Natural gas hits speed bumps: Interior Energy Project refocused after private partner leaves

Natural gas hits speed bumps: Interior Energy Project refocused after private partner leaves

Fairbanks Daily News Miner
Thursday, December 1, 2016

News-Miner opinion: November was a tough month for the Interior’s natural gas prospects. Two pieces of negative news related to the Interior Energy Project and natural gas delivery became public nearly simultaneously — the departure of IEP partner Salix and the disclosure that a test well drilled near Nenana by Native corporation Doyon, Limited, didn’t find commercial quantities of oil or gas. Both news items are unwelcome, but the Interior should continue pushing for low-cost natural gas, as it presents the best hope for affordable, cleaner energy for the community.

Local leaders had already sensed increasing reticence on the part of Salix during the summer, and they expressed their concerns to representatives of the Alaska Industrial Development and Export Authority and Alaska Energy Authority who were in negotiations with the company about terms for construction and operation of a gas liquefaction plant at Cook Inlet. Though AIDEA and AEA representatives did their best to reassure community members that an agreement was still possible, in the end, the concerns proved well-founded. Salix and the state were unable to find a way for the company to remain a partner with fiscal terms that would satisfy the project’s price goal of $15 per thousand cubic feet of gas to the consumer, the energy equivalent of heating fuel at $2 per gallon. Now the project is without a private partner, as it was after the departure of initial partner MWH Global.

There is a potential upside to the current status of the project, however: The state has signaled willingness to go it alone, without a private partner involved in the project. Although that increases the project’s risk and its cost to the state, it also removes the profit motive from all aspects of the gas delivery chain except the purchase of gas supply. Under end-to-end utility control, the project will have its best chance of meeting the $15 per mcf price target.

There is little upside, however, to the second piece of bad news for Interior gas — the poor result at Doyon’s Toghotthele No. 1 well near Nenana. The corporation had drilled the well primarily with an eye toward Interior demand for gas, hoping to be able to provide supply closer to home than Cook Inlet or the North Slope. Earlier in the summer, engineers at the site had been optimistic, giving the well a 50 percent chance of striking a commercial quantity of gas. But that optimism was dashed by the announcement in mid-November that the well hadn’t found gas in sufficient quantity to be produced economically. 

Doyon officials have said the corporation will continue to prospect for oil and gas in the area. That could be good for shareholders’ bottom lines, but it’s hard to imagine that gas being a primary supply for the IEP: Though there will likely be some flexibility, hitting the $15 per mcf price point will require long supply contracts and firm, stable prices for gas that will allow the economics of the project to be as solid as possible. Still, some local entities could benefit if Doyon’s future drilling proves fruitful, such as electric cooperative GVEA or the mining prospect at Livengood, both of which could need more low-cost energy in the future.

The delays Interior residents have endured in waiting for natural gas to arrive have been frustrating, though those involved in the process have mostly been stymied by market conditions rather than selfishness or intransigence. Now that the levers of the project are almost fully in state hands, it should become clear whether the IEP can hit its price target of $15 per mcf and achieve its goal of getting gas to as many people as possible, as quickly as possible, for as low a price as possible.

Fairbanks Daily News-Miner
P.O. Box 70710
Fairbanks, Alaska 99707-0710
(907) 456-6661

By | 2016-12-04T09:08:25+00:00 December 1st, 2016|Related Industry News|Comments Off on Natural gas hits speed bumps: Interior Energy Project refocused after private partner leaves