An Alaska Industrial Development and Export Authority team that has been evaluating proposals for providing a liquefied natural gas supply for Fairbanks favors a plan by Salix Inc. to build an LNG plant in the Cook Inlet region, the team told the AIDEA board on March 3. LNG would likely be transported to Fairbanks by truck, although shipment on the Alaska Railroad is also a possibility.
The team, a part of the AIDEA Interior Energy Project, had narrowed the LNG options to the Salix Cook Inlet proposal and to a proposal by Spectrum LNG for an LNG plant on the North Slope. The team said that both companies had presented strong proposals but that the decision to pick the Salix option was based on a unanimous vote by team members after a careful evaluation of both concepts. Selection criteria included the LNG plant cost; the risk associated with low gas demand scenarios; and LNG transportation costs.
“At the end of the day it was a unanimous selection of Salix as the top ranked respondent,” Robert Shefchik, the Interior Energy Project team leader, told the board.
The team must now conduct further work on some details of the Salix proposal before putting its recommendation to the AIDEA board, probably at the end of March, for a decision on whether to proceed with the Salix plan. The objective is to establish a viable, expanded supply of natural gas to Fairbanks for heating buildings and generating electricity, and thus also to alleviate air quality problems that result from the use of wood burning stoves. The target price for gas for Fairbanks consumers is about $15 per thousand cubic feet.
Following front end engineering and design, a decision on whether to move into development is expected in June, if the AIDEA board decides to progress the project.
Request for proposals
Having originally commissioned engineering firm MWH to investigate the potential development of an LNG plant on the North Slope for the delivery of LNG to Fairbanks, in January 2015 the AIDEA board determined that that the resulting proposal was too expensive for economic viability. Instead, the agency’s Interior Energy Project team issued a request for proposals for possible ways of delivering affordable energy to the Interior city. The team, having received 16 proposals from 13 vendors, eventually whittled down the proposal list to two finalists: the Salix and Spectrum concepts.
Consulting firm Arcadis has prepared evaluation reports on the proposals.
Salix has proposed an LNG plant in the Cook Inlet region with an initial capacity of 100,000 gallons per day, expandable to 200,000 gallons per day, according to Arcadis. The capital cost would be about $68 million, with operating costs of $7.7 million per year. Salix proposes splitting an estimated $500,000 in pre-development costs with AIDEA. Capitalization would involve a $10 million equity investment by Salix, a $30 million equity position by AIDEA and $28 million in AIDEA Sustainable Energy Transmission and Supply, or SETS, financing. The Salix plan envisages delivering gas to Fairbanks consumers at a cost of $15.74 per thousand cubic feet.
Spectrum has proposed a two-train plant on the North Slope with a production capacity of 260,000 gallons of LNG per day. The estimated $72 million capital cost of the plant, plus some contingency funding and $10 million to offset anticipated negative cash flows during the first four years of operation, would be raised through $5 million in equity from Spectrum, $30 million in AIDEA equity and a $50 million AIDEA SETS loan. Spectrum estimates a Fairbanks city gate price of $10 per thousand cubic feet for gas from the project, with storage and distribution costs in Fairbanks estimated at $4 to $5.
Salix is a subsidiary of electric and gas utility Avista Corp., while Spectrum is a major U.S. LNG producer.
Shefchik commented that both proposals anticipated capital expense requirements under $75 million and were in the range of $10 million to $15 million for annual revenue requirements. That compares with the nearly $300 million in capital costs and the about $25 million per year revenue requirement of the North Slope project that AIDEA had cancelled in early 2015.
Low oil price
With the current low price of oil, gas has become less price competitive with oil in Fairbanks, thus raising concerns about whether the demand to convert building heating systems to gas will be sufficient to support the project economics. The changing economic conditions have changed the entire project, with the focus moving to energy cost stability rather that energy cost relief, along with air quality improvement, Shefchik said.
The comparison between the finalists primarily revolved around the need to meet lower revenue requirements, given that the unit cost of the gas supplied would become higher as the fixed costs of the project become divided by a lower demand level, Shefchik explained.
“That weighed heavily as we looked at the price of oil, the differential between oil and gas,” he said.
The Salix proposal had lower revenue requirements, with the Spectrum concept costing more to build and operate. It would also cost less to transport LNG from Cook Inlet than from the North Slope. The Salix approach appeared to better accommodate low demand scenarios than that of Spectrum. In fact, in the event of low gas demand, it was difficult to see how the North Slope project could succeed in the first five years, Shefchik said. Another complication impacting the evaluation was a decision by Fairbanks utility Golden Valley Electric Association to only buy gas in the summer, given the low current price of oil. A smaller Cook Inlet project fits better with that decision than does a larger plant on the North Slope, Shefchik said.
Cost uncertainty
Another question is the level of uncertainty in the project cost, and the possibility of a cost overrun derailing the project economics. In terms of the development cost per tonne of LNG production capacity, the Spectrum plant actually looks cheaper than the smaller Salix plant. But, with that cost per tonne metric for Salix coming close to the worldwide LNG plant average, the risk of a cost overrun appears lower for the Salix plan than for that of Spectrum, Shefchik said.
In fact, there appears to be some scope for somewhat driving down the cost of the Salix project - the IEP team thinks that the original $15 gas price target for the project is within range. And, were the front end engineering and design phase of the project to show cost escalation, the project would likely stop at that point, Shefchik said.
Salix demonstrated a willingness to adjust its project to match what the Fairbanks utilities are looking for. However, there are still some issues relating to the term sheets, which need to be resolved prior to presenting the proposal to the AIDEA board for a decision on whether to proceed.
Shefchik commented that an oil price in the range of $45 to $55 per barrel might be needed to render LNG as a desirable alternative energy source in Fairbanks. However, there are factors beyond just the price that make the use of natural gas appealing. For example, gas is a cleaner fuel than oil, there are questions over the long-term price outlook for the fuels, and there are environmental concerns relating to buried oil tanks.
