With concurrent work progressing on multiple fronts, including a gas supply agreement, customer gas offtake agreements and plant cost estimates, a project to build a liquefied natural gas plant on the North Slope is moving rapidly towards a financial close in mid-December, executives from engineering firm MWH told the board of the Alaska Industrial Development and Export Authority, or AIDEA, on Sept. 25.
The LNG plant construction forms part of the Interior Energy Project, a project to bring affordable natural gas to Fairbanks by trucking LNG from the North Slope along the Haul Road and then delivering the gas through a greatly expanded distribution pipeline system in the city.
“There’s a lot going on right now, trying to meet this really accelerated schedule,” Rick Adcock, vice president and managing director of MWH Infrastructure Development Inc., told the board.
AIDEA is providing state funding support for the Interior Energy Project and has commissioned MWH to manage construction of the LNG plant. The target is to supply gas to Fairbanks consumers at a cost of $15 per thousand cubic feet or less, an energy cost substantially below the high cost of fuel oil and diesel fuel that Fairbanks currently uses.
On Sept. 19 AIDEA and MWH signed a concession agreement, creating the legal framework under which AIDEA will own and MWH subsidiary Northern Lights Energy LLC will build, operate and maintain the LNG plant. And, in anticipation of plant construction, a pad on which the plant will be sited has been completed on the Slope.
Decision-making process
During the board meeting questions arose regarding the feasibility of the decision-making process leading to the LNG plant project’s financial close, given factors such as having to finalize gas offtake agreements with Fairbanks utilities within a short period after completing the estimates of the LNG facility construction costs and schedule. Board member Gary Wilken suggested that, given the lack of alignment between the interests of the various stakeholders in the project, it would take significant time to iron out the various wrinkles in the “funding cocktail.”
Adcock responded that the project team is addressing the aggressive schedule by progressing several activities in parallel, and by holding meetings with stakeholders, to keep people apprised of the issues that need to be resolved, paving the way for efficient decision making by the necessary deadlines. Rather than facing people with the need for quick decisions, starting from scratch, the project team is keeping people informed, helping them towards the decision-making point, he said.
At the same time, having an aggressive schedule focuses minds, Adcock commented.
“It does put a lot of pressure on people to come to a decision,” he said.
Project status
Chris Brown, vice president and regional manager for MHW Americas Inc., reviewed the status of the various activities that need to be accomplished to achieve the financial close.
The project team has been negotiating with BP over an agreement for the supply of North Slope gas to the project. At the same time, negotiations are in progress over a joint development agreement between MWH, Golden Valley Electric Association and a private investment company, to form a special company for capitalizing the project. Under the terms of the concession agreement between AIDEA and MWH, the project financing will involve a mixture of AIDEA and private funds. According to the MWH project schedule, negotiations leading to the gas supply and joint development agreements will be completed in the latter part of October.
Meantime, MWH has selected a company to operate the LNG plant and is in the process of conducting the negotiations required for the award of an operating contract, Brown said. Estimates for the operating costs for the plant will be completed by the end of October, with the contract with the plant operator expected to be finalized in early December, he said.
Engineering and construction
Another major piece of the jigsaw puzzle leading to financial close is the contract for the engineering and construction of the LNG plant, including cost estimates for completion of the plant and an estimated work schedule. AIDEA has already contracted directly with engineering firm Kiewit for the construction of the pad for the LNG facility and to conduct early design, engineering and procurement work.
MWH has engaged a third-party cost estimating firm to help with the estimating process, while a team that includes AIDEA, MWH and Kiewit is close to achieving a design freeze, an important milestone in developing an engineering, procurement and construction contract, Brown said. The team envisages delivering estimates for the project costs and schedule on Nov. 4, with these results being issued on Nov. 7 following a validation process.
This anticipated timing led to some of the discussion in the board meeting about the project scheduling concerns, given that the AIDEA board has apparently planned a meeting in early November to review the project estimates.
Gas offtake agreements
Gas offtake agreements with the utilities that are interested in purchasing the North Slope gas are also critical to the financial close. According to the project schedule, discussions and negotiations over these agreements started in early July and have been ongoing - approvals of the agreements by utility boards are anticipated in November, a week or two after finalization of the project cost estimates. Much progress has been made in these negotiations, with a willingness from all concerned to find common solutions to the various issues that arise, Brown commented.
Brown also commented that the early procurement of some long lead time equipment needed for the plant is under way. And the utilities have been working cooperatively on the LNG trucking and storage arrangements needed to support the project - the plan is to form a trucking and LNG storage consortium, using the services of a trucking company.
“There’s growing confidence in how that’s going to work,” Brown said.
Uncertainties
Adcock presented an analysis of the major uncertainties relating to the project. It appears that the level of gas demand in Fairbanks and the cost of trucking LNG from the North Slope have particularly high sensitivities in terms of their potential impacts on the costs of LNG delivered in Fairbanks. Uncertainties in the financing of the project have the least potential impact. However, the management of the operating cost of the LNG plant is also extremely important in keeping the cost of the LNG as low as possible, Adcock said.
