Interior Energy Project on hold as MWH declines extension

GUTTENBERG

After a year-and-a-half of work, time has run out on the Interior Energy Project — at least for now.

MHW Global Inc., the Alaska Industrial Development and Export Authority’s partner in the plan to truck North Slope-sourced liquefied natural gas to the Fairbanks area, withdrew its request for an extension to its contract on the project in a Dec. 30 letter.

The working contract, known as the concession agreement, expired Dec 31. The AIDEA board of directors discussed the option to extend the agreement up to 90 days in an executive session at its Dec. 16 meeting but did not take any action on the matter.

AIDEA spokesman Karsten Rodvik said the authority formally terminated its agreement with MWH Jan. 5.

“AIDEA is fully committed to the goal of bringing affordable energy to the Interior, and we appreciate the effort that MWH put into helping bring the North Slope LNG plant closer to reality,” Rodvik said. “MWH achieved a great deal during 2014, and we thank the entire MWH team for all of their hard work.”

With no contract in place for a gas supply and delivered gas price estimates coming in at up to 35 percent higher than first projected, the AIDEA-MWH team was unable to meet its own deadline of the Dec. 16 board meeting to have the complex project’s loose ends tied.

MWH issued a statement to the Journal Dec. 31 from its corporate headquarters in Broomfield, Colo., saying the move does not mean it is withdrawing from the project and that the engineering and consulting company is still engaged with AIDEA and the local utilities to determine its role in the future.

“We believe this is the most appropriate decision for all stakeholders given that the (Interior Energy Project) does not appear to have the level of community and utility support needed to be successful as it is currently structured,” the statement reads. “Without this support, we believe a 90-day extension to continue working toward financial close would be unproductive.”

MHW declined additional requests for comment.

On Dec. 22, AIDEA Executive Director Ted Leonard sent a letter to MWH Vice President and Alaska Manager Chris Brown that stated AIDEA had “no desire to deviate from the existing provisions of the concession agreement,” which was set to expire Dec. 31.

Leonard encouraged MWH and its joint venture with AIDEA, Northern Lights Energy LLC, to complete all work to achieve financial close without an extension to the agreement.

The concession agreement was formalized in September and references Nov. 21 as the first target for wrapping up Interior Energy Project financials.

Leonard’s letter to MWH said AIDEA would be open to an extension, but the concession would be non-exclusive moving forward. Leonard also conditioned an extension on the premise that contracts with the utilities be in place by Feb. 28.

Further, AIDEA was liable to MWH for $1.25 million of work under the original concession agreement. The authority’s conditions for an extension would have kept that cap in place.

Brown responded in a Dec. 30 letter to Leonard that while financial close was not going to be reached by the deadline, MWH had met the project’s other requirements. It had provided a North Slope gas price lower than could be achieved from Cook Inlet, where a long-term supply has not been developed, according to Brown.

“Our thoroughly vetted capital cost estimates resulted in an LNG price at the North Slope — the pricing reference point established under the concession agreement — which was within the acceptable range for the Interior Energy Project as described to us by AIDEA,” he wrote.

Blowback from the public at the latest AIDEA board meeting based on a perceived lack of progress, notably from Fairbanks North Star Borough Mayor Luke Hopkins, led MWH to believe it did not have the community support it needed.

Brown also wrote to Leonard that the conditions of an extension would discourage private investment in the project.

“These conditions would undermine the commercial integrity of the concession agreement and make it impossible for MWH and other counterparties to undertake the commercial activities that are necessary for financial close,” Brown wrote.

Brown concluded the detailed, three-page correspondence by noting that MWH would work with AIDEA to support an Interior Energy Project that pursued strictly public funding options and would make its work available “for appropriate and fair compensation.”

Differing opinions were raised at the Dec. 16 AIDEA board meeting on how the authority should move the project forward. Hopkins and Interior Gas Utility chair Bob Shefchik said the Interior Energy Project needed a new direction.

Dan Britton and Cory Borgeson, the respective heads of Fairbanks Natural Gas and Golden Valley Electric Association, asked the AIDEA board to grant the extension to MWH if for no other reason than the lack of a better, current option.

“I believe that MWH is far enough along and has enough knowledge and enough respect from everyone that they would still be a potential contractor for this project,” Borgeson said Jan. 5.

AIDEA officially took over the Interior Energy Project after the 2013 legislative session when the Legislature passed Senate Bill 23, sponsored by then-Gov. Sean Parnell, which gave AIDEA the right to allocate $332.5 million in loans, bonds and grants to support the North Slope LNG trucking operation.

Project leaders began estimating that a final gas price to residents of about $15 per thousand cubic feet, or mcf, of gas would be feasible shortly after AIDEA began its work and before MWH was chosen as a partner.

At $15 per mcf the natural gas would be about half the cost-energy equivalent of heating oil at $4 per gallon and save many residents thousands of dollars on their annual home heating bills.

The first real blow to those estimates came in October when Borgeson told the Journal he believed the early delivered gas price would be in the $20 per mcf range and fall gradually as demand ramped up.

MWH and AIDEA disputed the claim at the time. However, Borgeson, and later Shefchik were proved correct at subsequent AIDEA meetings when MWH’s Rick Adcock conceded to the board that first gas would likely be between $18 and $20.50 per mcf under the project’s current financial structure.

