Tuesday, February 3, 2015

What is AIDEA up to ...

Last Thursday the Alaska Industrial Development and Export Authority (AIDEA) announced that it had entered into an agreement to buy the parent of Fairbanks Natural Gas and related assets (FNG).  The proposed purchase has led lawmakers and others to raise some questions about the purchase.  The concern largely revolves around the use of a state entity to displace a private business.

I have expressed a similar set of concerns.  In a time of constrained state capital, the last thing the state should be doing is putting state capital into a role that private investment already is filling.  To do so reduces the amount of state capital for other, needed projects that private capital is not available to meet.

I also have expressed concern that the transaction proposes to put the cart before the horse, by putting the state in the long term position of a becoming a gas middleman before it has arranged supplies. That role subjects the state to the risks of supply uncertainty and cost, usually handled well by private enterprise, but seldom by government which does not have the same efficiency, capital and cost control motives as private business.

As I have thought further about that issue, today I looked further into another of AIDEA's recent transactions which I had noted in passing earlier this month and not thought about much at the time, but which raises an interesting question when reconsidered in light of the FNG transaction.  That transaction involves a proposed equity investment by AIDEA in Furie Operating Alaska, LLC's proposed Kitchen Lights Unit.

As described by AIDEA, the potential transaction involves the investment of $50 million "for a preferred equity stake in the [Kitchen Lights] facilities, similar to the investment structures used for the Endeavour and MOC1 projects."  Memorandum Re: Resolution No. G15-01 Authorizing Cost Reimbursement Agreement between AIDEA, Furie Operating Alaska, LLC and Cornucopia Oil and Gas Company, LLC at 3.

As described by Furie, the Kitchen Lights Unit is largely a gas prospect located in the Cook Inlet.  In recent reports Furie has said that it "hopes to secure sufficient contracts to enable the production of 85 million cubic feet of gas per day" from the field.  As of the date of AIDEA's decision, however, Furie only had entered into one contract -- with an unspecified utility buyer -- for the sale of 4 BCF (or an average of 10 million cubic feet of gas per day), leaving an additional 75 million per day (27 BCF annually) uncommitted and looking for a market.  Previously, Furie had joined in a filing with other producers to the Regulatory Commission of Alaska (RCA) complaining about the lack of existing markets in the Cook Inlet.

Based on the size of the recent North Slope trucking proposal, the Fairbanks market is estimated at about 6 - 7 Bcf per year, well within the bounds of what Furie has claimed to be the remaining capabilities of Kitchen Lights.

All of this may be a coincidence, of course, but it does raise an interesting question about what AIDEA may be up to.

If it completes the financial transaction with Furie and the purchase with FNG, AIDEA will both have the means and the incentive to create (and indeed, favor) transactions between the two.  As Furie recently said, "one benefit [of the Furie transaction] may be that AIDEA would receive a portion of the proceeds from the gas sales."  AIDEA itself says in the Memorandum that "[c]urrent discussions with Furie intend to provide repayment of the investment over a 5-to-8 year term with an annual dividend at a to-be negotiated rate."  Furie's ability to make such repayments, of course, necessarily will depend on the ability to sell its production.

Interestingly enough, if AIDEA indeed has in mind putting the two pieces together, that will result in AIDEA being engaged in the same sort of vertical arrangement from the supply end up through the midstream and distribution phases as recently caused the Attorney General to express concerns with FNG's proposed transaction with Hilcorp.  Basically, that concern is that a connection between the supply and distribution ends could elevate price (even inadvertently) by limiting the ability of others to compete for sales into the market.

Who knows if such a combination is AIDEA's intent, but putting the dominoes together does make for an interesting pattern, and may make for an interesting point of discussion at this coming Thursday's hearing on AIDEA's proposed FNG transaction before the Senate Special Committee on Energy.