In a debate that revolves around the often contentious issue of the role of government in the economy, members of the Alaska Senate Special Committee on Energy were in listening mode on Feb. 5, when officials from the Alaska Industrial Development and Export Authority explained their proposal, announced in January, to purchase Pentex Alaska Natural Gas Co.
Pentex owns gas utility Fairbanks Natural Gas, a liquefied natural gas facility at Point MacKenzie on Cook Inlet and a trucking operation for transporting LNG from the Point MacKenzie plant to Fairbanks, in Alaska’s Interior.
The proposed purchase comes in association with the Interior Energy Project, an AIDEA program designed to help bring affordable natural gas to the Fairbanks area. Sanctioned in 2013 by the Alaska Legislature, the project, as originally conceived, would have involved the construction of an LNG plant on the North Slope and the implementation of a trucking system to ship the LNG to Fairbanks over the Dalton Highway. But late last year that proposal ran aground on estimated costs that proved too high for economic feasibility.
AIDEA has committed to finding alternative ways of achieving the objective of its project and says that the purchase of Pentex can provide an effective route forward. But the January announcement of the Pentex deal, apparently made with the encouragement of Gov. Bill Walker, came as a surprise to state legislators, some of whom expressed serious misgivings over state involvement in what some see as business more appropriately handled by private industry.
Complicating the issue is the fact that in November Pentex announced the proposed sale of the Point MacKenzie LNG plant and the associated LNG trucking operation to Harvest Alaska, a subsidiary of Hilcorp Energy, a major Cook Inlet gas producer. Associated with that deal is a proposed gas supply agreement between Hilcorp and Fairbanks Natural Gas for the supply of LNG. Fairbanks Natural Gas operates a small gas distribution network in central Fairbanks. The Regulatory Commission of Alaska is currently reviewing the sale of the LNG plant and the new gas supply agreement.
During the Feb. 5 Senate Energy hearing Sen. Peter Micciche, co-chair of the committee, set a conciliatory tone by commenting that, while he had significant concerns about the concept of AIDEA owning an LNG facility, he recognized that everyone was trying to achieve the common objective of bringing affordable energy to Fairbanks and the Interior.
“We do have to ask some questions because we’re looking at value for the state, we’re looking for value for the ratepayers,” Micciche said.
Integrated gas utility
Ted Leonard, executive director of AIDEA, responded by saying that AIDEA’s prime motive behind its Pentex purchase is the acquisition of Fairbanks Natural Gas, with the eventual objective of developing an integrated and efficient gas utility in Fairbanks. AIDEA’s low cost of capital would also bring immediate cost relief to Fairbanks gas consumers, if the Pentex purchase completes, Leonard said.
Leonard said that the question of purchasing Pentex had arisen in mid-January, following termination of the project to build a North Slope LNG plant. He said that AIDEA’s proposal involves the state agency acquiring all of Pentex’s shares while leaving Pentex’s existing contractual and other obligations in place. That would leave the door open for the completion of the sale of the Point MacKenzie LNG plant to Harvest, Leonard said.
Leonard said that AIDEA fully expects the sale of Pentex assets to Harvest to complete and that AIDEA’s concept is to reduce gas distribution costs in Fairbanks by creating a fully integrated distribution system in the city. Currently, Fairbanks Natural Gas has plans to build out its distribution network in the center of the city, while the Interior Gas Utility, the other Fairbanks utility, is moving ahead with a plan for its distribution network in a horseshoe shape around that central area. AIDEA’s ownership of Fairbanks Natural Gas can pave the way to efficiency improvements, such as the installation of IGU pipe through the Fairbanks Natural Gas sector of the city, Leonard said.
“We believe that this investment (in Pentex) would be of a short duration … with the goal of working with the community to transition to a single utility serving the Interior,” Leonard said, commenting that he sees the purchase as a critical investment for achieving the long-terms goals of the Interior Energy Project.
And AIDEA is conducting a full due-diligence study on the proposed Pentex purchase, with that study involving a public process and the preparation of a finance plan, Leonard said.
LNG storage
Gene Therriault, energy policy and outreach director for the Alaska Energy Authority, told the Senate committee that an ability to move ahead with expanding facilities for storing LNG in Fairbanks would be a key benefit of the Pentex purchase. Although Fairbanks Natural Gas had secured an AIDEA loan for expanding the LNG storage, the utility had cancelled that project, presumably because of uncertainties over when an expanded LNG supply would become available, Therriault said. A particular challenge with LNG storage in Fairbanks is that it would take about two years to construct, Leonard commented.
“We believe that by aggregating that (gas) demand and working more closely with IGU that we will be able to optimize that storage,” Therriault said.
Micciche cautioned that Senate Energy is interested in the possibility of a gas pipeline from Cook Inlet as an alternative to the shipment of LNG for a Fairbanks gas supply. He questioned whether LNG storage in Fairbanks would actually be needed if a gas line were built.
LNG storage would be essential to Fairbanks, even under a pipeline scenario, as a supply backup to the pipeline, Leonard responded.
Micciche misgivings
In expressing misgivings about state involvement in the Fairbanks gas supply situation, Micciche questioned whether that involvement is helping or hindering the situation.
“This is where I struggle the most,” Micciche said. “Fairbanks is a lucrative market. How much government interference has kept the typical providers out of the market? … We keep monkeying around with this market. … What would happen if we just got out of the way?”
Unfortunately, in this case the private sector has not been able to provide the necessary capital for a major expansion of gas supplies in Fairbanks, Leonard responded.
“We’ve had the private sector system in Fairbanks since 1997,” he said, referring to Fairbanks Natural Gas. “It has stayed at pretty much 1,100 customers.”
