AIDEA-Oil Search MOU eyes Pikka project

By: Elwood BrehmerAlaska Journal of CommercePost date: Wed, 08/12/2020 – 9:29am

Officials at Alaska’s state development bank are in early talks to fund basic infrastructure development at the largest North Slope oil project in decades.

The Alaska Industrial Development and Export Authority board of directors approved a preliminary memorandum of understanding with Oil Search Alaska LLC on Aug. 5 to investigate the viability of the authority financing road and bridge construction for the Pikka Unit project the company is advancing on the central North Slope.

Oil Search Vice President of External Affairs Joe Balash said the Papua New Guinea-based producer envisions the arrangement being similar to that for the 52-mile DeLong Mountain Transportation System for the Red Dog zinc mine in Northwest Alaska, in which AIDEA took ownership of the infrastructure, sold bonds to fund construction and recouped the investment through tolls paid by the mining company.

The current design for the $6.5 billion Pikka project entails 26 miles of gravel roads, approximately 70 acres of gravel pads, and more than 120 miles of pipelines. Balash said Oil Search has completed 11 miles of roads extending from the Kuparuk River field and several pads so far, with much of that work being done last winter.

In the case of Pikka, AIDEA would issue the debt to purchase the roads and lease them back to Oil Search, according to Balash. He said the arrangement could help the company capture the advantage of lower-cost bond financing available through the state-owned authority.Advertisement

“It’s a concept that at least in the 50,000-foot view looks workable but we need to go down a considerable bit in elevation,” Balash said of the plan.

The MOU calls for Oil Search to reimburse AIDEA for up to $225,000 spent from the authority’s Revolving Fund to analyze the details of the proposal.

Balash worked to advance the federal permitting process for the Ambler mining district access project — another industrial-use toll road concept AIDEA is proposing to reach remote Interior Alaska mineral deposits — while an assistant Interior Department secretary in the Trump administration. He left Interior last August.

At the start of 2020, Oil Search and Spanish major Repsol, its minority partner in Pikka, planned to make an final investment decision on the project by the end of the year, but the collapse of oil markets brought on by the coronavirus pandemic and a Saudi-Russian price war early in the year have forced the companies to defer sanctioning Pikka, which is expected to produce up to 135,000 barrels of oil per day at its peak, according to Balash.

Last October, Oil Search filed a Pikka development plan with the Division of Oil and Gas that called for pushing the first oil date from the field up a year, to late 2022 by processing oil from the first completed pad through Kuparuk facilities while the rest of the Pikka facilities were built.

Balash said Oil Search still expects to start production in 2025, even though the rest of the timeline is unclear at this point.

Oil Search started the year with a “mid-$40s” per barrel long-term breakeven price for oil from Pikka based on the design at the time, he said, and the companies are working to bring that cost down to reflect the new market.

Alaska North Slope oil prices have stabilized in the low-$40s per barrel of late but when the price will increase further will largely depend on the lasting economic effects of the pandemic.

“Exactly what our schedule is going to look like and what our profile’s going to look like — we’re working closely with Repsol and hope to have an update later this year,” Balash told the AIDEA board.

He emphasized that the Pikka project, which many industry advocates have pointed to as the genesis of a North Slope “renaissance,” could provide benefits beyond the companies.

“This is not just about the Pikka development,” Balash said. “We believe we have a lot to offer the state of Alaska for a very long time —that will be a substantial and material impact on the throughput of (the Trans-Alaska Pipeline System) for a very long time.”

The MOU expires in August 2021.

Power line purchase

Just prior to the Aug. 5 AIDEA meeting, the Alaska Energy Authority board — the same seven individuals that oversee AIDEA — approved a $15.3 million plan for the authority to purchase a 39-mile stretch of electric transmission lines damaged by the 2019 Swan Lake fire with the help of the Railbelt utilities.

The complex arrangement calls for AIDEA to sell bonds to allow AEA to purchase the Sterling-to-Quartz Creek segment of transmission lines from Homer Electric Associationthat connects several utilities to the Bradley Lake hydro project.

The Sterling-to-Quartz Creek segment was taken out of service in late August last year as the Swan Lake fire spread through the area and didn’t transmit power again until mid-December, for a total outage of 123 days. According to AEA, the fire damaged about one-third of the 127 support structures along the S-Q line. Homer Electric repaired five structures late last fall to put the line back into service, but another 38 still need to be replaced.

AEA Executive Director Curtis Thayer said that while the authority will own the line segment, the agreement calls for the six Railbelt utilities — including HEA — to pay the debt service on the bonds relative to the proportion of low-cost Bradley Lake power they receive. Railbelt consumers will benefit from the cost sharing, according to Thayer.

He first said AEA was in talks with HEA to purchase the line in late January.

AEA also owns the Bradley Lake project, which it is in the process of expanding .

The Sterling-to-Quartz line is owned by HEA but it largely runs through the Kenai Wildlife Refuge and does not serve HEA customers; rather, it connects to the transmission lines owned by Anchorage’s Chugach Electric Association, which start at the Quartz Creek Substation.

“By having this purchase you bring the resources of the six utilities to manage and help oversee” the transmission line, he said, adding that upgrading the line could eliminate up to 40 percent line loss as power is transmitted north from Bradley Lake.

“There’s both a short-term and long-term advantage to ownership of that line.”

The $15.3 million includes $13.3 million to buy the transmission line and another $2 million for repairs, according to AEA documents.

The transaction has been approved by the Bradley Power Management Committee — which includes the six utility managers — but must also be approved by the utility boards, Thayer said.

Officials with several of the other Railbelt utilities expressed frustration with HEA over what they felt was a slow response to fix the line in the weeks after the fire subsided.

HEA leaders said at the time that they were being cautious prevent exposing line crews to lingering ash pits or falling trees and also noted that strong fall windstorms storms on the Kenai Peninsula took manpower away from the Sterling-to-Quartz work.

According to AEA, losing access to Bradley hydropower collectively cost Railbelt consumers an additional $13.6 million and resulted in another $2.2 million worth of water being spilled over the Bradley dam.

Bradley Lake supplies up to 10 percent of the electricity needed by the Railbelt utilities. At 4 cents per kilowatt-hour, the hydroelectric dam can produce power for about half the current cost of natural gas-fired generation.

“I don’t think we would be here if that fire had not occurred,” Thayer told the AEA board.

Elwood Brehmer can be reached at 08/12/2020 – 9:47am