Beyond simply not hitting the initial target, higher gas prices could deter residents from converting their home heating systems to natural gas — a conversion that could cost some up to $10,000. The substantial demand increase needed to lower gas prices in subsequent years of the project likely wouldn’t occur at the rate the utilities hoped without the expected conversions.

The sticking point has been the cost of the North Slope LNG plant. The plant’s capital and operations costs would be diluted directly into the final cost of gas.

MWH’s latest target cost was $228 million for plant with annual capacity of 6 billion cubic feet, or bcf. In its November 2013 proposal to AIDEA, MWH told the authority a 9 bcf plant would probably cost $180 million and likely not more $200 million.

AIDEA’s early estimates — before MWH’s involvement — were that gas processing and liquefaction would cost less than $3 per mcf.

Adcock said Dec. 16 that processing would likely cost at least $5 per mcf from a 6 bcf plant at operating at full capacity. With demand in the first couple years of the Interior Energy Project projected at about 3 bcf, the processing cost could be up to $9 per mcf, Borgeson said.

In a last-ditch effort to save the project’s feasibility, Borgeson proposed Golden Valley would purchase 5 bcf of gas demand from the North Slope plant despite only needing 2 bcf of gas to offset the fuel oil it burns to produce about 30 percent of its power.

“We would be willing to pay for a five-car garage when we only need to put two cars in it,” he said.

Golden Valley could still save its members $5 million to $6 million per year even while paying for 5 bcf and using 2 bcf if oil were at $105 per barrel, Borgeson said in an interview.

It wasn’t enough.

MWH’s initial proposal also called for $65 million of private investment into a $180 million plant. The concession agreement called for a maximum AIDEA loan and grant contribution totaling $135 million, leaving nearly $100 million to be privately financed on a $228 million LNG plant.

Toronto-based Northleaf Capital Partners was MWH’s silent investment partner.

On top of the private investment that would need to be repaid, the concession agreement set a 12.5 percent maximum rate of return on Northleaf’s money, further driving up the cost of the plant and ultimately the cost of the gas.

The Sustainable Energy Transmission and Supply Fund loans AIDEA was authorized to issue under the Interior Energy Project legislation are capped at 3 percent interest.

“The concession agreement was really a P3, a public-private partnership, and I think now that model that Parnell came up with doesn’t work — that the investor in the (P3) would make requirements that would make this too difficult and costly,” Borgeson said. “It was always my belief that this project required aid funding because of the significant investment without a known customer base and the only way to make that work is to reduce the cap-ex (capital expenditure) cost.”

Rep. David Guttenberg, a Fairbanks Democrat who has voiced concern about the project, said the financial structure doomed the current iteration of the Interior Energy Project.

“I was concerned with bringing MWH in to begin with,” Guttenberg said. “It’s just an investment group in the end that’s going to be guaranteed a 12.5 percent return on their money.”

The state or the Interior Gas Utility, controlled by the Fairbanks North Star Borough, should own the LNG plant, according to Guttenberg. A publicly owned plant would avoid $4 million or more of property taxes to the North Slope Borough each year, another cost that would be rolled into the gas price.

In discussions with AIDEA leaders, Guttenberg said he has asked the authority to come up with a proposal that works and can be presented to the Legislature. In response, authority officials have said that would be going outside the bounds of SB 23, which controls the North Slope gas project.

“I think AIDEA is acting as the project manager and they should just be the banker and not the project manager. A significant restructuring is the only way this project is going to move forward,” he said.

Those in Anchorage, where AIDEA is headquartered, simply don’t understand the strain of Interior energy costs, according to Guttenberg.

“Let me be blunt: people in Anchorage are clueless. People in Anchorage have no idea how crippling the energy situation is in this state,” he said.

Guttenberg added that a lower-cost energy solution for the Interior would benefit the whole state by opening up roughly $300 million of disposable income that is now spent on heating bills.

According to Borgeson and the Interior Gas Utility’s Shefchik, the project needs more public funding directed at the North Slope LNG plant to drive down the gas price and in turn encourage conversions.

In the months leading up to the passage of SB 23, he and Borgeson pursued a $200 million grant for Golden Valley to build a North Slope plant, Shefchik said. With the prospect of such a donation out the window given the state’s immediate financial situation, he said other avenues of low-cost financing need to be investigated.

“I expect there will be a one- or two-month window of, ‘Let’s look at all the options that are before us and reorient on the one that’s going to get us the gas approaching 15 bucks and move forward,’” Shefchik said.

Whatever it looks like, the next iteration of the project should include the utilities at its core, he said.

Guttenberg said AIDEA and the utilities would be asked to come before the Legislature in the coming session to craft a new plan.

“It’s a process; nothing ends the way its started,” Guttenberg said.

The near-term collapse of the oil market shouldn’t affect the viability of the Interior Energy Project, according to Shefchik.

With first gas once scheduled for late 2015, then 2016 and likely later now, oil prices are likely to rebound in that time. The need for a cheaper, and cleaner, energy source will not go away, he said.

A natural gas pipeline, however, could change plans, given the Interior Energy Project was always meant to be an interim solution.

“The question of whether there is a gas line that will be on the near enough horizon to say, ‘Well, we wouldn’t want to invest in a plant;’ that’s a tough one,” Shefchik said.

Elwood Brehmer can be reached at [email protected].

Updated: 
11/18/2016 - 1:45pm

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