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Vol. 21, No. 15 Week of April 10, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Interior Energy Project preparing plan

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Tells AIDEA board that some work remains in completing the details of a proposal for a Cook Inlet LNG plant built by Salix Inc.

ALAN BAILEY

Petroleum News

The Interior Energy Project, a project designed to bring affordable energy to Fairbanks and the surrounding Interior, is still finishing up the various components of a proposal to put to the Alaska Industrial Development and Export Authority board, members of the team told the AIDEA board during its March 31 meeting.

The proposal under consideration involves the construction by Salix Inc. of a liquefied natural gas plant in the Cook Inlet region. The team had hoped to complete the proposal in time for the end-of-March meeting but now anticipates having a complete plan package ready in time for the next board meeting on April 28, Gene Therriault, Interior Energy Project team leader, told the board.

During the March 3 board meeting the team had told the board that it had chosen the Salix proposal as the preferred option for an LNG plant, but that further work was needed on the plan before putting it to the board for a decision. The idea is that the board will review the plan and decide whether to approve moving forward to the front end engineering and design, or FEED, phase of the project.

Therriault said that for a board decision to be made the plan must identify the source of natural gas for the LNG plant; it must provide an estimated cost for the project; and it must provide an estimated price for natural gas supplied to consumers in Fairbanks. Although there has been progress on all three of these fronts, the three components have not yet come together, team member Robert Shefchik told the board.

Discussions with producers

Nick Szymoniak, AIDEA’s energy infrastructure development officer, said that the team is “in discussions with multiple Cook Inlet producers about securing a gas supply for the project.” The project will have a term sheet for the gas supplies firmed up prior to a proposal to move into FEED for the LNG plant. The gas supply will be in addition to the supply to the existing Titan LNG plant near Point MacKenzie, and will supplant that supply when the existing Titan gas supply agreement expires in early 2018, Szymoniak said.

The Titan plant currently produces LNG for Fairbanks Natural Gas, which provides a gas supply service in central Fairbanks. The idea behind the Interior Energy Project is to greatly expand that supply. Both Fairbanks Natural Gas and the Interior Gas Utility, the other Fairbanks gas utility, have started building out the Fairbanks natural gas distribution infrastructure in anticipation of the increased LNG supply becoming available.

As part of the Interior Energy Project, AIDEA has purchased Pentex Natural Gas Co., the owner of both the Titan LNG plant and Fairbanks Natural Gas. AIDEA’s eventual objective is to achieve operational efficiencies and economies of scale through the consolidation of the two Fairbanks gas utilities, with AIDEA then spinning off the combined utility to some third party business.

Utilities involved

Shefchik said that the two utilities have been involved in the negotiations over new gas supplies and the new LNG plant proposal. He also commented that one consideration is possibly increasing the capacity of the Titan plant, and integrating the Titan plant into the new LNG supply arrangements. Work on expanding the Titan plant would likely cost $8 million to $10 million, with increased LNG storage capacity also being needed in Fairbanks, Shefchik said. Dan Britton, president and CEO of Fairbanks Natural Gas, said that the expansion would probably raise the plant’s capacity from about 50,000 barrels per day to 75,000 barrels per day. However, it would be necessary to run a computer model of the plant to confirm the assumptions made in the capacity estimates, he said.

Shefchik commented that there have been meetings to pin down the scope of early work associated with the Salix LNG plant and that it is important to have an understanding of what the project will look like, as well as the project’s commercial terms, before finalizing an agreement with Salix.

Gas demand

Therriault also commented on work in progress in trying to boost demand in Fairbanks for converting homes to natural gas - having an adequate rate of gas conversions forms a key component of project economics. Therriault said the project team is working with the local government and the Alaska Department of Environmental Conservation to find the best way of accessing an Environmental Protection Agency air quality fund, under a deal secured by U.S. Sen. Lisa Murkowski. One of the objectives of the Interior Energy Project is to reduce air pollution in Fairbanks that results from the use of wood burning stoves to heat houses.



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Discussions continue over FNG purchase

Discussions are continuing over the Interior Gas Utility’s potential purchase of Fairbanks Natural Gas, according to the latest quarterly report to the Alaska Legislature from the Interior Energy Project. The report, published on April 5, says that that the purchase could include Pentex Natural Gas’s liquefied natural gas plant near Point MacKenzie on the Cook Inlet, and a trucking operation for shipping LNG from the plant to Fairbanks. The target date for closing the transactions is June 30, the report says.

As part of the Interior Energy Project, a project to bring affordable energy to Fairbanks and the surrounding Interior, in 2015 the Alaska Industrial Development and Export Authority purchased Pentex, thus obtaining ownership of Fairbanks Natural Gas and the Port MacKenzie LNG plant. AIDEA has made it clear that its eventual objective is to consolidate the two existing Fairbanks gas utilities, Fairbanks Natural Gas and the Interior Gas Utility, and then to spin off the combined utility to a local control entity. The IGU takeover of FNG is presumably a means of achieving this objective.

Both gas utilities have already embarked on a program of expanding the existing natural gas distribution infrastructure in Fairbanks, in anticipation of an increased gas supply becoming available for the city. However, a key variable in the economics of the program is the rate at which Fairbanks homeowners convert their properties to the use of natural gas for heating. The April 5 report comments that, while a couple of years ago many Fairbanks homeowners had indicated a willingness to convert at the gas price of $15 per thousand cubic feet that the AIDEA project has been targeting, the subsequent fall in heating fuel oil prices has been leading to an increased interest in finding ways to help homeowners with a switch to gas.

In addition to the potential use of flexible conversion financing through utility bills, there are several possible sources of government funding assistance. The Alaska Legislature is currently considering legislation for the Property Assessed Clean Energy program, a national program that could allow the local government to issue loan financing with attractive terms. The closure in March of Alaska’s Home Energy Rebate Program means that that program is no longer available for funding help.

—ALAN BAILEY


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