Providing coverage of Alaska and northern Canada's oil and gas industry
January 2023

Vol. 28, No.5 Week of January 29, 2023

IGU moving gas supply to North Slope

Future Cook inlet supplies viewed as too uncertain to justify cost of planned expansion to utility’s Point Mackenzie LNG plant

Alan Bailey

for Petroleum News

In a Jan. 17 special meeting the board of Fairbanks based Interior Gas Utility unanimously approved two contracts for establishing a liquefied natural gas supply from the North Slope. One contract is with Harvest Midstream for the construction and operation of a 150,000 gallon per day North Slope liquefied natural gas facility. The other contract is with Hilcorp Alaska for the transfer of gas supply contract arrangements from Cook Inlet to the North Slope. Hilcorp will deliver gas to the Harvest LNG plant. Harvest is Hilcorp’s midstream affiliate that owns and operates pipelines in Alaska.

In effect, the new contracts will fully transfer IGU’s gas supplies for the Fairbanks-North Pole region from Cook Inlet to the North Slope.

IGU anticipates the new LNG plant going into operation by the end of 2024. Currently the utility manufactures LNG in its Titan plant near Point Mackenzie on Cook Inlet. IGU ships the LNG by road to its storage facilities in Fairbanks and North Pole, for the supply of natural gas to its customers.

Once the Harvest LNG plant goes into operation, the Titan plant will go into warm standby, as a backup facility, should there be some unanticipated problem with the North Slope supply, IGU General Manager Dan Britton told the board. IGU will need to establish a new trucking operation for shipping LNG from the North Slope to Fairbanks, either as part of IGU or as a contracted service, Britton said.

On Jan. 18 Harvest confirmed the agreement.

“We are pleased to be investing in a project that utilizes North Slope gas to bring reliable energy to the interior” said Harvest CEO Jason C. Rebrook. “There is still a lot of work to be done to bring this project to completion, but we are excited about the partnership with IGU that will give Alaskans greater long-term energy security.”

Agreed pricing over 20 years

Britton told the IGU board that the initial contracts with Hilcorp and Harvest cover a 20-year timeframe, with agreed pricing for gas delivered to the North Slope LNG facility and for LNG supplied on the North Slope from the facility. Taking into account this pricing, and the anticipated cost of trucking the LNG to Fairbanks, IGU expects the initial price of gas for the utility’s customers to be similar to current pricing. The contracts factor in long term price escalation to take inflation into account. There will be some uncertainty over the customer pricing until the trucking arrangements are finalized.

IGU views the move to the North Slope supply as bringing a high level of supply reliability together with major capabilities for supply expansion to support a growing customer base, given the huge amount of natural gas available on the North Slope.

On the other hand, the contracts have minimum volume commitments - should the growth in IGU’s customer base fall substantially below expectations, these volume commitments would impact the Fairbanks gas pricing. However, IGU is meeting its targets for customer growth and anticipates this success to continue. And in its early years the LNG supply contract anticipates LNG demand being below the LNG plant capacity, with the agreement allowing for shutdowns during the summer.

Under the terms of the contract with Harvest, IGU has first right of refusal on any future sale of the LNG plant by Harvest. And should some other entity end up buying the plant, the new entity would need to have the financial capability to meet the contractual commitments that have been made to IGU, Britton told the board.

When inviting board members to vote on the resolutions, board chair Gary Wilken commented on the major significance of the move to the North Slope.

“This is really a historic vote … years ago to think that we’d be sitting here today voting on a 20 or 30 year gas contract off of the North Slope with a bright future ahead, there were many that thought that couldn’t happen,” Wilken said.

