IGU, AIDEA boards approve MOU for consolidation of Fairbanks gas utilities


Petroleum News

The boards of the Interior Gas Utility and the Alaska Industrial Development and Export Authority have both approved a memorandum of understanding, setting out terms under which IGU may purchase Pentex Natural Gas Co. to form an integrated business for the supply and distribution of natural gas from Cook Inlet to the city of Fairbanks.

Pentex, the owner of Fairbanks Natural Gas, the gas utility for central Fairbanks, owns a small liquefied natural gas plant near Point MacKenzie on Cook Inlet and a trucking operation that ships the LNG to Fairbanks. IGU, the other Fairbanks gas utility, has been starting to build a gas distribution infrastructure in the more outer part of the city.

The idea of the Pentex purchase is to create a single, integrated gas utility business serving Fairbanks and encompassing the production of LNG from Cook Inlet gas, the transportation of LNG to Fairbanks, the storage of LNG in the city, and the distribution of gas to Fairbanks residents and businesses.

The intent is to finalize the terms of the purchase by the end of March. Jomo Stewart, IGU general manager, told the AIDEA board during its Jan. 11 meeting that, prior to the sale, IGU would provide a plan for how the personnel from the two existing utilities would be merged.

Affordable Fairbanks gas

The deal for the Pentex purchase comes in conjunction with the Interior Energy Project, an AIDEA project to bring affordable natural gas to Fairbanks. The IEP has set a goal of $15 per thousand cubic feet as the price for gas delivered to the burner tip in Fairbanks – the gas has to compete on cost with fuel oil, a commodity that has cheapened along with the falling price of crude oil over the last couple of years. However, the use of gas in Fairbanks would also help alleviate severe winter air pollution in the city.

The MOU is not binding and the completion of the Pentex purchase is contingent on a number of conditions, in particular the establishment of a Cook Inlet gas supply at a workable price. The IEP team has been negotiating with a Cook Inlet gas producer over a supply contract. Gene Therriault, IEP team leader, told the AIDEA board that, with the prospect of IGU taking over Pentex, IGU has recently been taking a lead in these negotiations.

“We have a gas supply agreement pending, but there is some uncertainty on getting closure on that,” Therriault said.

The challenges for the gas supply negotiations are the need for a workable gas price, combined with flexibility over any take-or-pay provisions, given the uncertainty over future Fairbanks gas demand. The contract would also involve a longer term than is typical for Cook Inlet gas supply agreements, Therriault commented.

Pentex: a strategic move

AIDEA purchased Pentex for $54 million in 2015. The agency characterized the purchase as a short-term, strategic investment, to help move the Interior Energy Project forward. The plan was to ultimately spin off the company to form a consolidated utility with IGU, thus enabling economies of scale in Fairbanks gas supplies and the development of a fully integrated gas distribution network in the city. The sale price indicated in the now-approved MOU is approximately $58.2 million, a figure that includes AIDEA’s anticipated return on its original investment in Pentex. The envisaged sale includes a gravel pad on the North Slope that was constructed as a site for a potential North Slope LNG facility in an earlier phase of the Interior Energy Project.

With AIDEA owning Pentex, the IEP team had been working with Salix Inc., a subsidiary of electric and gas utility company Avista Corp., on a plan for the expansion of the Point MacKenzie LNG plant, to support an increased Fairbanks gas supply. The concept involves a three-phase expansion of the facility to an eventual liquefaction capacity of 100,000 gallons per day. However, a few months ago, in a move to drive down costs, Salix withdrew from the project, selling its project documentation for the plant expansion to AIDEA. According to the latest report to the Alaska Legislature issued by the IEP team on Jan. 11, IGU will run the plant expansion project following approval of the Pentex purchase MOU.

Therriault told the AIDEA board that the IEP team is preparing to move the plant expansion into front-end engineering and design at the appropriate time under the combined utility structure. The MOU for the Pentex purchase by IGU requires both AIDEA and IGU to adopt an expansion plan for the LNG facility before the purchase can be closed.

Efficient LNG transportation

To reduce the unit cost of LNG transportation to Fairbanks while also accommodating an increased LNG supply, in 2015 the IEP successfully tested a prototype LNG trailer larger than the existing trailers used to carry LNG to Fairbanks over the road system. FNG has since continued using the prototype trailer and ordered more trailers of the same design. And in the fall of last year the Alaska Railroad tested the carriage of LNG using borrowed cryogenic LNG containers, as a possible alternative means of LNG transportation.

In Fairbanks, part of the plan is to construct a new LNG storage facility, to accommodate increased LNG supplies and to enable the storage of excess LNG produced during the summer when gas demand is low. Dan Britton, president of FNG, told the board that the construction of the storage facility is the longest lead-time item for the project – the project team wants to have this facility completed and in operation by Jan. 1, 2020, to qualify for a state tax credit for the facility construction.

And, to achieve the ultimate objective of supplying gas to as much of Fairbanks as possible, the consolidated IGU will need to continue building out the gas distribution pipeline network in the city. The buildout of the system began in 2015 but was suspended after the end of the construction season that year because of the terms of the legislative authorization for the project.

Encouraging gas conversion

A critical question in Fairbanks is the rate at which residents and businesses will convert their heating systems to the use of gas – the conversion rate will determine the gas demand, a key economic factor for the IEP. The IEP team has been investigating options for encouraging gas conversions, including Property Assessed Clean Energy, or PACE legislation, and the possibility of an on-bill payment system for the repayment of loans for conversion costs. PACE, if authorized through a bill to be re-introduced to the state Legislature, would enable low-interest loans for energy conversions for commercial properties.

Project funding

The IEP has funding through a combination of a $42.5 million state capital appropriation, $135 million in AIDEA Sustainable Energy Transmission and Supply, or SETS loans, and $150 million in AIDEA bonds. The MOU for the purchase of Pentex sets out conditions under which IGU would have access to these funding sources for the completion of the project, and a plan for how this funding would be used to pay for the various project components. The IGU plan involves a small amount of commercial financing in place of some of the AIDEA bonding, as well as the assumed tax credit for gas storage construction.

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