Delays continue to beset Interior gas project

Long challenged by unavoidably thin economics, the Interior Energy Project is now facing other pressures that are starting to force the hands of its developers.

The Environmental Protection Agency recently changed its classification of winter air quality problems in the Fairbanks North Star Borough from “moderate” to “serious.”

Additionally, the waning availability of a state tax credit for construction of a liquefied natural gas storage facility will require construction of the 5.25 million-gallon LNG storage tank to start this fall for it to be eligible for the tax credit at all, according to project leaders.

Finally, there is the ongoing need for a natural gas contract not only to supply future customers that will hopefully be attracted to the project, but also for Fairbanks Natural Gas’ existing customer base.

On top of all that, the Alaska Industrial Development and Export Authority and the Interior Gas Utility are still working to finalize the sale of Pentex Alaska Natural Gas Co., FNG’s parent company, from the state investment authority to the borough-owned utility.

That deal, which would ostensibly transfer the IEP management from AIDEA to IGU, was announced in January and was initially supposed to be done by March 31.

IGU General Manager Jomo Stewart said in an interview that AIDEA and the utility are still moving towards integrating Pentex-FNG and IGU as quickly as possible.

“You’ve got complex scheduling to work on a complex suite of documents to work on a highly complex project with lots of moving parts and frankly a number of mission critical elements that are complex in amongst themselves,” Stewart said.

Combining the startup and existing Fairbanks-area gas utilities has largely been viewed as the natural course of action since AIDEA purchased Pentex for about $52 million in 2015. It would provide numerous operational efficiencies and allow the utilities to source gas from a single contract.

Expanding Pentex’s small Southcentral LNG plant — from which it trucks LNG to its Fairbanks customers now — and getting the associated LNG storage underway in Fairbanks are a couple of those mission critical elements.

FNG first proposed building the LNG tank, estimated to cost about $42 million, several years ago before being purchased by AIDEA.

But actually building the additional LNG storage has been unnecessary to this point as the project lacks a gas contract to fill it.

However, the project should be eligible for a state tax credit of up to $15 million if it’s up and running by the end of 2019 to beat the sunset date of the credit; and it’s expected to take about two years to complete.

“We’re not going to miss another build season,” Stewart said. “There is a full, solid commitment that that storage is going to get started this fall.”

Whether or not IGU is ever reimbursed for the tax credit is another matter — it’s part of the state’s larger oil and gas tax credit program to which Gov. Bill Walker has vetoed funding the last two years as the state grapples with massive budget deficits.

But Stewart said the utility does not want to lose “the very opportunity to be in line” for the credit payment.

Adding 3 billion cubic feet, or bcf, of liquefaction capacity to the LNG plant that currently processes about 1 bcf of gas into LNG per year should take about 18 months.

AIDEA’s Interior Energy Project team has also been trying to get a natural gas supply from Cook Inlet producers on terms favorable enough to keep the project viable for more than a year.

The desire to secure a long-term gas contract is still there, but Stewart said the reality of the situation could amend what is accepted.

“The mindset is evolving that we’ll be doing it in increments — that it’s ok to do things on an incremental basis,” he said.

The challenges with the gas contract have always been that it is for a relatively small amount of gas, which makes it harder to secure a favorable price, and will require the producer to rely on the expectation that gas demand will grow over time.

Challenging the gas contract even further is the fact that low oil prices have lessened the price of fuel oil to the point where it is price-comparable with what AIDEA and the utilities hope to deliver natural gas to customers for, thus eliminating the major impetus for residents to invest in converting their homes from fuel oil heat to natural gas.

However, FNG’s gas supply contract for its existing customers expires next April, exacerbating the urgency of the situation.

FNG reached a $15-million deal in late 2014 for a 10-year gas supply from Hilcorp Energy, the major Cook Inlet producer, that included selling the LNG plant to the producer.

But it was rejected by then-Attorney General Craig Richards over concerns Hilcorp would control the entire gas supply chain to Fairbanks and could manipulate pricing to its benefit.

The economic hurdles the IEP faces have morphed the project from one primarily aimed at lowering energy costs in the Interior to one focused on improving the region’s winter air quality, which can be the worst in the country when ultra-cold and dense air traps emissions from vehicles, home furnaces and woodstoves — all running full bore to keep their owners warm.

The EPA, to that end, has long been watching the IEP and efforts by the Fairbanks North Star Borough to improve winter air quality in the region.

AIDEA’s IEP manager Gene Therriault said during a May 18 AIDEA board meeting that the EPA’s Region 10 officials ask for a project update each time they visit Fairbanks.

Therriault noted that the latest omnibus spending bill passed by Congress includes $30 million in competitive EPA grants for communities not in compliance with federal air quality standards, up from $20 million in the last budget cycle.

The Fairbanks Borough won $2.5 million last year to fund residential woodstove change-outs to cleaner burning heating options.

Fairbanks-area AIDEA board member Gary Wilken questioned whether the borough could use any future grant funds for residential natural gas conversions, which will underpin the entirety of the project.

Therriault said the EPA wants the funds to go towards immediate steps to improve winter air quality, but that the relationship the borough is building with the EPA could lead to conversion assistance or incentive funding when the time comes.

Wilken, worried the project could still be stuck in the same chicken-and-egg scenario, said the help is needed now.

“$5 million or $10 million goes a huge way in our project when we finally turn the valve on gas, so that’s not the time to start getting money out of the federal government; now’s the time to do it,” he said.

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

Updated: 
05/24/2017 - 12:47pm

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