Legislature(2013 - 2014)BUTROVICH 205
01/31/2013 07:30 AM Senate SENATE SPECIAL COMM ON IN-STATE ENERGY
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| Presentation: Alaska Industrial Development and Export Authority Overview of Fairbanks Gas Trucking Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
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| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON IN-STATE ENERGY
January 31, 2013
7:31 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator John Coghill, Co-Chair
Senator Peter Micciche
Senator Dennis Egan
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Giessel
COMMITTEE CALENDAR
PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT (AIDEA) OVERVIEW OF
FAIRBANKS GAS TRUCKING PROJECT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MARK DAVIS, Deputy Director
Infrastructure Development
Alaska Industrial Development and Export Authority
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of the Fairbanks
Liquid Natural Gas Trucking Project.
NICK SZYMONIAK, Project Economist
Alaska Energy Authority
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of the Fairbanks
Liquid Natural Gas Trucking Project.
TED LEONARD, Executive Director
Alaska Industrial Development and Export Authority
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of the Fairbanks
Liquid Natural Gas Trucking Project.
ACTION NARRATIVE
7:31:00 AM
CO-CHAIR CLICK BISHOP called the Senate Special Committee on In-
State Energy meeting to order at 7:31 a.m. Present at the call
to order were Senators Micciche, Egan, Co-Chair Coghill, and Co-
Chair Bishop. Co-Chair Bishop welcomed Senator Giessel and asked
her to join the committee.
^Presentation: Alaska Industrial Development and Export
Authority Overview of Fairbanks Gas Trucking Project
Presentation: Alaska Industrial Development and Export Authority
Overview of Fairbanks Gas Trucking Project
7:31:55 AM
CO-CHAIR BISHOP introduced the overview for the Liquefied
Natural Gas (LNG) Project regarding production, distribution,
and financing. He noted that Interior Alaska referred to the LNG
Project as the Interior Gas Trucking Project and was inclusive
of the Rural Interior River Systems for propane distribution.
7:32:35 AM
MARK DAVIS, Deputy Director, Infrastructure Development, Alaska
Industrial Development and Export Authority (AIDEA), said SB 23,
the Governor's bill, had two components: allowing AIDEA to do
direct project financing and the Governor's Interior Alaska Gas
Plan (IAGP). He explained that AIDEA was currently required by
law to own 100 percent of a project or own a project in
conjunction with other investors. He explained that it would be
best if AIDEA provided financing for certain projects that were
not owned by AIDEA for long periods of time. He noted that a
slight modification was made to AS 44.88.172(a) to allow AIDEA
to do direct financing.
MR. DAVIS said the Governor's IAGP was designed to work with a
number of components as follows:
· Gas storage credits, passed during last session by the
legislature.
· Appropriation request, a onetime appropriation of $50
million which would go to AIDEA.
· Recapitalization of the Sustainable Energy and
Transmission Supply Fund (SETS), an element of SB 25
that passed during last session by the legislature
that would be used as a loan to the project
· Authorization for AIDEA to issue $150 million worth of
bonds.
MR. DAVIS said the Governor's comprehensive package added up to
approximately $355 million and was made up of several components
with one component already in place.
7:34:41 AM
He explained the LNG Project goals as follows:
· Provide the lowest cost energy to most Alaska
consumers in the Interior.
· Get gas first to Interior Alaska while assuring
long-term access to gas from liquefaction plant
for all Alaskans
· Utilize private sector mechanisms as much as
possible.
CO-CHAIR BISHOP announced that Senator Wielechowski joined the
committee meeting.
MR. DAVIS explained the AIDEA Development Project Analysis &
Decision Making Process as follows:
SB 23 in the Interior gas plan is going to work in
conjunction with AIDEA's normal decision making
process. SB 23 is asking for:
· Appropriation.
· Recapitalization of SETS.
· Bond authorization to use in conjunction with the
Governor's gas storage credits as a unit.
AIDEA will apply this process to make sure it works via:
· Feasibility analysis.
· Deal structuring analysis.
· Put together the final deal.
MR. DAVIS said requests were issued in December for interest
from firms that might be willing to work within the AIDEA
Development Project Analysis & Decision Making Process and work
with the AIGP. He said AIDEA was pleased to announce that 16
Letters of Interest (LOI) were received from the request. He
noted that AIDEA was reviewing the LOI to see what had been
offered and what would fit within the process.
He said the goal was to lower energy costs by using the North
Slope's LNG and trucking it to the Fairbanks area. He said
AIDEA's LNG trucking project was being done in conjunction with
the Alaska Energy Authority (AEA). He explained that AEA had
provided AIDEA with the following data:
Key Assumptions:
· 9 Billion cubic feet (Bcf) plant.
· LNG plant bifurcated into two sections (industry
and utility).
· $50 million capital cost reduction applied to the
4.5 Bcf utility section.
· Re-gas, storage, and distribution costs are
presented as a range.
