Self-imposed deadlines have come and gone and the future of the Interior Energy Project is in doubt.
Project team members from the Alaska Industrial Development and Export Authority and its partner firm MWH Global Inc. were unable to present the AIDEA board of directors with a financial package to move the energy plan forward at its Dec. 16 meeting.
Dec. 16 was the most recent date circled by the Interior Energy Project team as its target to have agreements in place with all the project stakeholders. The close had been pushed back from a previous goal of early November.
Overall project completion has been pushed from an original and aggressive first-gas delivery target of the fourth quarter of 2015 to the third quarter of 2016 as it stands now.
MWH Managing Director Rick Adcock delivered more bad news to the board when he said current “burner tip” natural gas price estimates for Interior residents are in the $18 to $20.50 per thousand cubic feet, or mcf, of gas.
“To make a $15 (per mcf) goal, that’s got to be a really cheap, efficient liquefaction plant,” on the North Slope, Adcock told the AIDEA board.
With construction and engineering giant Kiewit Corp. leading the design of the plant, the target price for a 6 billion cubic foot, or bcf, annual capacity plant is $228 million now, Adcock said.
That’s down from November estimates of up to $235 million but still significantly higher than the $200 million mid-range price for a 9-bcf plant MWH proposed to the board when it was competing to lead the project about a year ago.
Representatives from Kiewit and MWH said the base plant cost is figured at $183 million without adding profit margin and risk contingencies.
“We all want the (LNG plant) cost to come down; we’re not happy with the cap-ex (capital expenditures) now,” Adcock said.
The state’s plan to truck LNG down the Dalton Highway began as a way to improve Fairbanks-area air quality and ease the burden of oppressive home heating costs by 40 percent to 50 percent — all based on $4 per gallon heating, or fuel oil.
When early projections of a $15 per mcf final gas price were thought to be feasible it became the de facto target. A burner tip price of $15 per mcf is the energy equivalent to half the cost of $4 per gallon fuel oil.
In late October, Golden Valley Electric Association CEO Cory Borgeson said the initial gas price to residential consumers would be in the $20 to $23 per mcf range. Adcock and other Interior Energy Project members disputed Borgeson’s claim at the time.
The regional electric utility, Golden Valley would be a key anchor tenant industrial consumer of gas to make the project financially viable. For Golden Valley the gas would offset some of the fuel oil it burns to produce nearly 30 percent of its power.
Then, in November, Interior Gas Utility chair Bob Shefchik largely echoed Borgeson’s gas price estimate during a presentation to the Fairbanks North Star Borough Assembly.
A higher gas price reduces the incentive for residents to convert their home heating systems — a conversion that could cost some up to $10,000 — from heating oil to natural gas. If the public doesn’t convert, the project doesn’t succeed. Uncertainty over how many residents and businesses will convert creates a paradox for all involved, which makes accurately projecting the conversion rate essential.
“We need to know the demand to come up with a price (of gas), and the buyer needs to know the price to come up with demand,” Adcock said.
If the Golden Valley board of directors approves, the electric utility might be able to absorb up to 5 bcf worth of demand risk, Borgeson said — a way to shift risk away from the expanding gas utilities.
“If the customers don’t convert, somebody’s got to pay for the plant on the Slope; that’s the reality,” Borgeson said.
Previously, he had said Golden Valley could commit to purchasing 2 bcf annually. More recently, Golden Valley has modeled that it would have the need for 2.8 bcf per year for four years, according to Borgeson. After that, Fort Knox gold mine has plans to change its processes and lessen its power purchase, but that would provide time for the gas utilities to build demand, he said.
The plan is a new one.
“I don’t think the way things have worked out in the past week there has been much sharing of the risk,” Borgeson said.
Fairbanks Natural Gas President and CEO Dan Britton and Shefchik disagreed about the demand risk, but noted that the Interior Energy Project has helped form a collaborative relationship among the utilities that have been competitors at points in the past.
The three utilities have agreed to the framework of a deal that would have Fairbanks Natural Gas manage a joint fleet of LNG tanker trailers, they said.
“It makes no sense for each one of us to run our own trucking operation,” Britton said.
As the head of both Fairbanks Natural Gas and its partner company Titan Alaska LNG, Britton has overseen a smaller but similar operation from Southcentral to Fairbanks.
Fairbanks North Star Borough Mayor Luke Hopkins testified to board during the public comment portion of the meeting that he is concerned the Interior Energy Project is becoming unsustainable. Area residents need to burn natural gas in lieu of coal and wood to improve winter air quality that can be dangerously poor at times, he said.
“(The Interior Energy Project) is not going to be delivering the lowest cost natural gas in the community that we expect to get,” Hopkins said.
Britton said in an interview that some in the Interior might feel entitled to lower cost energy, while others understand the challenges of the project.
Ultimately, Britton said, “We want to see lower energy costs for increased economic diversity and sustainability of the community.”
Fairbanks Natural Gas serves about 1,100 customers in the heart of Fairbanks with LNG trucked north from a small Southcentral plant.
