The Interior Gas Utility board of directors unanimously approved a set of 20-year contracts in what board members called a historic deal. The agreement includes the first sale of North Slope natural gas to a nonlocal utility.
One deal will move IGU's contract with Hilcorp Alaska, LLC for natural gas source from the Cook Inlet to the gas and oil company's North Slope subsidiary, Hilcorp North Slope.
A second contract executes a deal with Harvest Alaska LNG, LLC to develop and operate a 150,000 gallon-per-day liquefied natural gas facility on the North Slope. Harvest would construct the facility, manufacture and sell LNG to IGU with a target goal of October 2024.
Both contracts call for 20-year terms, with two five-year extensions.
Dan Britton, IGU's general manager, told board members in an update that the contract guarantees a supply for both its current 2,200 customers in Fairbanks and North Pole and for long-range growth.
"We need to add additional gas supply and LNG capacity by fiscal year 2024," Britton said, regarding the target goal. "Moving forward with a long term solution makes sense for our current customers and future growth."
Britton added, as priorities, "a commitment to our current customers and we need a long-term solution regardless of our long-term growth."
In a Wednesday news release, Harvest Midstream CEO Jason Rebrook celebrated the new deal.
"We are pleased to be investing in a project that utilizes North Slope gas to bring reliable energy to the Interior," Rebrook said. "There is still a lot of work to be done to bring this project to completion, but we are excited about the partnership with IGU that will give Alaskans greater long-term energy security."
IGU projects it will need 3.18 billion cubic feet of LNG by fiscal year 2032. IGU stands to use 1.09 billion cubic feet for this current fiscal year.
IGU currently manufactures LNG at its Titan facility in Point MacKenzie, which is capable of producing 50,000 gallons per day. Its current agreement with Hilcorp would ensure a steady supply of natural gas from the Cook Inlet through 2032.
However, the oil and gas company informed its customers in April that renewals were uncertain due to possible dwindling Cook Inlet natural gas reserves.
Britton told the board IGU staff and contractors carefully evaluated various options. These include expanding its current Titan facility, doing nothing, adding a temporary modular LNG facility at Point MacKenzie or importing LNG from Canadian suppliers.
Continued reliance on Cook Inlet gas would effectively halt the utility's growth, Britton said.
IGU management advised against expanding Titan or modular facilities, given the uncertainty of Cook Inlet's future gas reserves. Expanding the Titan facility itself would require at least $60 million in new bond debt financing, which would raise rates of the utility's customers.
"We would have to try to borrow money for a project and that would be problematic," Britton said.
Importing LNG from Canada would require an extensive logistic process, whether by barge, rail or truck. IGU would be subjected to unknown cost risks associated with supply and currency exchange rates. Britton estimated the utility would incur a 30% loss.
The new deals
Under the new contract, Hilcorp would sell North Slope natural gas at a fixed $2.50/MCF for the first five years, followed by an annual 2% increase for the final 15 years of the contract.
Harvest will construct the North Slope liquefaction facility, manufacture and sell LNG to IGU, with a minimum volume contract that increases each year. The contract allows IGU the first right to purchase the facility in case Harvest decides to sell it.
Producing LNG would cost a base rate $8.75 per thousand cubic feet (MCF), with an annual 1% increase in the first five years. The remainder of the contract includes a maximum 2% increase.
One potential cost saving considers low customer demand for gas during the summer months, meaning the Harvest facility wouldn't need to produce as much LNG.
Britton said there are a number of challenges involved, including a delay in building the facility because of supply chain issues, dependence on a third-party company for an LNG supply and the possibility of briefly losing access to cheaper gas supply should Alaska ever build an LNG pipeline.
However, IGU plans to keep its Cook Inlet Titan facility on standby in case the gas supply line gets temporarily disrupted.
IGU will continue to transport the gas, though Britton said it will need to re-evaluate how it's done.
The utility owns the tankers but contracts with a trucking firm to haul LNG from Cook Inlet to Fairbanks and North Pole.
Britton acknowledged transportation challenges, including adverse winter weather conditions on the Dalton Highway and hiring competition for truck drivers.
'Security and growth'
IGU board president Gary Wilken called the contracts practical.
"It brings security, supply and predictability of growth," Wilken said. "When you look at things, that bodes well for planning for businesses and families."
Wilken added when analyzing rate increases over a 10-year period "there will be no spikes or unknowns."
Board member Mike Miller, a North Pole resident, said the project bears significant value for his community, which has a smaller natural gas infrastructure footprint.
"For many, many years we considered natural gas a pipe dream at best," Miller said. "We had to push really hard to get it signed up."
Miller said if the utility stops adding customers, North Pole residents' interest in gas will fade. Wood stove use for home heating will continued to be used.
"The EPA does have a big stick, and we want to make sure this borough is a place our kids and grandkids can live in," Miller said.
Britton, the general manager, noted that IGU's growth over several years has spurred development and jobs, including construction of homes, infrastructure and contractors installing gas utilities.
In 2022, IGU installed 635 residential and commercial service lines and 16,500 linear feet of main line in Fairbanks and North Pole. Of the 635 lines, 400 have already hooked up as customers and an additional 235 are in some phase of starting service. Britton said IGU plans to build another 600 service lines this year.
Over a 10-year period, IGU projects growing its customer base from 2,200 to nearly 6,100.
Over the next 10 years, he added, IGU will need to spend nearly $98 million in capital investments, including $12 million for additional tankers and $82 million in distribution infrastructure.
Board member Steve Haagenson agreed that the deals create consistency.
"If you look at any other [natural gas] contract in Alaska, I doubt that will be the case," Haagenson said. He added a steady supply means growth.
"A utility that isn't growing is dying," Haagenson said.