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Vol. 23, No.23 Week of June 10, 2018
Providing coverage of Alaska and northern Canada's oil and gas industry

Pentex sale close deferred

IGU requests 2 changes to sale agreement; AIDEA board accepts one, rejects other

Alan Bailey

Petroleum News

In the latest twist in the Alaska Industrial Development and Export Authority’s Interior Energy Project, the AIDEA board has extended to June 14 the timeframe for closing the sale of Pentex Natural Gas Co. to the Interior Gas Utility. The intent had been to close the sale by the end of May.

The concept behind the sale is the consolidation of gas utilities IGU and Fairbanks Natural Gas, a Pentex subsidiary, to enable the development of a fully integrated gas distribution system in the Fairbanks region and to achieve economies of scale in the gas supply arrangements. FNG supplies gas to some consumers in central Fairbanks. IGU is owned by the Fairbanks North Star Borough - it has started building a gas distribution infrastructure but does not currently have a gas supply. AIDEA purchased Pentex in 2015 with the aim of eventual Fairbanks utility consolidation.

Letter of agreement

The IGU board had approved the completion of the sale, subject to two changes to the sale agreement. On May 22 IGU drafted a letter of agreement specifying the requested changes, asking that the AIDEA board sign off on the changes as part of the AIDEA authorization for the sale completion. During its May 31 meeting the AIDEA board passed a resolution agreeing to one of IGU’s requested changes but rejecting the other change. AIDEA extended the deadline for sale closure by two weeks, to enable the IGU board to decide whether to agree to AIDEA’s terms.

The objective of the IEP is to bring an expanded, affordable natural gas supply to Fairbanks and the surrounding Alaska Interior, to reduce the cost of energy for consumers while also alleviating air pollution primarily resulting from the use of wood burning stoves to heat buildings. In addition to FNG, Pentex owns the Titan liquefied natural gas plant near Point Mackenzie and a trucking operation for transporting LNG to Fairbanks.

Requested changes

The change to which AIDEA has agreed relates to improvements to a North Slope gravel pad that IGU is purchasing as part of the Pentex deal. But AIDEA has rejected a change that would consider the possibility of developing a new LNG plant adjacent the Alaska Railroad near Houston, as an alternative to a plan in the sales document to expand Pentex’s existing Titan LNG plant - the AIDEA board said that the sale documentation already includes language accommodating potential changes to the development of expanded LNG supplies for Fairbanks and that IGU’s proposed change to the documentation could have ramifications elsewhere in the purchase and sales agreements.

AIDEA board members also expressed concern about a request for changes to the documentation less than two weeks before the sale was due to close, given that the documentation had been completed and agreed in December.

“We have a good development process. We have language within that development process that ensures that the parties work together. And we have a dispute resolution that requires mediation and further allows the parties to work together,” said AIDEA board member Fred Parady, in reference to the documented development plan for increased LNG production.

State funding

The IEP has state funding in the form of Sustainable Energy Transmission and Supply, or SETS, loans, AIDEA bonds and a state capital appropriation. In 2015 some SETS funding enabled FNG to begin an expansion of its gas distribution network, while also enabling IGU to start building its network. The network build-outs came to a halt after that year, following changes in the plans for furthering the IEP.

The IEP plan now involves IGU using a SETS loan to purchase Pentex, with IEP funding also enabling the construction of a new, expanded LNG storage facility in Fairbanks. The expanded storage, by enabling the increased stockpiling of summer produced LNG, will enable the establishment of expanded gas supplies for Fairbanks consumers through the distribution system expansions that were achieved in 2015.

Increased LNG supply

However, the eventual aim is to increase the LNG supply, thus enabling the gas distribution system in Fairbanks to be further built out. The plan outlined in the Pentex purchase and sale agreement envisages the expansion of the existing Titan LNG plant, using further IEP financing. However, at this stage no final decision has been made on that plant expansion - the expansion would require IGU to issue a request for proposal for the development, with AIDEA, as financier for the project, having oversight of any development decision.

Manufacturing company Siemens, in conjunction with Knikatnu Corp., the Native village corporation for the Knik and Wasilla area, has proposed the construction of a new LNG plant near Houston, as an alternative to expanding the Titan plant. The proponents of the Houston proposal argue that this concept would offer the advantages of having a new modular and easily expandable plant, with the possibility of conveniently shipping LNG to Fairbanks by rail rather than by road.

October presentation

Siemens and Knikatnu conducted presentations on their concept to the AIDEA board during the agency’s Oct. 26 board meeting and, apparently, have more recently been discussing their proposal with the IGU board. During the October AIDEA board meeting Jerry Juday, assistant attorney general, Alaska Department of Law, commented that, although the Pentex sale documentation specifically references the expansion of the Titan plant as the means of expanding the Fairbanks LNG supply, the document does not preclude the possibility of the Houston group submitting its alternative LNG plant proposal, in response to the anticipated RFP for Titan plant expansion.

In its May 22 draft letter of agreement IGU requested modifications to the documented development process for LNG supply expansion in the Pentex sale agreement, to include an evaluation of the Siemens proposal, as an alternative to the Titan plant expansion, with a procedure for reconciling any difference of opinion between AIDEA and IGU over the preferred solution. The AIDEA board’s rejection of this proposal reflected the board’s view that the Pentex sale and financing agreements already accommodate the possibility of an alternative to the Titan expansion.

Storage tank construction

Meanwhile, the construction of the new LNG storage facility in Fairbanks has been proceeding to plan. Dan Britton, president and CEO of Pentex, told the AIDEA board that, with the concrete foundation for the tank already having been laid, the first of the panels for the tank was due to be delivered on June 6; all of the tank’s 44 panels should be installed by mid-July. The expectation is to have the new facility ready for commissioning at the end of June 2019.

One significant concern for the IEP is the rate at which Fairbanks consumers will switch to the use of natural gas for the heating of buildings: The project economics hinge on having an adequate demand for natural gas as a result of heating conversions. Gene Therriault, IEP team leader, told the AIDEA board that the recent passage by the state Legislature of a bill enabling the on-bill financing of conversions should help push up the conversion rate. An on-bill financing arrangement enables the payment of the conversion costs though installments added to a consumer’s monthly gas bills.

The Legislature had previously passed legislation enabling the implementation of Property Assessed Clean Energy, or PACE, arrangements that can bring low cost financing to businesses wishing to convert to natural gas use.

In addition, the Environmental Protection Agency has awarded a $4 million grant to Fairbanks North Star Borough for assistance in addressing air pollution issues: The EPA has indicated that the funds will be used in a program for replacing wood burning stoves with cleaner burning appliances.

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