Final Interior gas decision by AIDEA approaches

FAIRBANKS — Interior Energy Project pitches were made to the Fairbanks public Nov. 4; now it’s up to the Alaska Industrial Development and Export Authority to pick the right project partner.

IEP manager Bob Shefchik said he feels both goals of the meeting were accomplished: sharing the proposals from the project finalists with the community they hope to serve with natural gas, and verifying with the community that the process to select a viable private partner is moving forward.

While the Interior Energy Project revolves around its namesake region, AIDEA’s public board meetings are held at the authority’s headquarters in Anchorage.

Open seats at were hard to come by at Fairbanks’ Pioneer Park Civic Center when the three-hour open house started. Presentations were heard from four of the five IEP finalist teams.

“We figure there were 150 people that showed up on a Wednesday night to listen to five PowerPoints, so that’s a good turnout,” Shefchik said in an interview.

Hilcorp Energy’s LNG subsidiary Harvest Alaska was a last-minute scratch from the agenda. A Hilcorp spokeswoman declined to comment as to why the independent producer and IEP finalist was not represented at the Fairbanks meeting.

Harvest Alaska’s proposal includes options to simply liquefy natural gas at a Southcentral plant for a tolling fee of $4.95 per thousand cubic feet, or mcf, of natural gas; provide a Cook Inlet gas supply and liquefaction for $12.25 per mcf; or deliver LNG to the Fairbanks “city gate” at $15 per mcf equivalent.

Harvest wrote in its Sept. 3 proposal summary that the project could deliver either 3 billion cubic feet, or bcf, of gas per year or 6 bcf, and is planned with private financing, but using AIDEA’s IEP-dedicated grant-loan-bond package could lower those costs.

The gas supply and all-in proposals include a 10-year contract with utilities.

AIDEA’s IEP team plans to recommend a project partner to the authority board at its Dec. 3 meeting.

Shefchik reminded those attending the Nov. 4 meeting that the goal is not only to lower energy costs in the Interior, but also to improve winter air quality, which is dangerously poor at times due to large numbers of Fairbanks and North Pole residents who heat their homes with wood, a cheaper option to fuel oil.

The IEP will also provide a ready market if the Alaska LNG Project, or another large North Slope gasline project comes to fruition.

Before either happens, he noted, AIDEA’s purchase of Fairbanks Natural Gas will lower natural gas prices by about 13 percent for the small group of area residents and businesses that are the utility’s customers by removing tax and profit obligations associated with the formerly private business.

From there, the IEP will bring natural gas to more residents cheaper yet, if it ultimately meets the $15 per mcf “burner tip” price.

“The goal with every step is to drop the price of gas incrementally until we can” get energy prices competitive with Anchorage, Shefchik, an Interior resident, said.

The last step to get the Interior on par with Anchorage would be a large gasline.

Phoenix

Phoenix Clean Fuels LLC Chief Operating Officer Chris DeBerry was first to pitch his company’s plan. Phoenix Clean Fuels is a consortium of five companies: General Electric Oil and Gas, a LNG plant manufacturer; Alaska Industrial, a North Pole-based trucking company; TDX Power, which operates a North Slope electric utility; and Scimation and SLR, project management and engineering firms.

“We’ve tried to pull together a team that can execute this project, not just the liquefaction, but from start to finish — get (LNG) to the city gate just to make AIDEA’s job easier and provide a clearer picture to customers of how the project works,” DeBerry said.

All told, Phoenix is projecting a delivered LNG price of $9.65 per mcf equivalent from the North Slope, at least 25 percent cheaper than AIDEA’s first attempt at a North Slope gas trucking operation could achieve with MWH Global Inc. as it private partner.

That price would allow for $4 to $5 to be added to the gas price for storage, regasification and distribution and still meet the $15 per mcf customer price goal.

Phoenix plans to control transport costs through buying the LNG trailers outright, DeBerry said.

GE’s liquefaction plant design is being used at 30 other places worldwide, he noted.

“Everybody knows GE; it’s a household name,” DeBerry said. “GE has a modular plug-and-play solution that lends itself to a quick and easy installation in the harsh environment of the North Slope.”

LNG plant capital costs were a major impediment to the first Interior Energy Project attempt, which began to fizzle out about a year ago.

The GE plant would be assembled, broken down and shipped on 35 skids from a production facility in Texas. That mobility would allow Phoenix to use the plant other places on the Slope or around the world. There is little risk of it being a stranded asset if the state’s gasline wishes come true, according to DeBerry.

Phoenix, and the other North Slope proponent Spectrum LNG, modeled prices with a gas feedstock price of $2.10 per mcf. That is the current price of natural gas — tied to oil prices — in an unused contract Golden Valley Electric Association has with BP for North Slope gas, according to Spectrum LNG CEO Ray Latchem.