MR. DAVIS said the 9 Bcf plant was relatively small. He
explained that the $50 million appropriation from SB 23 would be
placed into the utility-side of financing the LNG plant in order
to keep the cost as low as possible. He noted that AIDEA had a
regulatory lawyer on staff to address regulatory issues of how
the deal would be structured.
He announced that there was good news from AEA on pricing as
follows:
Expected Utility Price per thousand cubic feet (Mcf):
· Wholesale LNG: $10.33.
· Natural Gas to Home: $13.49-$17.29
He noted a chart that showed a 40 percent reduction in
Fairbank's heating costs with natural gas versus fuel oil.
SENATOR WIELECHOWSKI asked what the total cost was for the LNG
plant, the cost breakdown for state's portion, and the bond
amount.
MR. DAVIS answered that the Governor's IAGP was made up of the
following components:
· Gas storage credits that was passed last session.
· Appropriation request for $50 million in SB 23
· Recapitalization for $125 million of the SETS
Fund that was made available from SB25 during
last session as a loan to the project.
· $150 million in bonding to AIDEA.
SENATOR WIELECHOWSKI asked Mr. Davis to explain the $125 million
recapitalization and the $50 million appropriation.
MR. DAVIS responded that financing would be as follows:
· $50 million one-time appropriation to AIDEA from
general funds.
· $150 million authorization for AIDEA to issue
bonds because if AIDEA issues bonds over a
certain limit, it must seek legislative
authority.
· Appropriation to recapitalize the SETS Fund at
$125 million and that, according the Governor's
Gas Plan, would be loaned to the project at 3
percent.
SENATOR WIELECHOWSKI asked if that $50 million was out of the
general fund and the rest was picked up through other bonding
sources.
MR. DAVIS answered yes.
He addressed the LNG project description as follows:
· Natural gas will be liquefied on the North Slope
and trucked to Interior Alaska.
· Primary LNG demand anticipated to be Fairbanks
and North Pole.
· LNG will be temporarily stored and re-gasified in
Interior Alaska.
· Natural gas distribution system with storage to
supply natural gas for heating.
He emphasized that the Governor's IAGP was anticipated to build
out distribution. He explained that the plan was not strictly
about building an LNG plant, but a complete integrated system
would be provided. He said the plan would create the gas, truck
the gas, and distribute the gas.
CO-CHAIR BISHOP said he would provide the committee with a copy
of financing build-out from the Governor's IAGP that was
submitted in December, 2012. He noted that the Governor's report
showed the funding sources more clearly.
MR DAVIS explained a diagram on the LNG-Supply-Chain. He said
the re-gasified LNG could be used as gas in space heating,
electricity, and industrial usage. He said there would be
liquids in the gas and AIDEA would attempt to capitalize on the
liquids by selling propane and other types that were usable on
the North Slope.
SENATOR WIELECHOWSKI asked what the expected price would be for
purchasing North Slope gas.
MR. DAVIS answered that AIDEA did not have an exact price.
He said AIDEA's 16 LOI for participation included the following:
· Two turnkey offers: Golden Valley Electric
Association (GVEA) and Pentex Alaska Natural Gas
Co., the parent company of Fairbanks Natural Gas
(FNG). Both of those companies indicate that they
have contracts in place with producers, but AIDEA
has not engaged in discussions with them at level
of determining exactly what those contracts say.
SENATOR MICCICHE asked what the LNG plant's daily capacity was.
MR. DAVIS answered 9 Bcf.
SENATOR MICCICHE asked for the plant's daily capacity.
MR. DAVIS replied that he would get back to Senator Micciche on
the LNG plant's daily capacity.
SENATOR WIELECHOWSKI addressed the "Natural Gas to Home" price
range that Mr. Davis noted of: $13.49-$17.29. He asked what
producer-price was used to calculate the price range.
MR. DAVIS answered that he assumed the price range from the
producer was $2.00 to $3.00. He noted that the price range was
an estimate and the actual price was not known.
SENATOR WIELECHOWSKI stated that he was told that gas was
selling on the North Slope for $4.00.
MR. DAVIS answered that he did not know the North Slope gas
prices.
SENATOR WIELECHOWSKI asked if it was possible for a more
detailed breakdown of tariffs, cost of gas, and trucking costs.
MR. DAVIS replied that the assumption for trucking was $4.00.
CO-CHAIR COGHILL commented that there was a slide at the end of
Mr. Davis' presentation that addressed more detailed costs. He
asked if AEA's economist could address costs.
CO-CHAIR BISHOP asked Mr. Szymoniak if he had the daily capacity
number for the LNG plant.
NICK SZYMONIAK, Project Economist, Alaska Energy Authority,
Anchorage, responded that he would calculate the LNG plant's
daily capacity.
CO-CHAIR BISHOP asked Mr. Davis to continue the presentation.
MR. DAVIS introduced the AEA and AIDEA project team as follows:
AEA:
· Gene Therriault: Deputy Director, State Energy
Policy Development.
· Kirk Warren: Technical Engineer.
· Nick Szymoniak: Project Economist.
