Alan Bailey, Petroleum News

Some lawmakers in the Alaska Legislature have voiced concerns over the proposal by the Alaska Industrial Development and Export Authority to purchase Pentex Alaska Natural Gas Co. LLC, the owner company of Fairbanks Natural Gas, of a small liquefied natural gas plant at Point MacKenzie on Cook Inlet and of the trucking operation for transporting LNG from Cook Inlet to Fairbanks. AIDEA said that the $52.5 million deal had been negotiated in conjunction with Gov. Bill Walker with the objective of advancing a goal of bringing affordable natural gas to Interior Alaska.

“I really worry the tone we are setting for our private sector in this state, with the state itself, and AIDEA specifically, stepping up to take ownership of another enterprise in the state of Alaska, especially when we look at the track record that AIDEA has had with investment projects like this,” said Rep. Mike Hawker, R-Anchorage, during a House majority press availability on Jan. 30.

A tangled web

In fact, the relationship between Fairbanks Natural Gas, the LNG facility and the state appears to have become something of a tangled web.In November the Pentex subsidiary that owns the Point MacKenzie LNG plant announced a deal to sell the plant to Harvest Alaska LLC, a subsidiary of Hilcorp Alaska LLC, a major producer of natural gas from the Cook Inlet basin. Fairbanks Natural Gas then formed a new gas supply contract with Hilcorp, in association with the sale of the LNG plant. Harvest announced plans to expand the Point MacKenzie facility following completion of the purchase of the plant.

The Regulatory Commission of Alaska is in the process of reviewing the new gas supply agreement. And the state attorney general has told the commission that he is unlikely to approve the sale of the LNG plant to Harvest until after the conclusion of the RCA rate case for the gas supply agreement. Hawker said that, given the deal with AIDEA, a state agency, the state appears to be “working both sides of the transaction” by simultaneously participating in the RCA review. He said that in his business this situation would be called insider trading, with the possibility of information obtained by one agency being used in a competitive situation by another agency.

Private competition

The lawmakers are also concerned that AIDEA is intervening in a situation in which private companies are already competing over the business of supplying LNG to Fairbanks.WesPac Midstream LLC has proposed building an LNG facility at Port MacKenzie, with an initial intent to supply LNG to Fairbanks and rural Alaska. BlueCrest Energy has recently announced the possibility of partnering with WesPac for the supply of gas from the Cosmopolitan oil and gas field to WesPac for the LNG plant. BlueCrest is developing Cosmopolitan offshore the southern Kenai Peninsula. Japanese company REI also has plans for an LNG plant near Port MacKenzie, with the primary purpose of exporting Cook Inlet LNG to Japan, but also with the possibility of supplying LNG for Alaska destinations. And then there is the Harvest proposal to expand the existing plant.

Hawker emphasized that the primary purpose of shipping LNG to Fairbanks is to reduce the cost of energy for Interior Alaska residents. With at least two private entities vying over proposals for producing LNG from Cook Inlet gas, private competition can drive down the price of the LNG he said.

“This is not the role we established for AIDEA, to step in and somehow use a state subsidy to eliminate the private sector,” Hawker said.

A competitive price?

In a Jan. 29 House majority press release Majority Leader Charisse Millett, R-Anchorage, questioned whether an AIDEA-owned entity would be able to deliver LNG to Fairbanks at a competitive price.“I will be interested to see what AIDEA’s due diligence turns up, and how they think they can deliver gas at a price that the private sector has not been able to offer – without ongoing government subsidy,” Millett said. “Certainly, once details are known, we’ll look to the Interior members of this Legislature for an assessment of whether this new plan is in Fairbanks’ best interests.”

Rules Chair Craig Johnson, R-Anchorage, commented that Gov. Walker had promised an open and transparent government.

“Yet, it appears that a new proposal was negotiated behind closed doors, without even informing the affected communities or their elected officials, potentially to the detriment and exclusion of private companies who were attempting to provide similar infrastructure,” Johnson said. “Government’s job is to assist the private sector in future economic development and partner with them – not preempt them. Government is a poor substitute for the private sector.”

A long debate

A debate over how to alleviate the cost of energy in Fairbanks and the Alaska Interior by the delivery of reasonably priced natural gas to the city goes back several years. The long-term hope is that a spur line from a future major gas export line from the North Slope will provide a solution. Meantime, proposals have included building a small diameter gas line to Fairbanks from the North Slope; building a liquefied natural gas plant on the North Slope for delivery of LNG to Fairbanks by truck; and the construction of a gas line from Southcentral Alaska to Fairbanks.The most recent efforts have revolved around the North Slope LNG option. In 2013 the Alaska Legislature passed Senate Bill 23, a bill that gave AIDEA the authority to provide up to $275 million in low-interest financing for a North Slope LNG plant and to support the expansion of the gas distribution infrastructure in Fairbanks. The consequent AIDEA-sponsored Interior Energy Project has resulted in Fairbanks gas utilities Fairbanks Natural Gas and Interior Gas Utility moving ahead with plans to expand the Fairbanks gas distribution pipeline network. And in January 2014 AIDEA selected engineering firm MWH to develop a plan for the LNG plant development.

However, during a December AIDEA board meeting it became clear that, despite MWH’s best efforts, the North Slope LNG concept would be too expensive for economic feasibility: The plan was dropped. And during its January meeting the AIDEA board approved the expenditure of $700,000 on a study into alternative ways to deliver affordable gas to Fairbanks and the Interior. At neither meeting was there any mention of the possibility of AIDEA purchasing Pentex.

Governor’s order

In a Jan. 16 order, Gov. Walker directed the commissioner of the Department of Commerce, Community and Economic Development to take a lead role in coordinating the state administration’s efforts to deal with issues surrounding consumer energy in the state. The order also required the Department of Natural Resources to work with AIDEA in assessing natural gas supplies for an Alaska Interior energy project.In a Jan. 30 project update, the Interior Gas Utility said that it is continuing to progress its plans for constructing phase 1 of its new gas distribution network in Fairbanks and that the utility sees the AIDEA purchase of Pentex “as a good move for Interior Alaska.”

AIDEA responds

In a Feb. 3 fact sheet, AIDEA responded to a number of the comments that have been made about the proposed Pentex purchase. The authority said that its purchase of Pentex would not displace any of Pentex’s pre-existing contractual obligations and would be inclusive of Pentex’s interest in selling the Point MacKenzie LNG plant to Harvest Alaska. AIDEA said that, with a cost of capital substantially lower than that of Pentex, the authority would be able to immediately lower the cost of gas for Fairbanks Natural Gas customers, following completion of the Pentex purchase. Under AIDEA ownership, Fairbanks Natural Gas would be in a position to work closely with the Interior Gas Utility in the construction and operation of a gas distribution system – the ultimate goal would be a single gas utility serving the Alaska Interior, AIDEA said. The acquisition of Pentex would promote an integrated distribution system, avoiding duplication between competing utilities, the authority said.AIDEA said that it plans a full due-diligence review of the proposed Pentex purchase. Following this review, the authority will submit the proposed Pentex purchase to the AIDEA board for consideration at a public meeting. The review will assess whether the purchase is a prudent investment. If the purchase goes ahead it will take place under state statutes as what is referred to as an economic development project, a project that would earn a return for the state on the investment, AIDEA said.