Indentifying the cheapest source of gas was Phoenix’s first task in developing its proposal, DeBerry said, and the roughly $4 per mcf premium for a Cook Inlet supply over the North Slope made the decision simple.

The Phoenix operation could be up and running by September 2017 on the current IEP timeline, according to DeBerry.

Salix

Salix Inc., a subsidiary of Pacific Northwest utility company Avista Corp., is proposing a Cook Inlet liquefaction plant with a “cost of service” tolling fee, versus a firm price contract, Salix President Bob Lafferty said.

“Our part is just the liquefaction part,” he said.

A cost of service fee includes a utilities energy supply or generation cost, operation and maintenance expenses and a rate of return. Lafferty said the cost of service route provides transparency for customers.

Salix projected an initial liquefaction cost of $2.87 per mcf in its proposal summary. The company also said it expects to enter into 20-year tolling service agreements with Interior utilities.

Salix estimates first commercial projection in early 2018.

Spectrum

Spectrum LNG’s Latchem highlighted his company’s experience in the LNG arena.

“We’re the only finalist that has produced LNG,” he said.

Spectrum developed Fairbanks Natural Gas’ LNG supply chain in the late 1990s before selling the company and currently produces LNG for vehicle use in Arizona.

Latchem said his company could produce North Slope LNG for $5.06 per mcf equivalent, leaving $10 available for trucking and distribution costs, while still meeting the project goals.

He added that Spectrum would postpone its management fee for the first year of operation to keep retail costs down while a customer base is built.

“Our commercial agreement with AIDEA would be a revenue requirement divided by how much the plant produces, so if we sell more LNG it doesn’t make our company any more money — what it does is it drops the unit price to the end users,” Latchem described. “It’s a simple enough deal; we just need to sell as much LNG as possible.”

He added that Spectrum has negotiated a feedstock price of about $2.10 per mcf with ConocoPhillips as well, and he feels that price could ultimately drop lower yet.

Spectrum could be ready to supply the Interior fairly quickly — in January 2017 — according to its proposal.

WesPac

WesPac Midstream LLC’s proposal would start with either a new LNG plant at Port MacKenzie, a project the company has been investigating for more than a year, or expansion of the Southcentral Titan LNG plant owned by AIDEA as part of the Fairbanks Natural Gas sale.

WesPac is building LNG plants in Tacoma, Wash., and Jacksonville, Fla., to supply Totem Ocean Trailer Express, or TOTE, vessels with fuel. TOTE is in the midst of revamping its cargo ships that serve Anchorage and Puerto Rico to run on LNG.

Both of WesPac’s Interior Energy Project LNG plant proposals include 500,000 gallons of on-site LNG storage, which could reduce the need for storage in Fairbanks or North Pole.

Anchorage-based oil and gas attorney Jon Katchen, who represented WesPac at the public meeting, said the company chose a Cook Inlet gas source primarily because of the location, despite a higher feedstock price. WesPac also has a 100 percent working interest in a Cook Inlet gas reserve.

“Perhaps the biggest advantage Cook Inlet provides is access to additional markets in the event demand doesn’t show up in Fairbanks,” Katchen said.

WesPac has expressed interest to serve coastal Alaska communities with LNG, and demand there could help mitigate costs to Interior residents. WesPac pegged its final, delivered LNG price at $12.25 per mcf equivalent in its proposal summary and it could be operating by January 2018.

More LNG capacity for Alaska Railroad

The Alaska Railroad Corp. now has approval from the Federal Railway Administration to haul enough LNG to meet projected Interior Energy Project demand.

In a Nov. 2 letter, the Railway Administration, or FRA, wrote that the Alaska Railroad’s expanded LNG transport authorization is for up to 12 portable tanks of LNG per train on up to three round-trip trains per week from Jan. 1, 2016, through the end of 2017. Beginning in 2018 and through 2020 the railroad can haul up to 60 tanks on one train every four days.

The letter came less than a month after the FRA approved the Alaska Railroad for hauling eight, 11,000-gallon LNG tankers on up to two trains per week through two years. This first authorization would have allowed the railroad to prove its ability to transport LNG for the Interior Energy Project, but would not have met projected capacity needs once the project is up and running.

The Alaska Railroad is the only railroad in the country approved to transport LNG.

Alaska Railroad CEO Bill O’Leary said in an interview that the railroad went back to FRA and explained the situation after the first approval.

The subsequent approval would allow the railroad to meet that need.

“The governor (Bill Walker) was extremely helpful, as was our congressional delegation in emphasizing the importance of this” capacity increase to the FRA, O’Leary said.

Moving LNG from Southcentral to the Interior by rail could potentially cut transportation costs for the IEP by more than 50 percent over the cost of trucking the fuel, according to railroad estimates. However, LNG by rail would add complexities to what is already a challenging logistical project.