AIDEA:
· Mark Davis: Deputy Director, Infrastructure
Development.
· Jim Strandberg: Energy Development Finance
Officer.
MR. DAVIS addressed the Collaboration Structure between AEA and
AIDEA as follows:
AEA is leading the policy development of the project:
· Ensure that project goals are defined and
consistent with the public interest.
· Engage the public, industry, and elected
officials.
AIDEA is developing the financing of the project:
· Examine finance options and commercial structure
in collaboration with private party participants.
· Utilize available finance tools to meet project
goals.
MR. DAVIS addressed the project's "expert consultation" as
follows:
Engineering consultant:
· LNG expert hiring by January 31.
· Provide technical project support.
Project management consultant:
· Anticipate hiring in February.
Financial consultant:
· Mark Gardiner of Western Financial Group.
· Retained in November.
MR. DAVIS noted that AIDEA hired experts on a project by project
basis. He said a Request For Proposal (RFP) had been issued for
LNG engineering consultants and AIDEA was reviewing responses.
CO-CHAIR BISHOP asked Mr. Davis to alert the committee when
AIDEA awards the engineering RFP.
MR. DAVIS answered yes. He noted that the AIDEA Procurement
Committee was meeting next week to make its selection. He added
that AIDEA was in the process of putting out an RFP for a
project management consultant to oversee the entire process
going forward to make sure it made sense. He said AIDEA was in
the project development and analysis phase. He explained that
the intent was to have its experts acknowledge if the LNG plant
was feasible with the proposed money and whether wholesale LNG
could be delivered to Fairbank at $10.00 Mcf.
CO-CHAIR BISHOP asked when the committee would know what Mr.
Davis had just described.
MR. DAVIS replied that the information would be put before the
AIDEA Board of Directors in a public forum.
CO-CHAIR BISHOP asked if Mr. Davis had a timeline.
MR. DAVIS answered that he would reveal the timeline at the end
of his presentation.
He explained the financing options for the North Slope LNG plant
as follows:
LNG Plant Finance Sources:
· Storage Credit: $15 million.
· General Fund Grant: $50 million.
· AIDEA SETS Loan: $125 million.
· Other Financing: $30 million.
· Plant Total: $220 million.
He noted that "other financing" would be from the private
sector. He explained that the Governor wanted the project to
work with the private side. He said AIDEA had $50 million in
general funds (GF) and the rest was in the form of loans or
AIDEA sourcing other capital. He noted that the 16 LOI were
potential financing participants.
CO-CHAIR BISHOP asked if private equity groups had shown
interest.
MR. DAVIS answered yes. He noted that additional interest was
shown by a bank and a financial consortium, a form of investment
bank and arm of a charter bank.
SENATOR WIELECHOWSKI addressed the LNG plant's bifurcation for
industry and utility usage. He asked what industries AIDEA
envisioned for the LNG. He inquired if the industry [sector]
would possibly pick-up the "other financing" of $30 million or
more.
MR. DAVIS answered that "other financing" would need to be
parsed out. He said the Governor's goal was to work with private
capital for the project.
He addressed LNG utility and industrial sales. He said AIDEA
would procure a "regulated sale" to a utility to achieve the
Governor's goal of providing the consumer with the best possible
price. He added that commercial-priced sales to industrial
accounts would help defray the debt service on the entire
project.
SENATOR WIELECHOWSKI asked if AIDEA envisioned selling on the
North Slope, Interior Alaska, or shipping via barges.
MR. DAVIS answered that some of the liquids that would be
stripped off of the gas could be sold on the North Slope. He
said propane that was generated from the LNG process could be
sold throughout the Interior. He addressed the possibility of
selling LNG to other commercial users that would not be in the
Fairbanks area.
CO-CHAIR COGHILL addressed industrial anchor-purchasers as
Golden Valley for electricity production and two refineries. He
explained that the refineries were using high cost oil in their
refining operations that could be replaced. He noted that
hospitals and big-box stores would also be possible commercial
purchasers. He said home heating would be the smallest unit
users for the build-out.
7:50:44 AM
SENATOR WIELECHOWSKI asked what AIDEA projected as the total
amount of gas available for the Interior.
MR. SZYMONIAK answered that some designs had been reviewed for a
space heating load to homes and businesses at 9 to 11 Bcf. He
explained that industrial load and refineries would be 9 to 11
Bcf. He said the total would be 18 to 20 Bcf.
TED LEONARD, Executive Director, Alaska Industrial Development
and Export Authority (AIDEA), said the LNG Plant was originally
designed for 9 Bcf with the ability to expand up to 20 Bcf. He
disclosed that the full build-out was currently projected for
high and medium density users in the Fairbanks area with the
industrial sector being approximately 14 Bcf. He noted that
expanded distribution to the Interior would increase the number
to 20 Bcf.
SENATOR WIELECHOWSKI asked if the LNG production projects were
for both industrial and utility usage.
