IEP team considers Fairbanks gas supply options; AG says no to LNG facility sale

ALAN BAILEY, Petroleum News

The Interior Energy Project, an Alaska Industrial Development and Export Authority initiative to bring affordable energy to Fairbanks and the Alaska Interior, has passed a couple of milestones, as the project team assesses bids for the supply of gas from the Cook Inlet basin and proposals for the shipment of gas to Fairbanks, the AIDEA board heard during its meeting on Aug. 6.

Meantime, in an apparent glitch in the project, on Aug. 3 state Attorney General Craig Richards informed Harvest Pipeline Co., a subsidiary of Hilcorp Energy LLC., that he is not allowing Harvest to proceed with the purchase of the Titan liquefied natural gas facility near Point MacKenzie on the Cook Inlet. Titan is a subsidiary of Pentex Alaska Natural Gas Co, the company that AIDEA is in the process of purchasing in order to acquire Fairbanks Natural Gas, another Pentex subsidiary – AIDEA’s plan had assumed the sale of Titan to Harvest, thus leaving AIDEA with the ownership of just the Fairbanks gas utility.

The purpose of the Interior Energy Project is to alleviate the extremely high cost of energy in Fairbanks, a cost that is both impacting the Fairbanks economy and causing Fairbanks residents to revert to the use of pollution causing wood burning stoves.

The project team has been testing the potential for obtaining a viable gas supply for Fairbanks from the Cook Inlet by issuing a request for interest from Cook Inlet gas producers. In parallel, the agency has issued a request for proposals for a mechanism for delivering gas to Fairbanks either from Cook Inlet or from the North Slope. Evaluation teams within the Interior Energy Project are now assessing responses to these requests.

Assuming that there is a viable gas supply and that there is a feasible proposal for delivering the gas to Fairbanks, a subsequent step will involve determining which of the responses could result in a commercial deal, Nick Szymoniak, AIDEA’s energy infrastructure development officer, told the AIDEA board. The Interior Energy Project has set a target gas price of $15 per thousand cubic feet “at the burner tip” in Fairbanks. The project has been considering the production of liquefied natural gas, either on the North Slope or in the Cook Inlet region, for shipment to Fairbanks by road or rail. But other options are possible, including a small-diameter gas line from the Cook Inlet, or the delivery of propane as an alternative to natural gas.

Multiple responses

The team is presumably feeling relieved, given that it has now received multiple responses on both the gas supply and the gas transportation fronts.“We do have responses to evaluate,” Szymoniak told the board with reference to the request for information regarding a Cook Inlet gas supply.

Given the confidential nature of the process for requesting Cook Inlet gas supply information from gas producers, Szymoniak was unable to provide any information about the number of responses received, the entities that had responded, or the gas pricing concepts in the responses. He said that the gas supply evaluation team is about to work through the proposals, initially to determine whether some form of Cook Inlet gas supply appears feasible for Fairbanks, in terms of both gas volumes and the price of the gas. The team will provide its findings to the group that is evaluating the various proposed options for transporting the gas to Fairbanks, Szymoniak said.

16 proposals

Szymoniak said that AIDEA can release some information relating to that other request, the request for proposal for transporting gas to Fairbanks. That request for proposal, having closed on Aug. 3, resulted in 16 proposals from 13 entities, with some entities putting forward more than one proposal. Nine proposals involve the production of LNG in the Cook Inlet region, with five of these proposals only involving the operation of an LNG plant; one proposal incorporates both an LNG plant and a gas supply; and there are three proposals that include a gas supply, an LNG plant and transportation of LNG to Fairbanks. Three proposals involve the development of a North Slope LNG plant, with two of these proposals also involving the transportation of LNG to Fairbanks. One proposal is for a gas pipeline from Cook Inlet; one is for imported propane; one is for imported LNG; and one involves a confidential option for energy from the Cook Inlet, Szymoniak said.Robert Shefchik, Interior Energy Project team leader, said that his team anticipates determining a shortlist of candidate proposals for gas transportation options by Sept. 1.

