IEP Gas Contract, Plant Costs Still Uncertain

Alaska Industrial Development and Export Authority staff and their Interior Energy Project partners from MWH Global Inc. said at the Nov. 6 AIDEA board meeting that a gas supply contract should be in place by early December.

Their goal is to financially close on the project at the Dec. 16 board meeting.

“The gas supply agreement is the foundation” of the Interior Energy Project, MWH Chief Corporate Officer Jim Kuiken said.

A wholesale contract with BP for North Slope gas offered up by Golden Valley Electric Association, which at one time had hopes of leading the project, will likely be used to supply the Interior Energy Project, or IEP.

The term of the contract needs to be extended from 20 years to 30 years to align with the operating agreement for the gas liquefaction plant, Kuiken said. Permission to connect to BP’s supply line also needs to be secured.

Several team leaders said the terms have been agreed to in principle but a mid-October meeting with BP to draft the contract amendments was postponed by the producer.

Within the last month, AIDEA has shifted from originally seeking its own gas contract to using Golden Valley’s. The gas price remains confidential, but AIDEA has assumed a price of $3.30 per thousand cubic feet, or mcf, in its presentations.

Authority board member and former Fairbanks state senator Gary Wilken expressed frustration that the supply agreement hasn’t been nailed down when talks of resolving the issue began in spring.

“Here we sit six months later with the same thing. ‘It’s not quite done but it’s going to get done next week; it’s going to get done next week,’” Wilken said.

He noted that he did not seek to blame anyone specifically, but that the lack of progress worries him.

“From one board member this doesn’t give me any confidence at all in the rest of the project,” he said. “These are the things that keep me up at night.”

Wilken has been the most vocal board member when the Interior Energy Project is discussed at the meetings and has regularly expressed his concern over the complex project’s inherent challenges.

AIDEA Deputy Director Mark Davis said the state will continue to push for the best possible gas contract.

“We haven’t given up our right later on to seek a different term if that’s beneficial to the consumers of this state,” Davis said.

The Interior Energy Project is the state-financed plan to cut heating costs in the Fairbanks area by up to 50 percent through trucking LNG from the North Slope. It is thought that if gas can be delivered to homes at a low enough price it will encourage residents and businesses to convert their heating systems from fuel oil to gas and further drive down the price of gas.

Since late October, Golden Valley CEO Cory Borgeson and Interior Gas Utility chair Bob Shefchik have predicted the initial gas price will be significantly higher than AIDEA’s goal, at $20 per mcf or higher.

AIDEA and MWH have disputed those predictions and said the target of $15 to $18 per mcf is still within reach.

One of the major variables to the final cost of gas is the price of the North Slope plant.

MWH’s Kuiken said the 6 billion cubic feet per year plant being modeled should come in at less than $235 million, but he doesn’t know by how much.

The drivers to the plant cost fall into three categories: risk, engineering and margin, he said.

“They’re all interrelated,” he said. “We’ve got to resolve who shares what risk; we’ve got to resolve what level of design is appropriate and then we can talk about what margin goes on that.”

When AIDEA awarded it the consulting work, MWH’s original term sheet projected a 9-bcf plant to cost between $165 million and $200 million.

The concession agreement between AIDEA and MWH has the latter operating the LNG plant under Northern Lights Energy LLC, a joint venture between MWH and AIDEA. It also allows for a maximum return to Northleaf Capital Partners, the plant’s private investor, of up to 12.5 percent.

The cost of trucking the LNG from the Slope has been projected at $5 to $6 per mcf throughout the project. MWH Alaska Regional Manager Chris Brown said current models put trucking costs lower — less than $5 per mcf — based on a couple assumptions.

The single biggest assumption is that larger trailers will be used.

“If they can transport LNG in 13,500-gallon trailers down the Dalton Highway that has a material impact on cost; it brings it down significantly compared to, say, a 10,000-gallon trailer,” Brown said.

Fairbanks Natural Gas President and CEO Dan Britton said the savings could be 20 percent or more simply because of the added volume on each trip.

“Your maintenance costs go up a little but you have significant savings,” he said.

Fairbanks Natural Gas currently trucks LNG from Point MacKenzie to Fairbanks to feed its small but growing service area in the heart of Fairbanks.

AIDEA and Fairbanks Natural Gas are working on a pilot project to determine the feasibility of the larger trailers, which would require added axles and a new design, Brown said.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.