MR. LEONARD answered that he believed the total build-out would
be 20 Bcf. He said bifurcation would be evenly divided between
industry and utility usage. He addressed potential industrial
development would include the North Slope and the transportation
section to develop LNG use in trucks. He noted that FNG had
purchased several LNG propelled trucks for transportation
between Port MacKenzie and Fairbanks. He explained that LNG
usage would expand quickly in Fairbanks and the Northwest Artic
Borough in replacing diesel fuel with LNG in powering mining
operations.
7:54:42 AM
MR. DAVIS stated that there would be industrial sales and
regulated sales, but some of the users that Senator Coghill
referenced would actually be regulated sales. He explained that
LNG sales to Golden Valley would be regulated by the Regulatory
Commission of Alaska (RCA). He said AIDEA was in preliminary
negotiations with other industrial users that would include the
Ambler mining district, [located in the Northwest Artic
Borough]. He explained that the mining operators' diesel
generator-sets could be designed to convert to propane. He said
there were many potential long term LNG users via pipeline or
trucking. He stated that the cost of trucking from Fairbanks to
outer areas was not that much of an increment [per Mcf of gas].
He reiterated that the cost to truck outside of Fairbanks was
$4.00 per Mcf.
CO-CHAIR BISHOP summarized that the more gas sold would
ultimately decrease the prices for the individual user at the
burner-tip. He noted Fairbanks' air quality problem with fine
Particulate Matter (PM) that was smaller than 2.5 microns in
diameter (PM2.5). He said the Department of Environmental
Conservation (DEC) told him that the use of natural gas would
lower the PM2.5 problem in Fairbanks. He noted that there was a
lot of LNG trucking projects that would be successful prior to
pipeline possibilities. He said Tower Hill Mining and the
[Ambler Mining District] were examples of potential big
industrial users for LNG truck-gas projects. He cited two paper
mills in Maine that were devastated by high energy costs that
successfully transitioned to LNG truck-gas and saved jobs. He
asked Mr. Davis if more gas volume meant lower costs.
MR. DAVIS answered yes. He said the LNG plant and trucking
operations would need to reach optimal sizes. He explained that
Economies of Scale (EOS) could be achieved. He said he agreed
with the DEC Commissioner that the Environmental Protection
Agency's PM2.5 designations would affect industrial users to
shift to natural gas and away from diesel generator-sets.
7:57:56 AM
SENATOR MICCICHE stated that Alaska was 40 years behind in
trucking LNG. He addressed the example of the paper mills
converting to LNG truck-gas in Maine and noted that the LNG was
delivered from a large-scale operation in [Everett,
Massachusetts]. He said AIDEA's LNG facility was a small-scale
operation that would not have the capacity for the uses that
were previously mentioned to the committee. He noted that the
current funding package would not meet the overall needs. He
addressed the theory that selling more gas equated to lower
pricing and noted that it would only work with negotiated prices
from the North Slope. He said the rest of the system would not
benefit from EOS. He added that the truck-gas system for a
small-scale facility was labor intensive.
SENATOR MICCICHE asked Mr. Davis to address the scope of the LNG
facility and inquired if depropanized or lean-gas would be
purchased from the supplier.
MR. DAVIS answered that the gas would be purchased as-is from
the North Slope. He explained that the contracts had not been
examined that were in place between the two turnkey offers. He
said he expected that [depropanizing] would be addressed in the
contracts.
SENATOR MICCICHE replied that the differences between
depropanized and lean-gas would dramatically affect pricing.
MR. DAVIS responded that an LNG engineer and lawyers were
engaged to review the contracts and delve into the details. He
said the goal was to achieve the best price and least cost that
was consistent with what the commercial sector would sell.
SENATOR MICCICHE asked if FNG would continue running the plant
at Point MacKenzie to meet the additional need.
8:00:37 AM
MR. DAVIS responded that he did not know and noted that FNG
would have to decide based upon their business plan. He stated
that AIDEA was not trying to compete against any existing
company and noted that the intent was to present a plan for the
Interior. He disclosed that AIDEA had been in contact with FNG
regarding their new natural gas powered trucks that would haul
LNG. He said he agreed with Senator Micciche that Alaska was
behind in LNG trucking and was interested in knowing how FNG's
trucks operated.
He addressed Senator Micciche's comments regarding EOS and noted
that financial EOS could be achieved from proper plant size and
the amount of financing required, but not from an engineering
perspective.
MR. LEONARD explained that AIDEA believed that the Governor's
financial package would set the core of the LNG plant. He
explained that the LNG plant was 9 Bcf with the ability to
expand in increments of 2 Bcf. He said AIDEA believed that the
LNG plant and distribution system would allow for the market to
finance incremental Bcf increases up to the 20 Bcf maximum. He
stated that one of the proposed contracts had indicated LNG
interest for up 20 Bcf for 20 years and another party proposed a
15 year contract for 14 to 16 Bcf. He said he had a discussion
with Senator Coghill in 2012 regarding fixed gas pricing [from
the producer] and pricing was in the $2.00 to $3.00 range. He
noted that an analysis was required with a confidential-shield
to be able to see the actual numbers. He explained that one of
the parts from the analysis would include a demand-review if a
pipeline came to fruition by 2020 to ensure the plant continued
to have demand after completion. He said a company would be
hired to provide detailed economic and demand-analysis to
provide a full picture for financing purposes.
