AG denies LNG plant sale after Hilcorp rejects alterations to sale contract

  • By Tim Bradner
  • Thursday, August 6, 2015 9:59pm
  • News

Alaska Attorney General Craig Richards has rejected the proposed purchase by Harvest Alaska of a small liquefied natural gas plant at Port MacKenzie.

In a July 7 letter to Harvest, a subsidiary of Hilcorp Energy, Richards proposed changes in the LNG sales contract reached in November 2014 with Fairbanks Natural Gas, the existing plant owner that also operates a small gas utility serving about 1,100 business and residential customers in Fairbanks.

Hilcorp rejected the proposed changes in a July 17 letter, telling the attorney general it wanted to stick to the original contract terms because the purchase already had a small profit margin.

Based on that, Richards informed Harvest in an Aug. 3 letter that he would not approve the sale of the plant. In an Aug. 6 statement, Hilcorp said it was disappointed in the attorney general’s decision.

“We believe the purchase and sale agreement originally struck in November 2014 (with Fairbanks Natural Gas) was both reasonable and fair,” Harvest Alaska president Sean Kolassa said.

The Alaska Industrial Development and Export Authority, or AIDEA, board of directors has approved a $53-million purchase of Pentax, the parent company of Fairbanks Natural Gas Co., in order to supply natural gas to the Interior after a previous attempt tied to North Slope gas turned out to be uneconomic.

The sticking point between the state and Harvest Alaska appears to have been Richards’ proposal that Harvest essentially adopt a “cost-based pricing” system.

In the July 7 letter from the state to Harvest, state attorneys wrote, “We are considering whether Harvest should be required to develop a price for processing natural gas into LNG for expansion capacity, and offer processing services at this price to AIDEA and other Cook Inlet gas producers.

This processing or tolling fee would allow AIDEA to negotiate with other gas producers for its supply on LNG in the event that it would like to expand beyond the base volumes under an LNG supply contract. Separating out the processing fee will allow the utilization of a market index, as discussed above, for developing a pricing formula that considers the cost of gas, cost of processing and the cost of transportation.

Calculating a processing fee can be done using a cost analysis from the previous RCA (Regulatory Commission of Alaska) dockets.”

The Harvest contract agreed to by Fairbanks Natural Gas set a price that would be a ceiling for the LNG supplied under that 10-year contract, but the attorney general also proposed a mechanism for periodic downward adjustments to the price that reflected any drop in Cook Inlet gas prices.

The attorney general also proposed that Harvest divest the transportation component — the LNG trailers and trucks that carry liquefied gas to Fairbanks — so that LNG would be sold at the gate of the plant.

Harvest wrote July 17 that it objected to the state’s proposal to base periodic downward adjustments on a Cook Inlet gas price index that would be part of a cost-based pricing system, and also said its existing proposals allowed for downward price adjustments, regardless of operating costs, “should LNG be offered at a more attractive price from credible source,” the company wrote in its letter.

“Because of the substantial risks associated with finding and developing gas reserves, the operation costs of operating the plant and transporting LNG, and the slim margin already incorporated in the deal, we simply cannot accept the additional market risk.”

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

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