Interior gas project still lacks key deals to move forward

Visible progress has all but stopped on the Interior Energy Project as negotiations on essential agreements chug along.

Project officials were expected to present the Alaska Industrial Development and Export Authority board of directors with a recommendation to finalize its partnership with Salix Inc. to expand the small Southcentral liquefied natural gas plant currently serving Fairbanks, but no recommendation was made at the Aug. 10 meeting.

AIDEA staff has been working to get a natural gas supply contract in place with a Cook Inlet producer since early this year, which Interior Energy Project manager Bob Shefchik has said is imperative to have before moving ahead on other parts of the complex supply chain.

That’s because the cost of gas feedstock is the base upon which every other cost is added.

As it has been for some time, the gas supply deal is close but not complete, according AIDEA officials. The gas producer, or producers, the authority is in negotiations with is confidential at this point.

“I can appreciate the board members’ frustration that we haven’t moved the ball forward as much as we had hoped,” IEP team lead Gene Therriault said during the Aug. 10 meeting. “I can assure you, though, the members of the team have been very responsive to make sure those entities that we’re negotiating with — that we have quick turnaround to make sure that the entities are not waiting on information from ourselves.”

Therriault, a full-time employee with the authority, took over in January as the project lead for Shefchik, an AIDEA contractor, as the second iteration of the Interior Energy Project has transitioned from the planning to implementation stages.

Additionally, the IEP team is hashing out terms with Salix for building and operating the expanded LNG plant.

In March, AIDEA informally selected Salix Inc., a subsidiary of the Washington-based energy utility group Avista Corp., as its preferred private project partner.

A formal agreement between Salix and the state-owned authority for the LNG plant — from which the LNG would be trucked north and then regasified for distribution — has been anticipated since.

“We have been working with AIDEA for over a year on (the IEP). It’s AIDEA’s process and we continue to work with them on that process,” Salix spokeswoman Jessie Wuerst said.

The expanded Point MacKenzie LNG plant would be ready for increased production sometime in 2018 if a deal with Salix can be reached soon.

Much of last year was spent evaluating more than a dozen proposals to get natural gas to Fairbanks-area consumers for $15 per thousand cubic feet, or mcf, of gas.

That price is roughly equivalent to heating oil at $2 per gallon, which is the primary source of home heat for a majority of Interior residents.

When the legislation establishing and funding the project was passed in 2013, heating oil in the Interior was upwards of $4 per gallon, making it in theory a viable investment to convert to lower-cost and cleaner natural gas for home and business owners.

However, the unexpected collapse in world oil markets, which has helped heating oil-dependent residents in the near term, has further strained the financial feasibility of the thin-margined Interior Energy Project.

Lower fuel oil prices have forced AIDEA to lessen its estimates on how many residents will convert once natural gas is available. Subsequently, the LNG plant size has been scaled back as well to shrink upfront capital costs, but both are hard on the project’s economies of scale.

“The commercial challenges of low (natural gas) demand and the requirement of return of commercial deals are tough for this project,” Shefchik said in an interview.

“It’s both gas and liquefaction.”

Securing such a small supply of gas — initially in the range of 3 billion cubic feet per year — adds to the obstacles inherent in negotiations, Shefchik said.

Fairbanks Natural Gas President Dan Britton has long said his small utility that operates in the heart of Fairbanks would have expanded its services to more customers had it been able to buy more gas from Cook Inlet.

While finalizing the paper side of the project has been tough, progress is being made on moving the LNG north, Shefchik and Therriault said.

Shefchik said the 13,000-gallon LNG tanker trailer being tested by Fairbanks Natural Gas has performed well and the project team is “looking at buying three or four more” if trucking the gas north from the LNG plant is the preferred option.

The trailers would cut transportation costs, which could be up to 20 percent of the $15 per mcf delivered cost, by up to 30 percent over the more standard 10,000-gallon LNG trailers currently employed by Fairbanks Natural Gas.

The other transport option being pursued is shipping LNG in large “ISO” containers via rail.

Therriault said the Alaska Railroad would be doing a “trial run” of LNG in ISO containers strapped to flatbed railcars in October or November “just to test the logistics” of shipping LNG from the Mat-Su area up to Fairbanks.

The Alaska Railroad received approval from the Federal Railway Administration last October to haul LNG and thus became the first railroad operator in the country to gain such approval.

Moving LNG from Southcentral to the Interior by rail could potentially cut transportation costs for the IEP by more than 50 percent over the cost of trucking the fuel, according to railroad estimates.

LNG by rail would add complexities to what is already a challenging logistical project, as it would still have to be trucked at least a short distance from the LNG plant on Point MacKenzie to the rail line in Houston.

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

 

Updated: 
08/17/2016 - 11:53am

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