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State plan to truck LNG to Fairbanks faces more hurdles

Dermot Cole | Alaska Dispatch News

FAIRBANKS — The key question mark about the state-backed effort to expand natural gas distribution in Fairbanks remains the price, with the release of new information put off until the end of the year.

The staff and board of the Alaska Industrial Development and Export Authority say the revised timetable on the gas trucking plan has nothing to do with the fall election, but is a consequence of a complex and challenging project with many moving parts made more difficult by a compressed schedule.

At a summer meeting, AIDEA board member Gary Wilken of Fairbanks said he would rather take an extra year to get it right than to spend the next 20 years having to live with something that was done wrong.

An AIDEA spokesperson said Friday the legal framework is in place, a gravel pad on which to build the liquefied natural gas plant has been built and a financial plan is taking shape.

“We have a job to do, and we are focused on bringing this project online and helping make this a success for the people of Fairbanks and North Pole,” the spokesperson said.

An agreement signed Friday by AIDEA with MWH Global Inc., the private contractor selected early this year to lead the venture, said the goal is to get the plant operating by no later than Sept. 30, 2016, about a year later than originally announced.

MWH has agreed to present a cost estimate by Nov. 5 and a final work plan by Nov. 14 this year, which will go a long way toward deciding whether a financial closing is possible.

Additional hurdles are still to be crossed, however, including the completion of gas sale contracts with the local electric utility, a private gas utility and a municipal gas utility, and arrangements concerning trucking and storage.

But AIDEA says by late this year a clearer picture will emerge about how much it would cost to build and operate a liquefied natural gas plant on the North Slope, the lynchpin in the system.

The ultimate fate of the project to change the energy equation in Fairbanks will boil down to one simple fact: If the end price for natural gas is too high, homeowners and business owners won’t convert from heating oil.

Without converts, a Canadian pension system poised to invest in the project won’t do so because of the risk that it won’t earn a sufficient profit on its investment. The agreement with MWH allows a maximum internal rate of return on the private equity investment of 12.5 percent.

The private financing is an important element in the plan envisioned by Gov. Sean Parnell, the Legislature and AIDEA, to go along with a combination of low-interest state loans and grants to pay the rest of the tab, estimated to total more than $220 million.

The agreement Friday said that the plant financing would include up to $35 million from AIDEA and up to $100 million in state loans. The private financing would be from $20 million to $50 million in equity and tens of millions more in loans.

As the contractor, the state agency and the utilities struggle to put the final pieces together, they are cognizant that the magic number bandied about in Fairbanks for the past few years is $15 per thousand cubic feet of gas.

That is roughly double the price of natural gas for customers in Anchorage, but half of what fuel oil costs in the Interior. If natural gas comes in close to that number in Fairbanks, people will want to make the switch from oil, the thinking goes. The more people that switch, the lower the cost of gas.

If the price goes too much above that mark, however, people will stick with oil. There is some disagreement on how high is too high, but not on the idea that a higher price discourages conversion.

In a venture that requires an industrial plant with a substantial private investment, changes in the variables could mean missing that $15 target by a wide margin.

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In August, AIDEA said its financial model shows that gas could be delivered to Fairbanks at a price between $11 and $13.50 per thousand cubic feet. The price to consumers would include a distribution charge that could be several dollars more.

If the financial closing on this project doesn’t take place, AIDEA will probably look again at the idea of whether Cook Inlet gas supplies could solve the situation for the Interior, which has been largely unable to get access to cheaper energy, with the exception of wood. That fuel source, however, has contributed to the air pollution problem, with local air quality falling significantly short of national standards.

There are many questions about the Cook Inlet idea for natural gas supplies, though a company called WesPac has made several presentations to community groups in Fairbanks, the Matanuska-Susitna Borough area and elsewhere about a possible development to ship gas to Fairbanks. The company has a PowerPoint presentation that has attracted some interest as a “Plan B” if the North Slope idea doesn’t work, but it doesn’t have a project just yet.

In the past the lingering concern that a better option might be available in the near future has led to indecision and projects that haven’t panned out. In addition to the uncertainty about the source of gas, there are issues with local distribution that have to be settled.

Based on the expectation that Fairbanks needs a new fuel supply — a situation described by many Fairbanks leaders as an essential step in making the future more secure — a municipal gas utility is prepared to begin installing pipe next year in North Pole, while the private gas utility, Fairbanks Natural Gas, has started expanding its lines this summer in the main areas of the city.

Within the next two months, AIDEA says it hopes to have a clearer idea of whether the Interior Energy Project is going to work. At that time, there will be some idea if the package of low-interest funds and a state grant was enough to entice private financing for a portion of the total.

If not, the argument will be made that the Legislature and governor relied far too much on public and private borrowed money and not enough on grants.

As envisioned, about three-quarters of the money is borrowed and has to be repaid, which means a lower risk for the state and a higher risk and expense for those companies and consumers buying gas.

The utilization rate is a central concern. It is almost as expensive to build and operate a plant that runs at half-capacity as one that runs at full capacity, 6 billion cubic feet per day.

But the cost per cubic foot of gas to the consumer could be prohibitively expensive if the plant is running at 50 percent instead of 100 percent.

In the latter instance, the costs can be spread out over sales of 6 billion cubic feet instead of 3 billion.

An additional factor is that the plant has to start with some excess capacity to allow future growth. The balance that must be struck then is between excess capacity and the added expense that entails.

It appears that the private gas utility, the fledgling municipal gas utility and the Golden Valley Electric Association are in line to acquire something close to half of the capacity of the plant or perhaps more.

GVEA would be the anchor tenant, using the most gas.

The Legislature has approved plans for up to $275 million in subsidized loans and bonds, $30 million in tax credits, and $57.5 million in grants to help the various aspects of the project.

A year and a half ago, AIDEA expected to be farther along than it is today, with a timetable showing the plant in operation by late 2015. A late 2016 start now appears more likely.

AIDEA has yet to solve this economic puzzle or declare that it’s all going to pencil out.

There is a a lot riding on this for Parnell, and Interior legislators, who have made the hope for lower energy prices a major campaign issue in Fairbanks.

 

Dermot Cole, who has been covering Fairbanks news since the 1970s, is a columnist and reporter for the Alaska Dispatch News.

 

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