Progress for Interior gas project with supply contract

Interior Energy Project leaders can finally see the light from a small, blue flame at the end of the tunnel.

Gene Therriault, the former Fairbanks-area state senator who of late has led the project to expand natural gas availability in his hometown, outlined the terms of the key natural gas supply contract Pentex Alaska Natural Gas Co. recently secured with Hilcorp Alaska to underpin the whole operation during the Sept. 21 Alaska Industrial Development and Export Authority board meeting.

Pentex is the parent company to Fairbanks Natural Gas; both are currently owned by AIDEA.

For starters, Therriault said the contract with Hilcorp, which takes effect April 1, 2018, eliminates a 4 percent increase to the current price of gas that was set for Jan. 1 in the utility’s existing deal with Hilcorp.

The new deal, with a three-year term, also provides “a great deal of volume flexibility,” he said — a particularly important factor considering the IEP is still mostly theoretical at this point.

“We do anticipate of course the signing of new customers but we didn’t want the project to have a whole lot of take-or-pay risk and so the contract offers a lot of flexibility to grow that (gas) volume without actually having to sign up for take-or-pay risk ahead of the customers actually signing up,” Therriault told the board.

AIDEA officials have been trying to reach a gas supply deal with Cook Inlet producers since early 2016 but the fact that the ultimate demand for gas is still unknown hampered progress.

What is known is that at least initially that demand will be small, another challenge.

The contract is for a flat price of $7.72 per thousand cubic feet, or mcf, of natural gas for its duration. That is also the highest price Hilcorp is allowed to sell gas for this year under the five-year Consent Decree agreement the company signed with the state when it purchased Inlet assets from major producers in 2012 and immediately became the dominant gas supplier in Southcentral Alaska.

The Consent Decree expires Dec. 31.

A prior Interior region gas demand forecast study commissioned by AIDEA projected gas use would increase about 50 percent per year once additional supply was available. Based on that assumption, AIDEA believes demand will grow to 3.25 billion cubic feet, or bcf, of gas by 2023 and reach nearly 5 bcf by 2027.

That volume growth should drive prices down from the roughly $20 per mcf current Fairbanks Natural Gas customers are paying to $17.30 per mcf in 2020 when the new supply should come online and hit the target $15 per mcf range by 2022.

A work in progress since its inception in 2013, the underlying goal of the Interior Energy Project has been to compete with the price of fuel oil on an energy-equivalent basis since oil prices fell sharply in late 2014.

Natural gas at $17.30 per mcf is equal to fuel oil priced at $2.39 per gallon, according to AIDEA.

Therriault acknowledged the promising numbers are all based on projections that could still change significantly and that the project’s price goals simply aren’t feasible on day one.

“It really does highlight that this is a volume enterprise and whatever we can do in conjunction with the local communities to help customers use this new cleaner fuel — it helps the economics tremendously,” he said.

While it appeared it would be relatively easy to convince residents to convert from fuel oil furnaces to natural gas appliances at the outset of the IEP when fuel oil was near $4 per gallon in Fairbanks, it is now much less clear how many households will commit to spending upward of $10,000 in some cases to overhaul their home heating systems with fuel oil closer to $2 per gallon.

As a result, AIDEA and the region’s local governments have looked for ways residents could lower conversion costs or use various mechanisms to finance them, such as adding conversion costs to property tax or natural gas utility bills.

To that end, Therriault said getting businesses to buy quantities of gas potentially equaling dozens of homes is imperative to the project’s success.

“We certainly want to get residential customers, but we just want volume and if it’s a business customer that’s good,” he said further. “It’s all about units of gas primarily.”

LNG plant, storage

Getting a gas deal done allows AIDEA and Fairbanks Natural Gas to move ahead with the other primary components of the IEP: expanding gas processing and LNG storage capacities.

Therriault said full-fledged engineering and design work will begin soon on the long-anticipated $46 million expansion of the Titan LNG plant on Point MacKenzie that supplies FNG. The expansion will add about 3 bcf per year of gas processing capacity to the existing roughly 1 bcf per year plant.

Coinciding with that, FNG is currently taking proposals to build a 5.25 million-gallon LNG storage tank in South Fairbanks to match the future LNG production growth.

The utility hopes to break frozen ground on the $42 million LNG storage project in February or March of next year and have it done in late 2019, according to Therriault.

If all goes as planned, the larger Titan plant will be ready to ramp up production very shortly after the LNG storage facility is complete and the whole system should start bringing more natural gas to the Interior in 2020.

Finally, having the gas supply deal in hand also gives AIDEA and the Fairbanks North Star Borough-owned Interior Gas Utility what they need to fold Pentex and Fairbanks Natural Gas into the IGU.

It has been presumed since AIDEA bought Pentex in 2015 that the two Fairbanks-area gas utilities would be integrated to maximize operational efficiencies across what is a relatively small service area.

Late last December, AIDEA agreed in principal to sell Pentex to IGU for $58.2 million. A memorandum of understanding between the local startup utility and the state-owned authority outlining that deal also included preliminary terms for AIDEA to fund up to $333.6 million of natural gas infrastructure throughout the utility’s supply chain — from expanding the Titan LNG plant to constructing LNG storage facility to continuing build-out of the gas distribution network to homes and businesses in Fairbanks and North Pole.

Most of the $333.6 million will come from the $332.5 million financing package of loans, bonds and grant money approved by the Legislature in 2013 for the Interior Energy Project.

Therriault said in an interview that the sides have continued to work under the terms of the MOU — which originally had a closing date of March 31 — to finalize the finer points of the financing and sale package.

The hope now is to have the whole thing wrapped up by the end of the year, he said.

AIDEA board member and Fairbanks resident Gary Wilken thanked state legislators, AIDEA staff and local government leaders in Fairbanks and North Pole for their continued support and patience toward the multiple iterations of the Interior Energy Project before voting to approve a project plan that again was contingent on the gas contract.

Wilken also said the conversation among Interior residents about getting natural gas has slowly changed in recent years from disbelief to hope.

“Today it’s not a question of if; it’s a question of when,” he said.

IGU General Manager Jomo Stewart also thanked AIDEA officials for their work on the project in comments to the board.

“With the passage of this resolution we now have a project,” AIDEA board chair Dana Pruhs concluded.

Elwood Brehmer can be reached at [email protected].

09/27/2017 - 1:14pm