8:03:57 AM
MR. DAVIS addressed financing and noted that the first people
that finance the LNG project would ask for a higher rate of
return due to risk. He said once a project becomes operational
with cash flow with a track history, a better rate could be
attained. He explained that obtaining a better rate was similar
to refinancing a home mortgage where payment schedule and equity
levels were reviewed in order to obtain a lower interest rate.
He said lowering interest rates over time was typical for
expanding industrial sites.
SENATOR WIELECHOWSKI asked if there was consideration to make
LNG available to South Central utilities due to the region's
concern of running out of natural gas.
MR. DAVIS responded that AIDEA had not looked at supplying South
Central. He said a delivered price to South Central could be
calculated once actual pricing and trucking costs were obtained.
SENATOR WIELECHOWSKI commented that whenever gas pipelines were
discussed in the past, a "postage stamp" rate was typically
addressed where everyone paid the price. He asked Mr. Davis if
he envisioned a "postage stamp" rate.
MR. DAVIS answered that parts of the system would come under the
jurisdiction of the RCA. He said the RCA would try to achieve a
uniform price for similar customers.
SENATOR MICCICHE addressed the challenges of offering a "postage
stamp" rate for delivering gas via truck versus a pipeline. He
stated that there was a need to focus on the fact that the
proposed LNG plant did not have a lot of capacity. He explained
that offering excess product for other areas would be difficult
to achieve. He noted that the proposed LNG plant was exciting,
but admitted that there was a lot to learn before the project's
cost, deliverable amount, and excess availability was known.
8:06:16 AM
MR. DAVIS responded that AIDEA was at the project analysis and
decision making phase. He said AIDEA believed that the
Governor's IAGP was a good plan and noted that SB 23 was not
designed to start building the LNG project. He said SB 23 would
put the right tools in place to allow the IAGP to be analyzed in
order to determine feasibility for a 9 Bcf LNG plant, delivered
pricing to Fairbanks, and possible residual uses for:
residential heating, industrial gas conversion, and mining
operations. He said the analysis would review all potential gas
markets and the projected effects on a 15 or 30 year plant
amortization plans.
He explained that SB 23 would request authorization to charge
for a 3 percent loan under the SETS program. He explained that
SETS was currently set by statute to be market-indexed with an
interest rate of 5 to 6 percent. He noted that a 3 percent loan
would only add $1.00 per Bcf and not hurt consumers. He pointed
out that a 3 percent interest rate would inflation-proof the
state's loan if inflation remained at current levels over the
next ten years. He addressed the possibility for plant expansion
and noted that the facility could be expanded up to 20 Bcf. He
said the LNG plant would have residual uses if a gas pipeline
was built.
8:09:48 AM
CO-CHAIR BISHOP asked if potential markets in Canada's Yukon
Territory and Southeast Alaska were considered.
MR. DAVIS replied that once Fairbanks' needs for natural gas
were supplied profitably, expansion possibilities could be
considered for other markets if EOS was achieved. He noted that
EOS could also be pecuniary or financial in nature too. He
explained that technical EOS was difficult to achieve through
production.
SENATOR MICCICHE addressed the 30 year amortizing analysis and
noted that consideration should be given to large-scale LNG
trucking for fleets of semi-trucks that run on LNG. He noted
that should a pipeline be built, an analysis should be done on
the cost of moving a plant to a location that had infrastructure
powered by LNG. He noted that LNG trucking from the North Slope
would no longer be necessary, but it would be interesting to
find out if an LNG fuel system would be available for the long-
term after a pipeline was erected.
MR. DAVIS replied that the LNG plant would be moveable by semi-
tractor trailer. He explained that part of AIDEA's business plan
anticipated moving the LNG plant.
SENATOR MICCICHE remarked that the proposed LNG would be similar
in size to T. Boone Pickens' Clean Energy Company (CEC) LNG
plants. He noted that California was using a lot of LNG for long
distance trucking from CEC's California facility.
MR. DAVIS replied that AIDEA was asking for the same type of LNG
plant as CEC's California facility. He noted that the long-term
residual use for the proposed LNG plant was its ability to be
moved should a pipeline be constructed. He explained that the
LNG plant could be moved to another natural gas source.
8:12:57 AM
SENATOR WIELECHOWSKI agreed with Senator Micciche that analysis
should be provided on the LNG plant's residual use to avoid
obsolescence. He asked if analysis had been done on a comparison
between LNG and the Susitna-Watana Hydroelectric project.
MR. DAVIS answered that he was not aware of a report that
compared LNG to Susitna-Watana.
MR. SZYMONIAK replied that the Alaska Energy Authority (AEA) had
not specifically looked at a comparison between trucking LNG and
Susitna-Watana. He said AEA was looking at an analysis of
supplying Fairbanks with electric based heat.