Pentex purchase

AIDEA wants to acquire Fairbanks Natural Gas through the purchase of Pentex as a means of reducing the cost of delivering gas in Fairbanks and also to enable the consolidation of the two existing Fairbanks utilities under as single “local control entity.” Consolidation of the utilities would enable both efficiencies of scale from organizational integration and the development of a more efficient gas distribution infrastructure, AIDEA thinks.But it is unclear at this point what the impact will be of Attorney General Richards’ refusal to allow the sale of Pentex’s Titan subsidiary to Harvest – during its Aug. 3 meeting the AIDEA board went into executive session for confidential discussions over how to respond to this new situation. AIDEA has planned to close its Pentex purchase in mid-October.

Richards told Harvest in an Aug. 3 letter that he was unwilling to approve the sale of Titan to Harvest because he was unable to accept conditions that Harvest has set for the sale.

Pricing concerns

In early July, Clyde Sniffen Jr., senior assistant attorney general, had written a letter to Harvest expressing concern about LNG pricing for Fairbanks, if Harvest takes over Titan’s Point MacKenzie LNG plant and the plant’s gas supply. Under the proposed purchase, Harvest would commit to a 10-year gas supply to Fairbanks Natural Gas at a fixed price. This gas would meet Fairbanks Natural Gas’s current needs but would only support a fraction of future gas demand, following expansion of the Fairbanks gas distribution system.But, while this fixed price arrangement would cause Harvest to assume the risk of a rise in the cost of Cook Inlet gas, the arrangement would also prevent Fairbanks residents from benefiting from any gas price fall, Sniffen said, arguing for a price ceiling coupled with potential downward price adjustments in line with market conditions. Sniffen also suggested the possibility of pricing the gas based on an index of prevailing Cook Inlet gas prices.

Sniffen also said that the Department of Law would like to see a separating out of price components for the delivery of LNG to Fairbanks, possibly with Harvest divesting the LNG transportation component of the package to AIDEA. He said that his department was also considering the merits of having Harvest offer LNG processing services to Cook Inlet gas producers through a processing or tolling fee.

The Department of Law would also like specific information about Harvest’s plans for expansion of the LNG facility, Sniffen said.

On July 29 Luke Hopkins, mayor of the Fairbanks North Star Borough, sent a letter to Richards arguing for public ownership of the Point MacKenzie LNG plant. Such an arrangement, with its tax-exempt financing and greater access to government loan programs, would best meet the public interest in “marginally economic areas” of this type, Hopkins argued. Hopkins also suggested several safeguards that should be put in place to protect the public interest, should the purchase of Titan by Harvest go ahead.

In a July 17 letter Harvest told Richards that, given the substantial risks associated with Cook Inlet gas development, the cost of operating the LNG plant and the slim margins associated with the deal that Harvest had negotiated with Pentex, Harvest was unable to consider any of the conditions that the Department of Law had presented.

Hence Richards’ Aug. 4 letter disapproving the sale of Titan to Harvest.

Fairbanks infrastructure

Meanwhile, construction of a greatly expanded gas delivery pipeline system in Fairbanks is proceeding to plan, in anticipation of an eventual expanded gas supply for the city. AIDEA is providing financial support for the infrastructure expansion.One of the issues facing the project is the need to convince sufficient Fairbanks residents to convert their home heating systems to the use of natural gas, to drive the gas demand necessary for project viability. Gene Therriault, energy policy and outreach director for the Alaska Energy Authority, told the board that a working group is addressing the conversion issue and that local lenders had indicated the possibility of providing financing for home owners for heating system conversions.

Therriault also said that he has been investigating the possibility of obtaining some funding for conversions through a new Energy Efficiency and Conservation Loan Program administered by the U.S. Department of Agriculture. He also encouraged Fairbanks residents to make use of funding assistance through Alaska’s energy rebate system, administered by the Alaska Housing Finance Corp.