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Chugach Electric makes public the data in Hilcorp gas supply agreement
Alan Bailey Petroleum News
Chugach Electric Association has released volume and price information for the recently announced extension to its gas purchase agreement with gas producer Hilcorp Alaska. In an Aug. 27 filing with the Regulatory Commission of Alaska the utility said that it has contracted for the purchase of 3.3 billion cubic feet of gas between April 1, 2018, and March 31, 2019, at an average supply rate of about 9 million cubic feet per day. Chugach Electric has an option to increase the annual volume to 8.76 billion cubic feet, if the utility notifies Hilcorp by Oct. 1, 2016, of its intent to take the additional gas.
Consent decree pricing The agreed price is $8.03 for base load gas, $10.04 for gas to meet high gas demand in the winter and $12.04 for emergency gas supplies. These prices are identical to those for the previous year in the Hilcorp supply agreement, with the pricing corresponding to price ceilings set in a consent decree agreed between Hilcorp and the state of Alaska.
The modified agreement with Hilcorp, which goes into effect on Jan. 1, 2015, includes a provision for Chugach Electric to buy additional gas at any time during the duration of the agreement, if the utility needs the gas and if Hilcorp has the gas available. The price of this additional gas would correspond to the price of base-load gas at the time of purchase.
Chugach Electric had filed the contract extension with the Regulatory Commission of Alaska on Aug. 1, seeking commission approval of the agreement. But in that filing the Southcentral Alaska utility did not make the contracted gas volumes or gas prices public, asking instead that the commission would rule these aspects of the contract confidential. The utility argued that public access to some of the terms of the agreement could compromise the utility’s ability to negotiate other gas supply agreements with other gas producers.
But in its Aug. 27 filing the utility withdrew its petition for confidentiality, not providing any explanation for its change of heart but saying that it may raise the confidentiality issue as a potential future regulation change.
Mitigate price risk In its new filing with the commission, Chugach Electric says that the minimum gas volumes in the contract extension help mitigate future gas price risk by securing gas at a fixed price. The extension provides for a cost of between $26.5 million and $70 million for gas supplies, versus projected annual revenues of around $200 million. Chugach Electric anticipates managing its gas demand variability both through terms already set in its contract with Hilcorp and through the use of the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula, the filing says.
According to data presented in the Aug. 27 filing, Chugach Electric anticipates that its total gas supply requirements in 2018 will be 8.8 billion cubic feet, with the utility’s existing Hilcorp supply agreement meeting 2.2 billion cubic feet of that demand. Adding in the 2018 portion of the 3.3 billion-cubic-feet commitment in the agreement extension adds 2.5 billion cubic feet to the 2018 supply, leaving a supply gap of 4.1 billion cubic feet. However, Chugach Electric could fill that supply gap by invoking the potential increase in the supply volume from 3.3 billion cubic feet to 8.76 billion cubic feet, as spelled out in the revised agreement.
Market opportunity By allowing the possibility of Hilcorp gas supplies in 2018 to fall short of Chugach Electric’s needs, the electric utility has presumably left the door open for gas producers other than Hilcorp to find a market for utility gas from the Cook Inlet basin. Gas producers have expressed concern about the impact of Hilcorp dominance in the Cook Inlet utility gas market, with all producers needing market outlets for their gas to justify the cost of finding and developing gas fields.
Hilcorp spokeswoman Lori Nelson told Petroleum News in a Sept. 2 email that Hilcorp’s investments in the Cook Inlet basin are resulting in increased gas production and that meeting gas supply commitments to local utilities is a priority for the company.
“Right now the longest range commitments we have made span into early 2019,” Nelson said. “Increased activity and production from Hilcorp and other operators in the inlet is positive sign that local utilities will be able to purchase the gas they need from local producers for several years to come.”
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