‘Middle Earth’ tax credit debate reaches Interior gas project

  • Crews are seen laying gas lines in North Pole last summer as part of the buildout for the Interior Energy Project being led by the Alaska Industrial Development and Export Authority to deliver cheaper and cleaner fuel to Fairbanks and North Pole. The project has been beset by delays, and the latest could result from a desire to wait for drilling results from Doyon Ltd. that could result in a source of gas 60 miles from Fairbanks rather than the current plan to truck LNG from Cook Inlet. Photo/Elwood Brehmer/AJOC

The tentacles of the debate over oil and gas tax credits have reached the state’s effort to expand access to natural gas in and around Fairbanks.

On May 14, the Senate Finance Committee sent a letter to Gov. Bill Walker asking him to delay the sanctioning of the Interior Energy Project at least until Doyon Ltd. has drilling results from its exploration of the Nenana basin.

The request comes as the Alaska Industrial Development and Export Authority is preparing to make a final investment decision later this summer on a plan to truck Cook Inlet-sourced LNG to the Fairbanks area.

Walker wrote in a May 17 response that a projected IEP delay of about 60 days to wait for Doyon’s results isn’t unreasonable, but that he would have to determine if AIDEA can legally delay the project.

In March, AIDEA selected Salix Inc., a subsidiary of the Washington-based energy utility group Avista Corp., as its preferred private project partner.

Salix was the authority’s choice from more than a dozen responses to a request for proposals last summer. Doyon did not participate in the competitive bid process.

Specifically, the Finance Committee letter notes the administration’s support for extending tax credits for exploration work done in the “Middle Earth” basins of Alaska, those areas other than the Slope and Cook Inlet, by a year to July 2017.

Those credits are refundable for 80 percent of exploratory well costs up to $25 million per company per year.

Fairbanks Republican Sen. Pete Kelly, a Finance co-chair, was the only committee member to not sign the letter that originated from the office of fellow Finance co-chair Sen. Anna MacKinnon, R-Eagle River.

Currently, Doyon, the Interior Alaska Native regional corporation is searching for oil and gas in the Nenana basin about 60 miles southwest of Fairbanks.

Ahtna Inc., another Alaska Native regional corporation, is similarly drilling for gas near Glennallen.

The Middle Earth credits were set to expire in July of this year, but were ultimately extended to July 2017 in the final version of House Bill 247 that passed the Legislature June 6.

By subsidizing both Doyon’s work and the Interior Energy Project, the state seems “to be competing against ourselves by supporting both projects,” the letter states.

Fairbanks is likely the only significant market for Doyon, should the company make a commercially viable gas discovery, absent a large export pipeline to tap into.

Sources familiar with the Nenana work say the state could end up spending $50 million or more to reimburse Doyon for its earned credits.

The company drilled its first two exploration wells in the area searching for oil in 2009 and 2013.

Doyon Lands and Resources Vice President Jim Mery said in an interview that a third test well was spudded late May 31 and should reach the suspected resources by late July.

There is also potential to drill a second well on the same pad later this year to delineate any reservoir find, he said.

Drilling results from the well likely won’t be available until mid-November at the earliest, according to Mery.

“The chances of success we think are greater on gas compared to oil but oil is still a target substance that we’re pursuing,” he said.

The company has put those chances of success at about 50 percent for gas and 20 percent for oil in testimony to the Legislature.

MacKinnon emphasized in an interview that the committee supports getting lower cost energy to Fairbanks, but said Finance members occasionally mentioned Doyon’s efforts when discussing the Middle Earth credits and how it could all relate to the Interior Energy Project.

“Why would we spend money incentivizing something if there’s no market?” she said. “What we’re looking for is return on investment.”

Assigned by the Legislature in 2013 with the ambitious task of getting natural gas to Interior residents for a price of roughly $15 per thousand cubic feet, or mcf, the authority’s IEP team has expressed substantial confidence in its latest project plan.

A prior effort to truck North Slope LNG to the region — as directed by the legislation providing financial backing to the project — fizzled in late 2014 due to burdensome construction costs for a Slope-based liquefaction plant.

While progress is being made to meet the project’s price goal and get more natural gas to the region by early 2018, lower oil prices have all but eliminated the price delta between fuel oil and natural gas at $15 per mcf on an energy equivalent basis.

This has challenged the project further because it is believed less residents will be willing to spend potentially thousands of dollars to convert their home heating systems to natural gas without immediate cost recovery, despite the air quality benefits gas would provide, and the six committee members cited that as well.

“Not only would an IEP (final investment decision) at this time result in an investment unlikely to provide the intended price relief for several years at a minimum, it would also reduce the incentive for Doyon to execute their project,” the letter states.

It’s believed Doyon could supply gas for “multiple dollars (per mcf) cheaper” than the IEP, MacKinnon said.

That would be because the gas would simply flow via a 60-mile pipeline to utilities and not have to be converted to LNG, trucked north and then regasified before being ready for use.

AIDEA has about $120 million invested in the project so far, according to its latest quarterly report to the Legislature.

Of that, $52.7 million is in loans issued to utilities to fund distribution pipeline build out in Fairbanks and North Pole. Most of that work went on last year.

The authority also purchased Fairbanks Natural Gas, the city’s small private gas utility, in 2015 for about $54 million. Plans are to transfer ownership of FNG and integrate it into the borough’s Interior Gas Utility.

When that happens AIDEA will recoup its investment, according to authority leadership.

Walker’s spokeswoman Katie Marquette said the administration is still evaluating the situation.

“Ultimately, I know that your goal is the same as mine: to ensure that consumers in Fairbanks are provided the lowest possible price for clean burning natural gas,” the governor wrote to MacKinnon.

“I look forward to continuing to work with you, and all members of the Senate to achieve that end.”

AIDEA spokesman Karsten Rodvik wrote in an email that the authority is aware of the correspondence but is not in a position to comment.

Detailed negotiations between Salix and the authority are progressing, but there is nothing binding between the two, Salix spokeswoman Jessie Wuerst said.

“We are one piece of the supply chain (the LNG plant),” she said.

“Where the gas supply comes from is up to AIDEA.”

Oil prices hovered around $100 per barrel in 2013 when the legislation to fund the project with more than $330 million in state grants and low-interest financing passed with broad support from Legislators statewide.

At those prices, fuel oil was near $4 per gallon in the Interior, or about twice the cost of $15 per mcf natural gas on an energy equivalent basis.

Mery said Doyon could conceivably start supplying gas in late 2019 if commercially viable reserves are discovered this year and a sanctioning decision is made next summer.

However, Doyon would face many of the same issues AIDEA has in keeping the Interior Energy Project afloat, Mery said, the main challenge being the lack of economies of scale.

If Doyon finds gas and moves ahead, “one of the biggest variables is going to be the pipeline tariff and that’s going to be driven by volume, so the more (customers) the better,” he said.

Elwood Brehmer can be reached at [email protected].

Updated: 
06/08/2016 - 3:26pm

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