AIDEA advances Interior gas project despite unknowns
The Alaska Industrial Development and Export Authority board of directors approved the framework of an agreement for the construction and operation of a North Slope natural gas liquefaction plant June 26 without yet knowing exactly what its financial contribution to the plant will be.
The concession agreement, as it is known, lays out how AIDEA’s project partner MWH Global Inc. will incorporate the private investment it secures with the state funds dedicated to the Interior Energy Project through Senate Bill 23. How much state money will need to go into the plant will depend on the final cost of the gas to Interior residents, which is dependent upon multiple unknown costs at this point.
Prior to entering an executive session, the board had a tense discussion with staff from AIDEA and MWH about the possibility of the state fronting nearly all of the money for the plant — up to $182.5 million — under the terms of the concession agreement. The state money would come from $125 million of Sustainable Energy Transmission and Supply, or SETS, fund loans and a $57.5 grant appropriated to AIDEA in SB 23 to pay down the cost of gas from the project.
Board member and former state senator from Fairbanks Gary Wilken said the prospect of the state paying for the bulk of a North Slope LNG plant expected to cost between roughly $160 million to $200 million is a diversion from what the board was told in January when it selected MWH to participate in the Interior Energy Project.
Based on MWH’s term sheet at the time, AIDEA was told portions of the SETS and grant money totaling $79.5 million would still be available for funding gas distribution systems after the plant was paid for, Wilken said.
AIDEA Executive Director Ted Leonard said that was not the case.
“We’ve always said a majority of the SETS funds would go into the plant and also the capital appropriation. That’s been in all of the presentations that I’m aware of,” Leonard told the board. “We are looking into having as much owner or investor money in the plant as we can where it still makes the (gas) price out of the plant viable.”
After an executive session the board unanimously approved the concession agreement.
According to the final MWH term sheet, MWH would contribute a minimum of $20 million and up to $85 million to the plant through its investor, Toronto-based Northleaf Capital Partners. AIDEA would then be on the hook for the remainder, between roughly $75 million to $180 million depending on a combination of the cost of the plant and private investment.
MWH Vice President and Managing Director Rick Adcock said that Northleaf wants to invest as much as possible while keeping the final cost of gas for Interior residents down.
AIDEA has continuously said its goal is to provide a “burner tip” gas price to consumers of about $15 per thousand cubic feet of gas, or mcf. That would be about half the cost of fuel oil, which many area residents currently use for heat.
How much private investment the authority secures will depend on the cost to construct and operate the plant. AIDEA Deputy Director Mark Davis said an “indicative” plant price should be known by the middle of July.
Similar prices for transportation down the Dalton Highway and gas storage in Fairbanks and North Pole should be available by July 25, according to MWH’s Chris Brown.
The indicative prices are closer to the final price than the feasibility estimates used earlier, but are still variable. Ultimately, the costs that will make up the final gas price should be known by Oct. 1, Davis said. By the end of October all costs and investments should be set and gas purchase agreements should be in place, MWH has said.
Another point of contention at the meeting was the unveiling to the board that AIDEA will likely use a gas supply contract that Interior utility Golden Valley Electric Association has with BP to feed the plant. Board chair Dana Pruhs called the use of Golden Valley’s contract “a cardinal change” in the project.
Pruhs asked AIDEA staff if Golden Valley would be able to set its own gas price that could inflate the final cost.
Golden Valley President and CEO Cory Borgeson said in an interview that the utility would act as a “pass through” for other utilities — Fairbanks Natural Gas and the Interior Gas Utility — buying gas from the project and would not mark up the cost.
The 20-year supply contract is for up to 23 billion cubic feet, or bcf, of gas per year, much more than the total estimated residential demand of 7.5 bcf.
“I believe that BP provided us this gas contract thinking that this contract would be used for this project because at the time we got this contract Golden Valley was pursuing (to lead) this project,” Borgeson said.
He said he believed AIDEA has worked hard to get its own contract but that securing a supply contract from a producer is “very hard.”
Borgeson said he could not disclose the contract price.
AIDEA’s cost models for the project have put the wholesale cost of gas at between $3 and $4 per mcf.
Always viewed as an anchor tenant, Golden Valley can commit to an off-take of 2 bcf per year for electrical generation, Borgeson said. That gas would offset power currently produced by burning diesel. As a large Interior Energy Project customer, the more gas Golden Valley purchases the lower the cost of gas would likely be for everyone involved.
He added that Golden Valley was recently notified by Fort Knox mine, a major customer, that the gold producer would be cutting back its annual power demand in 2017 from 33 megawatts to about 12 megawatts to 17 megawatts, a fact that could affect how much gas Golden Valley needs.
Borgeson has said the utility has a responsibility to its ratepayers to provide the lowest-priced electricity it can and if that comes from fuels other than natural gas it must go in another direction.
“Golden Valley really wants this project to succeed,” he said. “We believe this is extremely important. We’ll do everything we can to help facilitate this but we’ve made it clear that there are certain risks we are not willing to take that make this project all the more complicated.”
For the birds
While prices are being hashed out in offices to the south, AIDEA’s Davis said the authority is trying to get to work on the North Slope pad that will eventually support the LNG plant.
Earlier this year, AIDEA purchased a parcel from Spectrum LNG for $1.8 million to use for the 17-acre pad site. Davis said AIDEA is working with the Department of Natural Resources to get the occupancy date for the site moved up from mid-August so the construction team can get to work as soon as possible.
When much of that work begins will depend on ducks in the area, he said.
“They have to wait for a bird window on the Slope,” Davis said. “Construction can’t begin until about Aug. 1 to Aug. 15, that depends on when the eider ducks leave, but we will have observers out there watching and when they leave we’ll start” building the gravel pad.
Elwood Brehmer can be reached at [email protected].