Elwood Brehmer
Alaska Journal of Commerce

The Interior Energy Project took a big step forward Thursday 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 request for proposals, or RFP, issued by the state authority.

According to a third-party analysis of Salix’s proposal by the global consulting firm Arcadis Inc., 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 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.

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.

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

Shefchik 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.

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

Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached