage, while built to accommodate increased LNG production from the Titan plant, will also allow the warehousing of summer produced LNG from the existing plant - that will enable some increase to IGU’s customer base, regardless of the Titan plan expansion.
| 