IEP talks advance with Cook Inlet gas partner

  • Positive results from test runs of the 13,000-gallon trailer, seen outside the Crowley office in Anchorage, means the larger LNG trailer could lower transportation costs by about 30 percent versus the 10,500-gallon capacity trailers currently used to supply Fairbanks Natural Gas from the small LNG plant on Point MacKenzie. Photo/Elwood Brehmer/AJOC

The Interior Energy Project took a big step forward March 3 when the Alaska Industrial Development and Export Authority announced it is negotiating with a sole project partner to supply Cook Inlet natural gas to the Fairbanks area.

IEP Manager Bob Shefchik said to the AIDEA board that the proposal by Salix Inc. to build a small natural gas liquefaction facility on Point MacKenzie in the Matanuska-Susitna Borough is the best option for the project as it faces viability challenges brought on by low oil prices.

Salix is the last standing of 13 companies that offered 16 ideas to get an alternative space heating energy source to the Interior in response to a June 2015 request for proposals, or RFP, issued by the state authority.

According to an analysis by the global consulting firm Arcadis Inc. of Salix’s proposal, the plan for a $68 million, 3 billion cubic feet per annum natural gas liquefaction plant should equate to gas delivered to Interior customers for $15.74 per thousand cubic feet, or mcf.

That price would nearly meet the project’s stated goal of $15 per mcf, which is roughly the energy equivalent price of $2 per gallon fuel oil.

Salix and Spectrum LNG, a small Oklahoma-based LNG company with a North Slope-sourced proposal, were the finalists in the RFP process started this past summer.

Salix is a subsidiary of Avista Corp., a Spokane, Wash.-based utility company that operates electric and natural gas utilities in Idaho, Oregon and Washington. Avista also purchased Juneau’s Alaska Electric Light and Power Co. in 2014.

Avista spokeswoman Jessie Wuerst said the company is very pleased to have been chosen as a partner to this point but declined to comment further because project negotiations are ongoing.

The basic financing structure for the plant would start with a $30 million equity investment by AIDEA and a $28 million, long-term, low-interest loan from the state Sustainable Energy Transmission and Supply Fund.

Salix would post a $10 million equity stake; requiring an 11.7 percent rate of return.

Shefchik said the $3.24 per mcf tolling fee identified by Salix for the LNG plant  — the first major cost layered on the wholesale gas price to add up to the final “burner tip” cost of gas for consumers — could fall in negotiations.

“As we work with Salix on both the term sheet and the financing, our effort is to push that $3.24 down to the $2 range and we believe that’s possible,” he told the AIDEA board.

AIDEA’s first attempt at the project in 2014 was limited to North Slope gas by legislation passed in 2013 that funded the project with $332.5 million with primarily low-interest loan and bond authority, as well as a $57 million grant appropriation. Financing for the Salix plant would come from that pot of funding, as the legislation was amended last year to support a Cook Inlet-sourced Interior Energy Project.

The ability for Cook Inlet producers to supply another market long-term was unclear in 2013, but the Inlet’s available gas reserves have grown since, as new companies have entered the market and Hilcorp Energy’s work on existing gas fields has also greatly improved the situation.

Further buoying Salix’s proposal is a $6 per mcf Cook Inlet wholesale gas price, and the prospect of even lower-cost natural gas to feed the LNG plant, according to the project evaluation.

Southcentral utilities have signed gas supply contracts in recent months for base demand in the $7.50 per mcf range, less than a current state-mandated price cap that expires at the end of 2017.

Shefchik said in an interview the project team is negotiating with multiple producers for gas supply.

He also noted the unavoidable reality of high capital costs on the Slope as a main reason for moving forward with Salix over Spectrum. That was evidenced in the first IEP go-round, which was scrapped by the authority just prior to making an investment decision because construction costs for a larger plant kept final projected gas prices in the $18 per mcf and higher range — too high to continue.

Now, oil in the $30 per barrel range has pushed fuel oil down to the $2 per gallon range, challenging the IEP from any gas source, as potential customers are less likely to make upfront investments to convert to natural gas. However, Shefchik said the energy price reprieve has also given AIDEA the time to develop a project durable across a range of energy prices rather than rushing to complete a less optimal solution.

Larger LNG trailers should also play directly into improving the final cost of gas in Fairbanks, Shefchik said. Pentex Alaska Natural Gas Co., the parent company to Fairbanks Natural Gas owned by AIDEA, has been testing a 13,000-gallon capacity LNG trailer for suitability along the route from Southcentral the Fairbanks.

Positive results from those test runs means the larger LNG trailer could lower transportation costs by about 30 percent versus the 10,500-gallon capacity trailers currently used to supply Fairbanks Natural Gas from the small LNG plant on Point MacKenzie.

Additionally, building the Salix plant on the same pad as the plant run by Pentex subsidiary Titan LNG could offer operational savings by running both plants with a single operator. Shefchik said the location the Salix plant isn’t yet settled but he hopes it can be built alongside the existing plant to minimize capital costs and maximize operational efficiencies.

Besides the economic benefits of a potentially lower- and stable-cost energy supply, a successful Interior Energy Project would significantly improve the region’s winter air quality — some of the worst in the country due to low-level atmospheric inversion that occurs in the area and traps wood smoke and emissions from fuel oil furnaces.

Detailed negotiations are with Salix are ongoing, according to Shefchik, and an official recommendation from the AIDEA board to continue is expected at its March 31 meeting.

Fairbanks rates drop 10.4 percent

Fairbanks Natural Gas President Dan Britton told the AIDEA board that changes to the utility’s pricing structure implemented Jan. 1 have largely been successful, resulting in ratepayers bills being lowered by an average of 10.4 percent during the first two months of the year.

AIDEA took ownership of the utility last year through the authority’s $52 million purchase of FNG’s parent company Pentex. Transfer of the private, unregulated utility to a public entity allowed for lower rates of return and tax savings among other items that were first expected to result in 13 percent rate reductions for FNG customers.

At the same time, Britton wrote in a brief operational report to the AIDEA board that the warm Interior winter and low fuel oil prices have combined in a gas sales volume that is 17 percent, or about $700,000 below budget for January and February.

“We will be watching expenses very closely,” Britton said, adding capital projects may be deferred if the trend continues.

He said in an interview that margins were already thin after the rate reduction but that the utility is still on solid financial footing.

With the forecast showing no sign of a cold snap, Fairbanks seems to have escaped this winter without hitting minus-30 degrees Fahrenheit. Most winters the city sees more than 20 days colder than minus-30, Britton said, which simply means customers burn less natural gas.

The number of heating degree days — a temperature-based metric for determining how much energy is required to heat a structure during cold weather — in Fairbanks has also been off 17 percent from FNG’s budget in the first to months of the year, according to the report to the board.

Piling on the warm weather is cheaper fuel oil that has led some Fairbanks Natural Gas customers to revert back to the fuel the city has so badly wanted to get off of.

At about $2 per gallon delivered, fuel oil is about 25 percent cheaper on an energy equivalent basis than FNG’s current price for natural gas, which is about $20 per mcf, according to Britton.

He said 12 of the 14 school district buildings that the utility had budgeted to be on natural gas switched to fuel oil in January and February, along with the state’s Ruth Burnet Sport Fish Hatchery.

Many of the utility’s large customers are interruptible, which allows FNG to supply them with gas when it is available. That also means interruptible customers must have a backup fuel source — and when the backup fuel is cheaper it is their prerogative to switch.

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

Updated: 
03/09/2016 - 2:56pm

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