By Elwood Brehmer, Alaska Journal of Commerce
This time, a Cook Inlet gas source is a real possibility.
With the Alaska Industrial Development and Export Authority back on its own in the endeavor to get natural gas to the Fairbanks area, the AIDEA board passed a resolution Jan. 14 authorizing staff to spend $700,000 to investigate a new path forward for what was, and still could be, a plan to truck liquefied North Slope natural gas south.
AIDEA formally terminated its agreement with project consultant MWH Inc. Jan 5. MWH was hired to pull together the web of stakeholders and private financing needed to bring the public-private partnership version of the project to fruition. Time ran out on the concession agreement between the authority and MWH at the end of the year and the parties declined an extension.
The resolution authorized $500,000 of Sustainable Energy Transmission and Supply Fund money available to AIDEA be spent to further investigate Interior Energy Project solutions. Another $200,000 would come from the AIDEA’s Economic Development Fund, “to pay for the cost of the authority’s own personnel and facilities in evaluating means of supplying energy to Interior Alaska,” the resolution states.
Using its own money also allows AIDEA to look at gas sourcing options other than the North Slope. Senate Bill 23, which gave AIDEA $332.5 million in loans, bonds and grants, required the financing be used to develop a North Slope supply.
As of Jan. 5 AIDEA had spent $15.3 million of the $57.5 million direct appropriation in SB 23, leaving $42.2 million available for future work. An $8.1 million loan to the Interior Gas Utility for distribution work from the $125 million in SETS funds left $116.9 million in project loans available. The remaining $150 million bond authorization has not been touched, according to AIDEA’s financial records.
Board member and former state senator from Fairbanks Gary Wilken said in an interview that he hopes the Legislature will give AIDEA more tools to draft a financially viable gas plan.
“The thing at hand right now is to determine what changes we need in SB 23 to move forward. Now we need to look south and explore elsewhere, and that will require a change in the law,” Wilken said.
He said he has discussed the project with several members of the Fairbanks delegation.
One legislator Wilken has not talked to is Rep. David Guttenberg, who has criticized the authority’s handling of the Interior Energy Project. Guttenberg told the Journal in early January that AIDEA should stick to its role as a finance agency and not manage the Interior Energy Project.
The public-private partnership, or P3, plan drafted by former Gov. Sean Parnell and passed without opposition by the Legislature was “doomed from the start,” Guttenberg said.
According to Wilken, Guttenberg, who was excused from the House vote on SB 23, has not offered any suggestions to him on how to improve the project.
Despite a failure to finalize financial terms to build and operate a North Slope-sourced gas truck operation, Wilken said the AIDEA-MWH team made great strides during 2014.
Coincidentally, the Jan. 14 board meeting where discussion was had on how to continue without MWH was one year to the day after the board chose MWH to be its project partner.
“I think everyone from the beginning knew it was a challenging project,” Wilken said. “I don’t think it was time wasted nor money wasted. We have a yardstick by which to measure every other project.”
MWH developed an intricate modeling program that could take in detailed cost variables — construction, operation, financing — and compute out a final gas price.
The work also narrowed down what it would cost to build a 6 billion cubic feet, or bcf, per year LNG plant on the North Slope. In its early proposal, MWH estimated the cost for a 9 bcf plant to be $180 million to $220 million. Those ballpark figures turned out to be optimistic, as the last refined estimate company representatives gave was $228 million for a plant with 6 bcf annual processing capacity.
“If we made a mistake we probably didn’t give (MWH) enough time,” Wilken said.
He added that he admired their willingness to tackle the multi-faceted task.
Wilken noted that the energy “landscape” of the state has changed significantly since SB 23 was passed early in 2013. The price of oil is less than half of what it was during all of 2013 and much of 2014, shrinking the project’s feasibility margin; and a renaissance in Cook Inlet gas production has secured a once-tenuous market. Fairbanks Natural Gas now has a 10-year supply agreement with Hilcorp to feed its existing customer base in the heart of Fairbanks.
Such a contract would have been unthinkable just a couple years ago.
As the Legislature and Gov. Bill Walker’s administration move further the Interior Energy Project, Wilken said he sees AIDEA continuing to play a significant role. The authority is open to partner with any party that brings forth a well-developed plan to add cleaner and cheaper options to Interior’s energy portfolio, he said.
Layered agreement strained IEP
Reflecting on the year of Interior Energy Project work at the Jan. 14 board meeting, AIDEA Chief Infrastructure Development Officer Mark Davis said a long-term energy solution for the Interior ultimately led to the project’s demise as it was structured.
The gas trucking project, always intended to be an interim solution, required LNG plant financing be spread over a 30-year plant life to make it viable.
“When the project started we thought a joint development agreement would be used — AIDEA acting as a finance arm of it,” Davis said.
The plant would be owned by MWH and its investor, Toronto-based Northleaf Capital Partners, the two would also operate it. The prospect of a gas pipeline created a financial risk “sticking point,” he said.
If a pipeline was built within the 30-year plant lifetime, the investor would need loan forgiveness if it was to accept the alternative supply risk. However, Davis said AIDEA’s forgiving of the SETS loans would then create an unacceptable tax liability.
Thus, the concession agreement formula was adopted.
That model had AIDEA forming a limited-liability company with MWH — Northern Lights Energy LLC — which was then bound to a series of conditions and precedents that had to be met before financial close of the whole project, Davis said.
AIDEA would own the plant and MWH would operate it for 30 years, after which it would revert back to AIDEA.
Those conditions included an overall target gas price and an engineering, procurement and construction plant price. When those prices, which AIDEA had no control over, didn’t come in low enough it all fell apart.
“We think the focus going forward needs to be on the product that’s going to be delivered,” Davis said. “Instead, the concession agreement focused on a complex relationship between AIDEA and MWH, or Northleaf, that really didn’t have complete buy-in from the customers and that proved to be a problem.”
Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.