CO-CHAIR BISHOP commented that a proposed dam was considered in
the Fairbanks region call the Rampart Dam project [in the 1950's
and 1960's]. He said new homes with electric based heat were
built in anticipation, but the Rampart Dam was never built.
CO-CHAIR COGHILL stated that he wanted the Susitna-Watana Dam to
come on-line. He said the proposed dam may not help his
Fairbanks based industrial users and noted that it was critical
to provide them with natural gas. He explained that the Susitna-
Watana Dam was not scheduled to come on-line until 2025 and
Fairbanks' two refineries and existing power generation required
a power [rate] drop as soon as possible.
MR. DAVIS responded that the Governor's IAGP was designed to be
complementary with the Susitna-Watana Dam and was the reason for
the joint policy effort between AIDEA and AEA. He noted that
AIDEA was also monitoring the Alaska Stand Alone Gas Pipeline
(ASAP) Project in order for financiers to address the LNG
plant's residual value when additional energy projects come on-
line.
8:15:45 AM
MR. DAVIS addressed the Project Finance Overview as follows:
· $325 million for project in Governor's finance
plan.
· AIDEA financing can be applied to different parts
of the LNG supply chain.
· AIDEA will use this finance package to leverage
private investment.
He said $325 million was in SB 23 and $30 million in gas tax
credits that the Governor put in place for use last year. He
said AIDEA would apply to finance "in pieces" throughout the
supply chain to achieve the best cost with the intent to reduce
the financial debt on the LNG project. He explained that
achieving good gas prices was based upon what was paid to the
natural gas supplier and how much was paid for the
infrastructure required to produce the LNG. He said the intent
was to reduce the infrastructure debt to the lowest possible
point.
He addressed the Governor's "finance package" as follows:
· $50 million General Fund appropriation:
ƒDirectly reduces the cost of LNG.
· $150 million AIDEA bonds:
ƒ3 percent interest rate (projected rate
based on current market rates.)
· $125 million SETS capitalization:
ƒ3 percent interest rate.
ƒFlexibility to provide optimal
commercial structure.
· $325 million total package.
· $30 million natural gas storage credit:
ƒ$15 million tax credit per qualifying
storage tank.
ƒCreated through previous legislative
action.
He said the Governor's finance package would be set forth from
SB 23.
8:16:59 AM
CO-CHAIR BISHOP called an at-ease.
8:17:25 AM
CO-CHAIR BISHOP called the committee back to order.
SENATOR WIELECHOWSKI asked if $325 million was the total cost of
the project and the cost of the liquefaction plant was included.
MR. LEONARD answered that the current estimate for the project
was $220 million for a 9 Bcf plant and $20 million for each 2
Bcf production increase.
MR. SZYMONIAK remarked that a 4.5 Bcf incremental increase would
be approximately $50 million and a bit less for a 3 Bcf
increase.
MR. LEONARD said the initial LNG plant would be $220 million and
the distribution system would be initiated for an additional
$200 million for the first phase. He summarized that the first
phase would be approximately $400 million and the total
[project] cost would be approximately $800 million with the
distribution.
He noted that a LNG trucking feasibility study was done
approximately three years ago. He said an LNG trucking program
was dependent on oil pricing being above $60 per barrel,
included industrial-based demand, and had the ability to build-
out demand. He explained that demand and production had to be
financed in tandem.
8:22:04 AM
MR. DAVIS said bond covenants that identified gas sources would
be required to issue bonds. He said bonds were necessary to
finance a good distribution system and noted that SB 23 was a
comprehensive plan.
SENATOR MICCICHE reiterated that AIDEA did not know if the gas
coming to the plant was depropanized. He explained that 50
trucks would be required to deliver LNG when the plant was at
full capacity and additional vaporization would be required in
the Fairbanks area. He asked if everything he noted was included
in the request for financing.
MR. LEONARD replied that the LNG plant would produce propane and
it would be stripped out at the facility. He explained that the
LNG plant would produce approximately 10,000 gallons of propane
per day. He said the gas would be purchased with contained
liquids.
MR. DAVIS explained that he was a lawyer and focused on
contractual language. He noted that he was reluctant to share
information until he had read the contracts. He stated that he
assumed propane would be available to sell from the LNG plant.
CO-CHAIR BISHOP declared that the day's topic was on financing
and a high-project overview. He said as the LNG project
progressed, the committee would bring the appropriate experts
forward. He addressed his background in trucking and noted that
the LNG trucking from the North Slope was not an issue. He
disclosed that a major trucking company claimed that capital
assistance was not required to finance equipment.
MR. DAVIS commented that he had assisted AIDEA five years ago to
analyze LNG trucking from the North Slope. He said prices had
changed since the analysis, but noted that the analysis
concluded that trucking was very probable without a requirement
for cash infusion.
SENATOR MICCICHE addressed the financing package and reiterated
that the actual costs were not known. He said he was looking
forward to acquiring additional financing information as the
project developed.
