Petroleum News ^ | Week of November 16, 2014 | Alan Bailey
With many stakeholders, several major interrelated components and an aggressive timescale, the Interior Energy Project presents something of a challenge. The project, with funding support from AIDEA, or the Alaska Industrial Development and Export Authority, is designed to bring affordable natural gas to Fairbanks and the Alaska Interior via a to-be-constructed liquefied natural gas plant on the North Slope and an LNG trucking operation on the North Slope Haul Road.
AIDEA has commissioned engineering firm MWH to manage the construction of the LNG plant. The Interior Gas Utility and Fairbanks Natural Gas, the two Fairbanks gas utilities, will arrange the LNG trucking operation and the provision of LNG storage facilities in Fairbanks. Fairbanks electric utility Golden Valley Electric Association is also involved in the project, with an interest in using North Slope gas as fuel for power generation.
“It is a very complicated project. There are many, many moving parts,” Chris Brown, vice president and regional manager for MWH Americas Inc., told the AIDEA board on Nov. 6. Brown and other MWH executives were updating the board with the latest status of the project.
Brown said the project team is continuing to drive for a financial close in December. That would enable a decision on whether to proceed with the final design and construction of the LNG plant. The plan is to be able to start delivery of North Slope gas to Fairbanks in a couple of years’ time. “We want to keep the pressure on,” Brown said. “We remain on track for first gas in the third quarter of 2016.”
Brown said that the project has seen significant progress, with the levels of certainty around the construction plans increasing while the estimated costs have been trending lower.
Jim Kuiken, senior vice president of MWH Americas Inc., commented that the supply agreement for the feed of gas into the LNG plant forms the foundation to a multi-tiered set of major project components. In addition to setting a key cost parameter for gas in Fairbanks, the supply agreement would spell out the tie-in point for gas piped into the plant, thus enabling finalization of the plant design. With that design complete, finishing touches could be put to the contract for engineering, procurement and construction of the plant.
Gas supply agreement
For the gas supply agreement, the project team plans to use a modified version of an existing supply contract that Golden Valley had previously agreed with BP. Discussions between the Interior Energy Project and BP have been in progress for some time but an agreement on the contract has not yet been finalized. However, with the required contract changes being relatively straightforward, the project team anticipates completing the agreement by the end of November or early December, Brown said. The engineering, procurement and construction contract, the tier above the gas supply agreement in the layers of interrelated project components, is progressing well, Kuiken said. The LNG plant design must be firmed up before another contract, the contract for operating the plant, can be completed, he said.
The gas supply agreement and the contracts for constructing and operating the plant feed into gas cost parameters for the gas offtake agreements with the Fairbanks utilities. All of these components then need to come together as a package that can be presented to the AIDEA board at financial close for the project.
“We’re really orchestrating quite an involved ballet here, with many players, to come to this financial close,” Kuiken told the board.
Kuiken said that cost estimates for the LNG plant construction and operation are coming in largely on schedule. In August the project team had estimated a cost of around $235 million for the construction of the plant. But with more definition around the engineering and the project plan, the uncertainty in the estimate is narrowing, with that $235 million figure representing the upper bound of the possible cost range he said. Given the stack of detailed design drawings that are now available for the plant, the estimates for the costs of concrete, steel, hardware, equipment and other physical items are now well defined, Kuiken said. However, the project team is considering a “compelling proposal” from one supplier that may impact the cost estimate, he said. And competitive bidding for the work involved in facility construction may also improve the project economics.
Kuiken said that complex negotiations are in progress with the various parties involved in the project, figuring out some touchy and interrelated issues such as who will accept financial responsibility for the various uncertainties and risks associated with the project, and what the profit margins will be.
These negotiations should last two or three weeks, enabling completion of the engineering, procurement and construction contract in early December, as planned, Kuiken said.
Gas offtake agreements
Brown said that the project has reached agreement with the Fairbanks utilities on the contractual approach for the utility gas offtake agreements and that it should be possible to agree on term sheets for the offtake by mid-November. However, details of the agreements would then have to be worked out and approved by utility boards prior to the financial close for the LNG plant construction. A major component of the cost of gas in Fairbanks will stem from the cost of trucking the gas from the North Slope. Estimates for the cost have in the past tended to land in the range of $5 to $6 per thousand cubic feet of gas, Brown said. But following further investigation the project is now modeling a cost that is a little under $5, he said.
Utilities have moved towards the concept of establishing a shared trucking consortium, rather than each separately contracting with trucking contractors, Brown said.
Size of trailers
However, one of the big uncertainties impacting the cost is the size of the LNG trailers that the trucks will haul from the Slope – the bigger the trailer, the lower the unit cost. Ted Leonard, executive director of AIDEA, said that AIDEA is working on a contract with Fairbanks Natural Gas to design a relatively large 13,500-gallon trailer. That design would factor into estimates of the trucking costs, Leonard said. Dan Britton, president and CEO of Fairbanks Natural Gas, said that, while drivers would likely use their own tractors in the trucking operation, maximum efficiency in the use of the relatively expensive trailers would probably require the continuous use of a pool of trailers, swapped around between the tractors as needed.
Brown commented that one of the possible trucking risks is the availability of drivers for the trucks.