The Interior Energy Project

After IGU was formed in 2012 as a local government owned utility, with the intent of expanding gas supplies in the Fairbanks-North Pole region, it became in involved in the Interior Energy Project, or IEP, an Alaska Industrial Development and Export Authority sponsored project with the objective of bringing affordable natural gas to the Fairbanks region. The concept was to establish a fuel source cheaper than fuel oil for heating buildings, while also reducing the winter air pollution that plagues Fairbanks. IEP funding involved a combination of a state appropriation; AIDEA Sustainable Energy Transmission and Supply, or SETS, loans; and AIDEA bonds.

The original concept was to use IEP financing to build an LNG plant on the North Slope and to truck the LNG to Fairbanks.

However, following engineering work for the LNG project, it became clear by the end of 2014 that the project was not viable - the project costs would have resulted in gas prices too high for gas consumers. But work did move ahead on some buildout of the gas distribution pipeline network in Fairbanks, on the assumption that an expanded gas supply for the city would be forthcoming at some stage.

The Pentex purchase

In June 2015 AIDEA, in moving forward on the IEP, purchased Pentex Alaska Natural Gas Co., the owner of the Titan LNG plant, the trucking operation for shipping LNG from the Titan plant to Fairbanks, and Fairbanks Natural Gas LLC, a gas utility with customers in central Fairbanks. In December 2017 AIDEA approved the sale of Pentex to IGU, thus establishing a single gas utility in Fairbanks, with its own LNG supply via the Titan plant. The AIDEA board also approved loans for the construction of a new 5.25 million gallon liquefied natural gas storage facility in Fairbanks, to underpin expanded gas supplies in the region.

The new LNG storage facility was completed at the end of 2019 and in early 2021 IGU completed additional storage facilities at North Pole. With then having plenty of LNG storage capacity, IGU was able to move ahead with expanding its customer base and extending its gas distribution infrastructure.

But the throughput capacity of the Titan LNG plant then became a constraint on future expansion. IGU had planned to expand the plant from its 50,000 gallons per day throughput to 150,000 gallons per day. However, in the spring of 2020 uncertainty in future energy pricing because of the COVID pandemic caused the IGU board to put a final investment decision for the plant expansion on hold.

Britton told the IGU board in the Jan. 17 meeting that the utility had continued to see the Titan expansion as the next step in enabling the utility to sustain its plan of expanding its customer base. The existing Titan throughput capacity could only support IGU’s planned increase in customers until the end of this year’s construction season, Britton said.

“At that point we have reached our maximum capacity with our current liquefaction assets and our current supplies,” he said.

IGU anticipates having around 2,200 customers by the end of June this year and expects its customer base to increase to over 6,000 by June of 2032.

Cook Inlet supply uncertainty

But a few months ago Hilcorp informed all of the utilities sourcing natural gas in the Cook Inlet that they should no longer rely on Hilcorp to the extent that they have on the past and that “they did not have line of sight beyond their current contractual commitments,” Britton said.

That, in effect, nixed the Titan expansion, given what would have been a project with an uncertain future involving more than $60 million in debt funding. That uncertainty would likely have made it impossible to attract workable financing, Britton said. Moreover, IGU has a commitment to its existing customers to provide a long-term, gas supply solution, he said.

Several options investigated

IGU then looked at several potential options for expanding its LNG supplies. The utility discussed with a company called Cryopeak LNG Solutions the possibility of building a temporary 50,000 gallons per day LNG plant next to the Titan plant, as a short-term fix pending a longer-term solution. But this would have taken about two years to construct and would have resulted in rate increases for IGU’s customers and higher long-term costs, Britton said.

Another option could have been to import Canadian LNG while further deferring a decision on the Titan expansion - IGU investigated various proposals for trucking LNG from Canadian producers to the Vancouver area for shipment by barge to Alaska, Britton said. But each option would have required gas price increases in Fairbanks, in addition to which IGU would have been exposed to uncertain future Canadian gas pricing and the vagaries of currency exchange rates.

Ultimately, the option to purchase LNG via a Hilcorp North Slope gas supply and a Harvest operated LNG plant on the Slope proved to be the optimum solution.

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