|
Next steps for Interior Energy Project Study into alternatives for Fairbanks natural gas supply moves ahead while due diligence for Pentex acquisition also progresses Alan Bailey Petroleum News
Two initiatives furthering the objectives of the Interior Energy Project, a project tasked with bringing affordable natural gas to Fairbanks and the Alaska Interior, are moving towards major decision points in the coming summer, the board of the Alaska Industrial Development and Export Authority heard during its March 26 meeting. One of these initiatives is investigating alternatives for establishing a viable gas supply, while the other is conducting due diligence on a proposed AIDEA purchase of Pentex Alaska Natural Gas Co., the holding company for gas utility Fairbanks Natural Gas Co., for a liquefied natural gas facility at Point MacKenzie on Cook Inlet and for a trucking operation for transporting LNG from Point MacKenzie to Fairbanks.
The initiatives have come in the wake of AIDEA calling a halt in early January to a project to build an LNG facility on the North Slope and to truck the LNG to Fairbanks. Fairbanks residents are hurting both from the very high cost of energy in the city and from poor air quality resulting from the use of wood burning stoves as a means of reducing home heating bills.
Gas supply alternatives Following its decision over the North Slope project, in mid-January AIDEA approved funding for the investigation into Fairbanks gas supply alternatives. Robert Shefchik, AIDEA team leader for the Interior Energy Project, said that the proposed North Slope LNG arrangement had been a commercial project which had not passed all of AIDEA’s due diligence tests. The investigation that is now under way is still considering the possibility of obtaining gas from the North Slope but is particularly focusing on options for supplies from the Cook Inlet basin, he said. The gas supply situation in the Cook Inlet region has changed dramatically since the early days of the Interior Energy Project, with heightened levels of gas development in the region changing a pending shortfall of utility gas into a potential gas surplus.
And, while the North Slope offers a reliable gas supply through known supply contracts and terms, Cook Inlet offers lower costs for LNG facility development and LNG transportation, albeit with higher levels of supply uncertainty, Shefchik said.
“The conclusion is if affordable gas is available, then Cook Inlet LNG really is favorable,” Shefchik said. “If it’s not, then you look back on the North Slope. We expect to look at both as we move forward.”
Two-pronged approach Shefchik described a two-pronged approach to the investigation, with the Alaska Department of Commerce, Community and Economic Development, AIDEA’s parent agency, taking a lead role in trying to establish a reliable and affordable gas supply from one or more Cook Inlet gas producers, while the AIDEA team issues a request for proposals for a gas supply chain for Fairbanks. Shefchik said that he anticipates the request for proposal attracting a variety of supply chain options.
Although the AIDEA team anticipates preparing cost estimates for trucking LNG from Southcentral Alaska to Fairbanks, a procedure that has already been in operation for several years and is, therefore, well understood, the Alaska Railroad is also interested in the possibility of LNG transportation. The AIDEA team has been providing the railroad with projected Fairbanks LNG demand profiles, to assist the cost estimation for the rail option, Shefchik said.
In response to concerns expressed in the state Legislature by Sen. Peter Micciche, R-Soldotna, the AIDEA team is also assessing an option to construct a gas pipeline from Southcentral Alaska for the delivery of gas to Fairbanks, Shefchik said. And, at this stage, AIDEA is not precluding from consideration other possible options, such as the supply of propane rather than natural gas, he said.
With the reliability of a gas supply from Cook Inlet being a significant issue, the Alaska Department of Natural Resources is assisting in the project, ensuring that a Department of Commerce, Community and Economic Development request for interest in contracting for the supply has the specific level of detail required for issues such as where the gas needs to be delivered, Shefchik said. Although the state will conduct negotiations with gas producers, the Fairbanks utilities will ultimately need to hold any gas supply contracts, either individually or as a utility consortium, he said, adding that the state is keeping the Fairbanks utilities “up to speed” on what is happening.
End June target
Shefchik said that both the request for interest in providing a gas supply and the associated request for proposal for the supply chain should be ready for release in about a month’s time. The target is to have gas supply term sheets, rather than finalized gas supply agreements, by June 30, and to have completed the first step towards selecting a supply chain partner by that time, he said. The expectation is to winnow down the supply chain options to two to four alternatives, prior to narrowing the field to one preferred solution, he said.
Shefchik said that AIDEA also anticipates completing the due diligence on its proposed acquisition of Pentex in about that same late June timeframe.
AIDEA has said previously that its prime motivation in purchasing Pentex is the acquisition of Fairbanks Natural Gas, an acquisition that would enable the state agency to reduce the cost of gas for Fairbanks gas consumers while also paving the way for consolidation of the gas distribution system that is being constructed in Fairbanks. As part of the Interior Energy Project, AIDEA is providing financial support for the build out of the Fairbanks gas distribution network - the build out by utilities Fairbanks Natural Gas and the Interior Gas Utility is moving ahead this summer, on the assumption that an appropriate gas supply will emerge in due course.
Pentex is in the process of negotiating the possible sale of its Point MacKenzie LNG facility to a subsidiary of Hilcorp Energy, a major Cook Inlet gas producer. AIDEA has said that its purchase of Pentex will not impact the proposed deal between Pentex and Hilcorp.
Pentex due diligence Mark Gardiner from the Western Financial Group told the AIDEA board that the due diligence study for AIDEA’s purchase of Pentex is proceeding to plan, with the legal, regulatory and financial aspects of the study now largely complete. Work is in progress on technical and environmental reviews, including site visits, and a preliminary risk analysis for the Pentex acquisition has been done, Gardiner said. Assuming successful negotiations with Pentex, a draft financial plan should go before the AIDEA board in April or May - the target for closure of the deal is the third quarter of this year, he said.
AIDEA has said that it sees its operation of Fairbanks Natural Gas as a temporary arrangement, with an eventual goal of transferring the utility to some long-term operator. Gardiner said that it will be necessary to work with the Fairbanks community, to figure out how best to consolidate the gas distribution system, with a transition to local control likely taking 18 to 24 months to complete, with a target financial return of 3.5 percent to AIDEA. The eventual utility configuration could involve a change of ownership or some other form of operation, such as a leasing arrangement, he said.
Shefchik said that, under the plan for the build out in Fairbanks, gas distribution piping would eventually reach about 12,700 individual structures in Fairbanks, most of them residential housing. He said that the AIDEA project is investigating partnering with local banks, to enable loans for residential heating systems to be converted to gas operation, with loan repayments being built into gas bills. Polling has suggested that about half the residents would convert to gas if cheap gas were available, with the other half not sure whether they would be able to afford the conversion, he said.
|
