Interior Gas Utility inks supply deal with Hilcorp Alaska
Most of the leaders of the Fairbanks-area gas utility believe they finally have a gas supply contract that will afford it the security needed to grow.
The Interior Gas Utility board of Directors voted 5-2 Jan. 19 to approve what could end up being an 11-year feedstock supply contract with Hilcorp Alaska. The agreement has an initial five-year term as well as a pair of three-year buyer options to extend the terms. Hilcorp cannot turn down an extension option if IGU exercises it, according to utility General Manager Dan Britton.
The contract could also be the end of a long and circuitous search for additional natural gas supplies for the Fairbanks area that began in 2013 as the state-sponsored $330 million Interior Energy Project.
“We can know what our gas cost will be for Titan (LNG plant) feedstock for 11 years and anything we do in the future could improve on that,” Britton told the utility board.
Board member Gary Wilken called the contract building block for the utility’s long-term success.
“This is a very big deal for this utility,” Wilken said.
The initial price of $7.60 per thousand cubic feet, or mcf, of gas is a 1.5 percent price cut from the $7.72 the borough-owned utility pays Hilcorp under its current contract, which was set to expire March 31, according to meeting documents.
Britton said the lower gas price — set to rise 8 cents per year — amounts to $100,000 per year in collective savings. Hilcorp also agreed to make the price retroactive to Jan. 1, a $30,000 savings for the utility, according to Britton.
Board member Pamela Throop said IGU shouldn’t bind itself to a single gas supplier at a price that is still higher than what Southcentral utilities pay when it has received other proposals to buy potentially cheaper LNG.
Former board member Patrice Lee said during a public comment period that the contract all but assures IGU will move ahead with expanding its Southcentral Titan LNG plant — upwards of a $70 million project — despite having other options to lower the cost of gas to customers.
IGU currently trucks LNG from the Susitna-area plant to Fairbanks before regasifying it for distribution to customers.
Increasing the availability of natural gas in the Fairbanks area has been a primary goal for many attempting to clean up the city’s at-times dangerously poor winter air quality as well as those seeking a more affordable energy alternative to heating oil.
Britton said the gas price is about 1 percent higher than most other contracts for Cook Inlet gas because IGU purchases just a fraction of the volumes that most Southcentral utilities do and Hilcorp has agreed to match its supply to IGU’s highly seasonal demand swings. He noted the agreement allows IGU to lessen the volume of gas it will buy for the remainder of the contract once, which allows the utility to continue to search for other options.
However, he stressed the contract from the dominant Cook Inlet producer with multiple fields to draw gas from gives the utility the security it needs to grow its firm customer base.
“I share the goal to lower prices but you cannot, in my view, supply our customers, to whom we have made a firm commitment, with an interruptible (LNG) supply,” Britton said.
Under the deal IGU must purchase a minimum volume of gas that equates to the current demand from its roughly 1,400 customers, according to Britton. The utility also has the option to more than triple its gas requirements of Hilcorp with advanced notice if it decides to expand the Titan LNG plant.
The utility was set to make a final investment decision on the expansion project last April but the wildly uncertain economic conditions at the onset of the pandemic made Britton pause his recommendation to approve the expansion.
The board has not formally revisited the topic since.
He said while Hilcorp could provide gas to feed an expanded LNG plant under the contract IGU management is still open to other LNG sources should a supplier propose a reliable plan.
IGU and the Alaska Industrial Development and Export Authority — which led the Interior Energy Project before transferring Fairbanks Natural Gas to IGU — both entertained proposals from other entities pitching lower cost LNG.
IGU leaders notably spent months discussing LNG deliveries with Siemens Government Technologies in 2019; however, the neither the global government contractor or other firms could provide AIDEA or the utility with detailed and firm gas supply plans and cost structures.
Elwood Brehmer can be reached at [email protected].