Interior Alaska gas board ends work with Siemens on LNG rail delivery system

A third would-be private partner has gone by the wayside in the state-sponsored effort to get more natural gas to Fairbanks.

The Interior Gas Utility Board of Directors voted 5-2 to terminate its working agreement with Siemens Government Technologies Inc. during an April 9 special meeting.

The board signed a memorandum of understanding with the multinational industrial technology firm last October to investigate Siemens’ proposal to bring new supplies of Cook Inlet-sourced LNG to the Fairbanks area by rail.

Board members who voted in favor of ending the courtship reiterated themes that were heard throughout the fledgling business relationship: that Siemens representatives were still unable to substantiate key portions of their pitch after roughly five months of negotiations.

The vote came following a recommendation by IGU’s management and negotiating team to end the agreement.

“I think we turned over every stone we could turn over,” utility attorney Zane Wilson said in reference to negotiations with Siemens.

Board member Patrice Lee voted against terminating the MOU and instead suggested a 30-day pause independent review of Siemens’ plan. Lee said she believes Siemens and IGU representatives have very different views of the progress of their negotiations.

Other board members who supported the recommendation said the company had not lived up to its end of the agreement. Some had been skeptical of the proposal from the outset and said Siemens still had not answered fundamental questions from utility leaders.

Last August, representatives from Virginia-based Siemens Government Technologies presented a proposal to IGU officials for a 20-year “turnkey” project that would have relieved IGU from much of the work it would have to do for the Interior Energy Project; all the utility leaders would have to do is sign a liquefaction services agreement, or LSA, and wait for the Alaska Railroad to deliver LNG to the utility’s storage tank now nearly completed in South Fairbanks.

Specifically, the plan called for Siemens to install two of its modular “LNGo” gas liquefaction units at a proposed industrial park on Knikatnu land near Alaska Railroad Corp. tracks in Houston.

Knikatnu is an Alaska Native village corporation.

The fuel would travel by rail to IGU facilities in Fairbanks for regasification and distribution to residents and businesses.

Once gas demand grew to where more than four of the LNGo units were needed, the company would look at installing a single, larger LNG facility, according to Siemens officials. The acknowledged at the time that the company hopes to parlay work with IGU into more gas supply projects in the state, notably at Interior military bases.

Siemens representatives also consistently stated a belief they could get feedstock gas for $5 per thousand cubic feet, or mcf, or less, which would be significantly cheaper than pricing much larger Southcentral utilities have been able to secure in recent years on much higher volume supply contracts.

The Siemens-led group also said it would investigate the prospect of developing potential gas reserves in the Houston area, which would bring the feedstock price down to $4 per mcf, according to the company’s project documents.

Some IGU board members were skeptical of the gas supply claims from the outset and that skepticism did not wane.

Board member Jack Wilbur said Siemens eventually backed away from the position it could supply gas and handle the transportation contract with the Alaska Railroad.

“In the end the only thing they were willing to do was toll gas,” Wilbur said, referring to Siemens’ alleged desire to just run the LNG portion of the complex supply chain.

A Siemens spokesman said via an emailed statement that the company has been working with the utility for more than a year on options for delivering more natural gas to the Interior.

“We respect the IGU Board of Directors’ decision to exit the current memorandum of understanding in order to consider new options. With a long-standing commitment to Alaska and ongoing projects in the state, we look forward to next steps, and, the opportunity to evaluate a new approach as LNG procurement plans are finalized and communicated by IGU,” the statement said.

Knikatnu CEO Tom Harris said in an interview that he was “saddened to hear IGU chose to walk away,” noting that reviews of geologic and well data from old exploration wells in the Houston area indicate large potential gas resources. However, Harris said there are no immediate plans to drill new exploration wells in the area.

“We’re concerned that (IGU’s) decision will mean more LNG trucks on the road,” Harris said.

IGU currently has a gas supply contract with Hilcorp Energy for $7.72 per mcf of gas that runs through 2021 for its base of nearly 1,000 Fairbanks customers.

Where exactly IGU goes with the Interior Energy Project from here is unclear, but utility officials are also in the process of designing and evaluating an estimated $75 million expansion to the small Titan LNG plant in the Mat-Su Borough that supplies its existing customer base. A final investment decision on the Titan expansion is planned for later this year.

IGU is also close to completing a 5.25-million gallon LNG storage tank in South Fairbanks.

In late 2014 the Colorado-based engineering firm MWH Global Inc. parted ways with the Alaska Industrial Development and Export Authority after plans to source gas from the North Slope and truck LNG south to Fairbanks fell through. Cost estimates for final, delivered gas in that proposal came in roughly 35 percent higher than expected and challenges securing a gas supply also scuttled the plan.

AIDEA was tasked with the Interior Energy Project by the Legislature in 2013 when lawmakers and former Gov. Sean Parnell approved a $330 million bond-loan-grant financing package to support getting additional supplies of natural gas to the Interior where high energy costs and poor winter air quality have been ongoing issues.

Then in November 2016 AIDEA ended its relationship with Salix Inc., a subsidiary of the Washington-based utility company Avista Corp., which it had first partnered with to develop a Cook Inlet-sourced LNG supply chain for the Interior. However, challenges getting a gas supply at desired prices for a fledging market with an uncertain demand profile killed those prospects as well.

AIDEA then turned the project over to IGU in a December 2017 deal that included the utility purchasing Fairbanks Natural Gas Co. and its sister LNG supply chain companies to IGU for $54 million. However, some IGU leaders contended at the time that the state-owned authority had inflated the price of FNG in the deal.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.