MR. DAVIS replied that the Governor's IAGP was designed to work
with the private sector and AIDEA was looking for an infusion of
private capital. He cited SB 23 as the tool needed to work with
the private sector.
SENATOR WIELECHOWSKI recounted that trucking would cost $2.00 to
$3.00 per Mcf and commented that he perceived the cost as being
high. He asked Mr. Leonard to provide additional details on the
trucking costs. He noted that the overall project cost was
declared to be $800 million when it was previously reported to
be $325 million and asked that the difference be addressed. He
referred to the request for $50 million from the General Funds
and asked if AIDEA would return next year to request for
additional appropriations.
8:27:18 AM
MR. LEONARD answered that the $325 million plus $30 million in
credits for storage tanks would create an LNG program that met
high and medium density demand in Fairbanks. He said added costs
would be realized when added demand required capital for
expansion. He explained that a 20 Bcf LNG plant would ultimately
require $800 million. He remarked that an established core-LNG
program would leverage private sector financing for expansion.
He said the goal of SB 23 was to get the first LNG system in and
get gas to the Interior as quickly as possible. He explained
that expansion would be addressed with the legislature and
private sector financing after the initial LNG system was in
place.
CO-CHAIR COGHILL advised the committee that the $800 million
noted by Mr. Leonard was a "what if" number. He said the $325
million was to get the industrial use and immediate build-out
use in the highest density area in Fairbanks. He said the
initial build-out would have a huge impact on the Fairbanks area
and explained that Fairbanks' regional refineries were as
stressed as the home owners. He said Eielson Air Force Base
(EAFB) was dependent on the refineries for their flying fuel and
the refineries contributed to EAFB's economic stress. He said
the LNG project would have a beneficial cascading effect that
was larger than strictly home heating, but he stated that home
heating was essential. He said the $800 million was the
potential scope that would most likely be filled by a pipeline.
8:31:49 AM
MR. DAVIS addressed Senator Wielechowski's question if AIDEA
would come back to the legislature next year to request
additional funding. He stated that AIDEA would not come back
with a request next year. He said the Governor's IAGP would
provide a way to start the LNG distribution, design for its long
term development, and anticipate changes that would require the
plant to be moved. He said the business plan would say that
AIDEA would be off and running if SB 23 passed. He explained
that the analysis process would dictate if the project should
proceed.
CO-CHAIR BISHOP summarized that the $800 million was a full
build-out with private equity taking the balance after the
initial $355 million financing plan from the state.
MR. DAVIS answered correct. He explained that the $30 million in
storage credits was obtained last year by the Governor. He noted
that the $50 million appropriation from General Funds would only
be spent if AIDEA decided to go forward with the project. He
said the $125 million was a loan that should go back to the
Treasury and $150 million in bonds would come back to AIDEA.
CO-CHAIR BISHOP asserted that the payback would be similar to
the DeLong Mountain Road to the Red Dog Mine site.
MR. DAVIS answered correct. He said AIDEA was in the business of
making a return and then hopefully paying the legislature a
dividend from the return.
SENATOR MICCICHE explained the home owner typically covered the
cost in a Utility Special Assessment District (USAD) and that
was what kept the costs somewhat manageable for those putting a
project forward. He asked if USAD was the vision on getting
distribution to individual subdivisions and homes.
8:34:40 AM
MR. DAVIS answered correct. He said Alaska allowed for Local
Improvement Districts (LID) and noted that LID was used to
supply gas to Girdwood. He disclosed that AIDEA was considering
what other states had done that allowed improvements to run with
a reality via property tax inclusion. He noted that AIDEA hired
a consultant with property taxation experience for improvement
projects. He said AIDEA would like the homeowner to be able to
afford any added taxes. He mentioned the Governor's IAGP intent
was to make pricing affordable to consumers in Fairbanks and
address their plight over high fuel costs.
SENATOR MICCICHE stated that one of three primary reasons why he
was in the committee and legislature was his dream for a natural
gas fueled economy through the populated areas of Alaska. He
emphasized that there were a lot of ways to achieve a natural
gas fueled economy and he appreciated the work done by AIDEA. He
stressed that he wanted the best option for Alaskans. He said
Alaska had a relatively endless supply of natural gas that could
fuel utility uses for home heating and power the vehicles that
delivered goods throughout the state.
8:36:31 AM
MR. DAVIS said AIDEA appreciated Senator Micciche's comments.
CO-CHAIR BISHOP noted that there were economic benefits that
were yet to be realized if the LNG project came along. He said
he would share one hard number for AIDEA to consider. He
addressed a recent conversation with a school superintendent
whose district was spending $9 million per year for heating. He
stated that cutting heating costs by 40 percent would free up
more money for school districts. He noted that everyone was
aware of the impending budget constraints that the state would
face. He said cheaper energy would solve a lot of problems.
MR. DAVIS replied that AIDEA was working on another gas
distribution project for an undisclosed city and school
district. He noted that energy cost could be reduced by 50
percent.
