BY TIM BRADNER, ALASKA JOURNAL OF COMMERCE
Alaska Attorney General Craig Richards has rejected the proposed purchase by Harvest Alaska of a small liquefied natural gas plant at Point MacKenzie, and the action is drawing criticism as well as praise.
In a July 7 letter to Harvest, a subsidiary of Hilcorp Energy, Richards proposed changes in the LNG sales contract reached in November 2014 with Fairbanks Natural Gas, the existing plant owner that also operates a small gas utility serving about 1,100 business and residential customers in Fairbanks.
Hilcorp rejected the proposed changes in a July 17 letter, telling the attorney general it wanted to stick to the original contract terms because the purchase already had a small profit margin.
Based on that, Richards informed Harvest in an Aug. 3 letter that he would not approve the sale of the plant. In an Aug. 6 statement, Hilcorp said it was disappointed in the attorney general’s decision.
“We believe the purchase and sale agreement originally struck in November 2014 (with Fairbanks Natural Gas) was both reasonable and fair,” Harvest Alaska President Sean Kolassa said.
Assistant Attorney General Ed Sniffen, who led the negotiations with Harvest, said the state’s proposals were aimed at protecting Interior consumers who would be paying for the LNG from the plant.
“There was no requirement in the (proposed contract to buy the plant) that Harvest would drop its price for LNG if Cook Inlet gas prices were to decrease. The Fairbanks gas utility would have no other options for gas. They would be stuck at the price,” in the contract, Sniffen said.
In the July 7 letter, the state was proposing that some form of pricing index be agreed to, but Harvest wanted to stick to its original contract terms, Sniffen said.
Lori Nelson, a spokesperson for Hilcorp Energy, the parent company of Harvest, said the state’s proposal removes any potential gains for the company.
“The attorney general suggested terms to place risk on Hilcorp (and Harvest) and to remove any performance incentive should we execute well and improve plant efficiency,” Nelson said in a statement.
However, Fairbanks North Star Borough Mayor Luke Hopkins supports the attorney general’s position.
“We’re very satisfied with the decision. It protects Fairbanks ratepayers,” Hopkins said in an interview.
The mayor is unhappy with other aspects, he said, mainly in that the future of the plant, which would supply energy to the Interior, is in ownership limbo.
The plant is now owned by Pentex, the parent of Interior gas utility Fairbanks Natural Gas Co. The Alaska Industrial Development and Export Authority, the state economic development corporation, has approved a $53-million purchase of Pentex and when the sale goes through the LNG plant, operated under subsidiary Titan, would belong to the state corporation.
“It will be interesting to see what AIDEA does with this,” Hopkins said.
Many in the state’s business community are weighing in on the side of Hilcorp and Harvest, however.
Alaska State Chamber president Rachael Petro said her organization, “believes it unwise to use scarce state funds (through AIDEA) to invest in projects when private sector investment is available.
“We are discouraged that the attorney general rejected private sector investment in the Titan LNG plant particularly from a business that has a successful track record. Hilcorp has built a solid, credible and successful track record in Alaska through its Cook Inlet and North Slope investments.”
AIDEA’s board of directors approved a $53-million purchase of Pentex in order to supply natural gas to the Interior after a previous attempt tied to North Slope gas turned out to be uneconomic.
The sticking point between the state and Harvest Alaska appears to have been Richards’ proposal that Harvest essentially adopt a “cost-based pricing” system.
In the July 7 letter from the state to Harvest, state attorneys wrote, “We are considering whether Harvest should be required to develop a price for processing natural gas into LNG for expansion capacity, and offer processing services at this price to AIDEA and other Cook Inlet gas producers.
“This processing or tolling fee would allow AIDEA to negotiate with other gas producers for its supply on LNG in the event that it would like to expand beyond the base volumes under an LNG supply contract.
“Separating out the processing fee will allow the utilization of a market index, as discussed above, for developing a pricing formula that considers the cost of gas, cost of processing and the cost of transportation. Calculating a processing fee can be done using a cost analysis from the previous RCA (Regulatory Commission of Alaska) dockets.”
The Harvest contract agreed to by Fairbanks Natural Gas set a price that would be a ceiling for the LNG supplied under that 10-year contract, but the attorney general also proposed a mechanism for periodic downward adjustments to the price that reflected any drop in Cook Inlet gas prices.
The attorney general also proposed that Harvest divest the transportation component — the LNG trailers and trucks that carry liquefied gas to Fairbanks — so that LNG would be sold at the gate of the plant.
Harvest wrote July 17 that it objected to the state’s proposal to base periodic downward adjustments on a Cook Inlet gas price index that would be part of a cost-based pricing system, and also said its existing proposals allowed for downward price adjustments, regardless of operating costs, “should LNG be offered at a more attractive price from credible source,” the company wrote in its letter.
“Because of the substantial risks associated with finding and developing gas reserves, the operation costs of operating the plant and transporting LNG, and the slim margin already incorporated in the deal, we simply cannot accept the additional market risk.”
Hilcorp has become the dominant natural gas player in Cook Inlet supplying Southcentral utilities after acquiring the former assets of Chevron and Marathon in 2012 and 2013, respectively.
Sniffen said Hilcorp’s strong position in Cook Inlet gas production raised anti-trust concerns over the LNG plant purchase.
“Harvest would be the only plant supplying the gas utilities in Fairbanks, unless Fairbanks can find other sources of supply,” Sniffen said.
The ConocoPhillips LNG plant would be an unlikely competitor, he said, because of the longer trucking distances from Nikiski or the costs of moving LNG containers by barge to Port MacKenzie.
A possible North Slope gas pipeline is at least 10 years away from operations, if it proceeds.
The state’s goal was to put the Fairbanks utilities in a position to take advantage if more favorable gas supply conditions develop in Cook Inlet, even offered by other producers, and to be able to process the gas in the Harvest plant under a “tolling arrangement,” where the plant owner would charge a processing fee.
Doing this, however, would move the plant toward a “cost-based pricing” system similar to what would be required if the plant were subject to utility regulation under the Regulatory Commission of Alaska.
“They were not interested in that,” Sniffen said.
Tim Bradner can be reached at email@example.com.