At the end of the Interior Energy Project discussion, the board met in executive session with MHW representatives and the utility leaders to discuss if AIDEA’s working agreement should be extended beyond a Dec. 31 financial close deadline. The concession agreement allows the development authority to extend its relationship with MWH for up to 90 days in the event an encompassing project agreement is not reached by the end of the year.
Hopkins urged the board to end its affiliation with MWH over the project, as did IGU’s Shefchik.
The 6-bcf plant MWH is currently recommending is “a significant change” from what was presented to the board and the public last January, when MWH was selected as the project partner, Shefchik said.
“The results we have today we can’t afford,” he said.
Borgeson and Britton supported extending the agreement for lack of a better option.
The AIDEA board did not vote on what it will do with MWH. The next board meeting is scheduled for Jan. 14, exactly one year after the board selected the firm as the authority’s Interior Energy Project partner.
Cook Inlet no cheaper
Getting privately financed gas from Cook Inlet likely would not be much cheaper, if at all. WesPac Midstream LLC, an energy infrastructure company, is planning an LNG plant to serve Alaska markets at Port MacKenzie. It projects delivering LNG, without regasification and distribution costs, to Fairbanks for about $14.50 per mcf equivalent.
Fairbanks Natural Gas just agreed to a 10-year LNG supply at a liquid price that equates to $15 per mcf from Hilcorp, Britton said. Titan Alaska LNG, a partner company to Fairbanks Natural Gas, recently sold its liquefaction plant that supplies the Interior utility to Hilcorp.
The consent decree that binds Hilcorp Cook Inlet gas supply contracts makes it difficult to find cheaper gas in the state than what is under the Slope, Britton said.
Borgeson has said the $332.5 million state financing package passed by the Legislature in 2013 to support the Interior Energy Project needs to be largely devoted to the North Slope LNG plant to drive down the cost of gas processing. With a primarily privately-financed plant, gas processing amounts to about $5 per mcf, according to MWH.
Fairbanks Natural Gas and its parent Pentex Alaska Natural Gas Co. proposed a project plan to AIDEA, which competed with MWH’s, that recommended $155 million of state financing for a $185 million, 9-bcf plant.
“When we envisioned this project we envisioned the North Slope plant was essentially a free plant, that’s why we wanted the state involved,” Britton said.
Golden Valley requested a $200 million allocation from the state to jumpstart the project under its lead prior to the Legislature’s loan, bond and grant package.
There are legitimate reasons Fairbanks doesn’t already have a permanent natural gas supply, and the Interior Energy Project, an interim solution, is unavoidably complex. Adcock said the team is working to reach agreements with 10 stakeholders to pull the project together — AIDEA, the three utilities, BP, Kiewit and MWH’s private financer Northleaf Capital Partners, among others.
Just getting a gas supply contract in place has been more of a challenge than expected.
Former Fairbanks state senator and AIDEA board member Gary Wilken has been visibly frustrated at recent meetings over the lack of progress made on a fundamental part of the project. The board was told in May that a supply contract with BP to feed the North Slope plant was nearly in place. The terms remaining to be negotiated with the producer are “perfecting amendments,” Adcock said, but it has yet to be finalized.
Apparent confusion over whether or not AIDEA would use a gas supply contract Golden Valley has with BP has slowed the process, multiple project members said.
Wilken said he is “not interested in crawling in bed with (BP)” given the company’s inability to reach an agreement to sell a small amount of gas.
“We have spent eight months of — I’m trying to be kind — of dithering by BP and we still don’t have a contract and we’re two weeks from the end of this thing,” he said.
Borgeson confirmed a rumor that former Gov. Sean Parnell called Alaska BP leadership about the Interior Energy gas agreement before he left office.
“I think (BP is) hoping this project will go away,” Borgeson said.
The tentative gas supply contract has a price indexed to oil, according to Adcock. At current prices of about $60 per barrel, the natural gas feedstock would be in the $2 per mcf range; at $150 per barrel, it would be $4.50 per mcf.
Oil price drop a factor
To make matters worse, falling oil prices could strain the projects economic viability even at a $15 per mcf burner tip price. Britton said heating oil at $2.70 per gallon would be the energy-cost equivalent to natural gas at $20.50 per mcf, the high range of MHW’s current projection.
Board member Wilken, of Fairbanks, said he just purchased heating oil for $3.07 per gallon. Britton said a common price in the area is about $3.40 per gallon, but that would likely continue to drop, he said.
Shefchik said conversions would probably still happen, but over 10 to 12 years instead of the vast majority happening within six years as was once thought.
Low oil prices have also hurt the feasibility of storage expansion for Fairbanks Natural Gas Britton said. The utility suspended its $20 million loan application to AIDEA for construction of a 5.25 million-gallon LNG storage facility in Fairbanks.
Regardless of short-term oil price, the consensus at the meeting was the need for a cleaner, cheaper energy option in the Interior will not go away.
“We talk about at Golden Valley what this community needs and this community needs natural gas; there’s no doubt about that,” Borgeson said.
Wilken emphasized that the Interior Energy Project work should continue in earnest. However, he said if immediate market forces can ease the heating cost burden in Interior residents the group might have a chance to search for better solutions.
“Time is no longer a reason for us to make bad decisions,” he said.
Elwood Brehmer can be reached at [email protected]