MR. LEONARD stated that one of the first things any business or
private sector organization would look at was their cost of
energy and its stability. He noted that mining operations look
at cost as a major component of their decision to go forward.
MR. DAVIS referred to a discussion he had with a CEO from a
mining company and his first question pertained to energy costs.
He said the CEO asked if the proposed LNG plant could be moved
to another source to assist mining operations. He explained that
one of the problems with developing mines was access to power.
He addressed AIDEA's business plan was to anticipate LNG uses.
8:39:15 AM
SENATOR MICCICHE addressed Mr. Davis' comment and noted that the
state had helped with a gas-line to Homer in his district. He
said the savings to the Kenai Peninsula Borough (KPB) for
public-building heating would be approximately $2 million per
year. He noted that KPB residents who were not receiving natural
gas would realize indirect savings in property taxes due to
KPB's lowered cost in maintaining infrastructure. He said
natural gas would have an overall incremental benefit to
everyone. He addressed individuals who would never directly
receive natural gas and pointed out that their electricity might
be generated by natural gas. He referenced to his dream for a
statewide build-out for natural gas that would eventually
provide for substantial savings to everyone.
MR. DAVIS addressed the LNG project's schedules and milestones
and noted that SB 23's passage would put AIDEA in a position by
August to provide the AIDEA Board with recommendations.
CO-CHAIR BISHOP asked what the target date was to choose a
recipient from the 16 LOI that AIDEA received.
MR. DAVIS replied that an initial analysis was recently
completed and selection was being refined down to a smaller
group. He said a project manager and engineer would be hired to
assist in working the selection down to four or five candidates
within two weeks.
SENATOR WIELECHOWSKI asked about the $3.00 to $4.00 trucking
tariff and the timeline for getting gas to Fairbanks.
8:41:47 AM
MR. SZYMONIAK answered that the cost of trucking was $4.00.
MR. DAVIS said the $4.00 trucking cost was used as a "place
marker." He recounted a previous LNG trucking analysis that
showed that the project would work if oil stayed above $60 per
barrel and the project's build-out costs were kept low. He
addressed financing for LNG trucking and referenced Senator
Bishop's statement that trucking companies would actually be
hired and expensed rather than adding equity-debt to the
project. He explained that a business structure should be
created for the special-purpose-vehicle that owned the LNG plant
to capture the federal tax expenses to the partners that put up
the capital that does not allow flow-back to AIDEA. He noted
that one of AIDEA's jobs, as with the [Cook Inlet] jack-up rigs,
was to develop a business structure that was most beneficial.
8:43:15 AM
MR. LEONARD replied to Senator Wielechowski's question regarding
the 16 LOI. He explained that there were two turnkey proposals
with some having [specific] interest in financing or
engineering. He said one turnkey proposal projected gas
availability in Fairbanks by 2015.
CO-CHAIR COGHILL stated that he knew at least two turnkey
proposals had obtained permits with engineering and many of the
operational issues were addressed. He said there may be the
perception that permitting would still have be resolved and
noted that the turnkey proposals had many of the permits
accomplished with the proper economics.
MR. DAVIS replied that with the direction of the Governor's
office, AIDEA was in consultation with the Department of Natural
Resources (DNR) regarding large permitting to address costs,
timing, and evaluation in toto.
MR. LEONARD addressed Senator Wielechowski's question on the
$4.00 trucking rate. He said the two turnkey operations had
based trucking rates on FNG's current gas transportation costs
from Port MacKenzie to Fairbanks.
He stated that the Governor's goal for AIDEA was to ensure that
the private sector was involved as much as possible in the LNG
project. He explained the advantage of having the private sector
look at the LNG project to indicate whether it made sense to
move forward.
8:45:53 AM
SENATOR MICCICHE asked if the storage tanks were over 72,000
gallons. He noted that tanks over 72,000 gallons changed the
permitting and regulations structure.
MR. DAVIS replied that the storage tank size question had not
been answered. He agreed that storage tank size had an impact on
permitting.
CO-CHAIR BISHOP explained that when AIDEA returned to the
committee to address the LNG project's mechanics, the importance
of having storage tanks in July would be revealed.
CO-CHAIR COGHILL asked when AIDEA would return to report to the
committee and review upcoming project evaluations.
MR. DAVIS responded that AIDEA would return with an update in
approximately three weeks. He said once the engineering firm was
hired, AIDEA would ask questions that were submitted by the
committee. He noted that AIDEA would ask FNG how their LNG truck
program was working.
CO-CHAIR BISHOP noted that Commissioner Susan Bell from the
Department of Commerce, Community, and Economic Development
(DCCED) was attending the committee meeting. He said DCCED was
equally interested in the LNG project.
8:48:21 AM
There being no further business to come before the Senate
Special Committee on In-State Energy, Co-Chair Bishop adjourned
the meeting at 8:48 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2013_01-31_LNG-SB23_final.pptx |
SISE 1/31/2013 7:30:00 AM |
SB 23 |