AIDEA buys out Salix for work on Interior Energy Project

For second time, private partner has separated from state-led effort
  • The Alaska Railroad was the first in the nation to deliver LNG by rail on a series of runs that began Sept. 27. The approval from the federal government was granted last year and is one possible way to reduce costs for delivering natural gas to Fairbanks as part of the Interior Energy Project. (Photo courtesy of the Alaska Railroad Corp.)

The Alaska Industrial Development and Export Authority has quietly parted ways with its private industry partner on the Interior Energy Project for a second time.

The authority’s IEP team lead Gene Therriault said in a written response to questions from the Journal that the decision to end its relationship with Salix Inc., which was working on a plan to expand the LNG plant used by Fairbanks Natural Gas and is owned by AIDEA, was made after it was determined a new model to develop the LNG facility could lower the financial risk for potential Interior natural gas customers.

“The IEP team and Salix together developed the agreement for the sale of the pre-FEED (front-end engineering and design) project development work product that concluded Salix’s involvement in the project,” Therriault said. “The IEP team has enjoyed the professional manner in which Salix has participated in the project development.”

Salix is a subsidiary of the Washington-based utility company Avista Corp. Avista purchased Juneau’s electric utility Alaska Electric Light and Power Co. in 2014.

Company spokeswoman Jessie Wuerst said the amicable parting was a joint business decision.

“Salix is still very excited about potentials in Alaska and we’re continuing to work to explore those opportunities,” Wuerst said.

The company — formed in 2014 to explore LNG business ventures — had proposed to expand processing capacity at the LNG plant through its own $10 million equity investment in the project, a $30 million investment by AIDEA and a $28 million low-interest loan from the authority.

AIDEA’s financial contributions to the plan to build out the plant would have come from the $330 million grant, loan and bond package the Legislature passed to fund the Interior Energy Project in 2013.

Salix was never under contract with AIDEA to work on the IEP, but was selected as the authority’s preferred partner in March after an eight-month public selection process that generated plans from 13 firms with plans to get affordable energy to the Interior.

When the authority’s project team selected Salix in March, the expectation was the two would sign a deal to make the partnership official by the end of June. The finalizing of that agreement was pushed back and ultimately never materialized.

AIDEA cut ties with MWH, the large engineering firm that was working on a North Slope LNG plant for the IEP, in December 2015 after capital costs for the plant came in higher than anticipated to meet the IEP goal of $15 per thousand cubic feet, or mcf, of natural gas.

The subsequent drop in oil prices has translated to Interior fuel oil prices that have fallen upwards of 40 percent since the AIDEA began working on the IEP. Lower fuel oil prices have tempered the rate at which residents are expected to invest themselves and convert to natural gas, an unavoidable reality that has further financially strained every aspect of the project that was always going to rely on thin margins.

AIDEA’s purchase of Fairbanks Natural Gas and its sister companies also gave the authority in-house, small-scale LNG expertise.

According to Therriault, Salix was first approached about possibly selling its pre-FEED work in early August. The AIDEA board unanimously approved a resolution to buy Salix’s pre-FEED work on the LNG plant expansion for $250,000 at its Oct. 27 board meeting without discussion.

The prospect of buying out Salix also was not mentioned in the authority’s Oct. 11 quarterly update to the Legislature on the project. Additionally, Therriault did not discuss ending work with Salix during his status report on the project at the Oct. 27 meeting just before the resolution was passed.

He said in a follow-up interview that the final decision to take the pre-FEED purchase to the board was made shortly after the Legislature’s report was drafted.

In hindsight, Therriault added, the deal should have been communicated better.

A source close to the project said work to investigate a “utility model” supply chain had been ongoing for nearly a year and with that as a financial benchmark, Salix’s proposal requiring a nearly 12 percent rate of return on the private firm’s investment and tax payments, just couldn’t compete.

There was also concern that news about another change in the project would leak out in bits without the understanding the parting was mutual and actually beneficial to the project, according to the source.

Fairbanks Rep. David Guttenberg, who has at times been an open critic of AIDEA’s handling of the IEP, said he was not upset that the buy out was not in the Legislature’s report. The Legislature, deep in the middle of an election cycle, would not have been the best place to make the news public, he said.

Guttenberg added that all large projects evolve, and the happenings with Salix are just part of this one’s maturation. Getting a different perspective on any project, as Salix provided, is an important and beneficial part of the work, he said further.

“AIDEA now has the obligation to explain that this project has survived this, that this was healthy, that the relationship with (Salix) was good or bad; here’s what we got out of it and we’re moving forward,” Guttenberg concluded.

Elwood Brehmer can be reached at [email protected].

Updated: 
12/03/2016 - 10:08pm