Deadlines looming for Interior gas project


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The Alaska Industrial Development and Export Authority is in overdrive to finalize agreements for all of the facets of the complex plan to deliver lower cost natural gas to the state Interior.

Staff from AIDEA’s project partner, Colorado-based engineering and consulting firm MWH Americas Inc., helped lay out the near-term Interior Energy Project timeline to the state authority’s board of directors at a June 4 meeting.

“The next three months are going to be very critical as we drive towards financial close, and that’s the goal, getting to financial close,” MWH Vice President and Managing Director Rick Adcock said.

The first step to getting to financial close with all the parties involved in late October is finally completing the working agreement for the future of the project. AIDEA Executive Director Ted Leonard said the agreement would lay out the ground rules with MWH over the up to 30-year life of the project.

It should be ready for board review at the June 26 AIDEA board meeting, he said.

“We are right now in the process of completing the concession agreement, which is the main agreement that AIDEA will have with the project company,” Leonard said.

AIDEA is also actively looking for gas from one, or possibly more, North Slope suppliers, he added. Those talks will continue over the next couple weeks.

Chris Brown, a vice president and Alaska manager for MWH said the team hopes to have a gas supply contract in place by June 30.

The $332.5 million in bonds, loans and direct appropriations that the state gave AIDEA to put towards the project last year in Senate Bill 23 for the IEP is reserved specifically for North Slope natural gas production, liquefaction and shipment down the Dalton Highway to Fairbanks and North Pole.

Converting to natural gas heat from fuel oil could cut heating costs up to 50 percent for some residents, multiple studies have indicated.

First gas is scheduled to reach the Interior in late 2015, when Fairbanks Natural Gas, a small private utility that serves the center of Fairbanks, should have its distribution system fully built out.

Golden Valley Electric Association, the region’s power utility, could also have a substantial demand for gas that would be burned to generate electricity.

Leonard said AIDEA is still investigating the possibility of hauling Cook Inlet gas north to Fairbanks, much the way Fairbanks Natural Gas currently operates, but on a larger scale.

Using Inlet gas could be an easier and cheaper solution, particularly with the option of hauling it the majority of the way by rail. However, the availability of gas from the region has limited that option.

Hilcorp, the main producer in Cook Inlet, is making supply commitments into 2019 and is “examining the market’s appetite for even longer supply commitments,” Hilcorp spokeswoman Lori Nelson wrote in an email to the Journal.

Further, Nelson wrote that Hilcorp is interested in supplying all of Interior’s gas needs, as it does Fairbanks Natural Gas and Southcentral utilities, and that the company thinks it can be an equally reliable supplier to other parties around Fairbanks.

AIDEA projects residential gas demand from the IEP to be about 7.5 billion cubic feet, or bcf, of gas annually by 2021 — less than 10 percent of Southcentral’s gas demand of about 90 bcf per year.

Currently, Fairbanks Natural Gas gets just less than 1 bcf per year from Hilcorp.

If North Slope gas is used, the utilities — Fairbanks Natural Gas, the Interior Gas Utility and Golden Valley — will have to agree to a price range until a final price can be worked out, members of the IEP team said.

Brown said the goal is to have a final gas price pinned down Oct. 3. The utilities would then enter into final off-take agreements and the rest of the Slope LNG plant contracts and others would fall in line by the end of October. All of the items on the IEP list are very interdependent, he said.

“In order to get to that off-take agreement there has to be a gas price; there has to be (operating expenditures and capital expenditures) for the LNG plant; there has to be trucking and storage costs known,” Brown said.

The size of the LNG plant, which could cost more than $180 million for a 9 bcf plant, likely won’t be finalized until the gas demand is clear, as well.

“It’s the interplay of increasing certainty that allows the process to move forward,” Brown said.

During the feasibility stage, AIDEA estimated the “burner tip,” or gas cost for consumers, would about $15 per thousand cubic feet, or mcf.

Now the team has to work towards an indicative cost range that will be the basis for the preliminary off-take agreements, Brown said. Those agreements are needed by July 30 to keep the process moving, he said.

MWH’s Adcock said other potential industrial and federal government customers are being pursued as well.

“We’re trying to get all of the utilities to the table to help us understand demand profiles (and) timing,” Adcock said to the board.

While everyone involved repeatedly acknowledged the aggressive timeline of the project, AIDEA board member and former state senator for Fairbanks Gary Wilken noted that the board was told in February the commercial agreements would be in place by the end of May and that timeline has been pushed back five months to the end of October.

In April the AIDEA board approved a $15 million loan to Fairbanks Natural Gas to jumpstart the expansion of the utility’s distribution system so its customers could be able to receive gas when it becomes available. A key term of the loan was Fairbanks Natural Gas consenting to a “take or pay” agreement of 0.5 bcf of gas.

Wilken said he has concern with the fact that Fairbanks Natural Gas could decline the $15 million loan at 3 percent and look for a private lender at likely a higher interest rate if it can find a better gas price than the IEP can provide.

Golden Valley President and CEO Cory Borgeson said a hitch in the plan is that it doesn’t incentivize the utilities to sign up early; they are offered the same gas price no matter when they sign up. Part of the answer has to be a non-guaranteed price, he said.

Without the utilities’ gas demand, the whole project could fall apart.

“Every one of the utilities is going to act like a business and make their decision based on the narrowing of that (gas) price range,” AIDEA’s Leonard said.

Adcock said he’s confident off-take agreements will be reached with the utilities given that everyone understands the importance of the agreements to the project.

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

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