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RCA reconsiders Enstar/Marathon contract findings Regulatory Commission of Alaska still rejects pricing but concedes Henry Hub indexing has spurred new Cook Inlet gas exploration Alan Bailey Petroleum News
An an order issued Dec. 29 the Regulatory Commission of Alaska has reconsidered some of its findings on the latest Cook Inlet natural gas supply contract between Marathon and Enstar.
Enstar announced the new contract in November 2005, as a means of ensuring adequate gas supplies through to 2016. The price that Enstar would pay for the gas would be based on a 12-month trailing average of the Lower 48 Henry Hub gas market futures.
Following a lengthy public hearing, RCA issued an order on Sept. 28 rejecting the gas pricing in the contract. The order represented a majority decision, with commissioners Dave Harbour and Mark Johnson dissenting (Johnson has also partially dissented from the Dec. 29 order).
The commission did allow the supply of gas under the new contract, but only if the contract pricing reduces the average cost of gas to Enstar.
In support of its September decision, RCA said that gas pricing indexed to Henry Hub had not resulted in additional Cook Inlet exploration. The commission also said that Enstar had not demonstrated that the new contract would result in reliable gas supplies.
Flurry of filings A flurry of RCA filings followed the Sept. 28 order.
The Alaska Attorney General said that pricing based on Enstar’s average cost of gas would, in effect, peg the contract price to the Henry Hub index that other Enstar contacts use. Enstar concurred with that view, requested clarification on how to calculate prices based on the average cost of gas and suggested contract amendments that would render the contract acceptable to the commission.
Marathon emphasized that it was the only gas producer to have offered to fill Enstar’s future gas supply needs and that it had put significant investment capital at risk in exploring for new Cook Inlet gas reserves. Tesoro, a major user of Cook Inlet gas at its Nikiski oil refinery, said that during the RCA hearing Enstar failed to justify the contract pricing and was unable to furnish evidence for the reliability of gas supplies under the contract.
And Bill Van Dyke, then acting director of Alaska’s Division of Oil and Gas, told the commission that the experiment in Henry Hub indexed pricing for Cook Inlet gas had been a “smashing success,” with the discovery of new gas reserves and the construction of a new gas pipeline.
Henry Hub impact In its Dec. 29 order the commission agreed to reconsider its position on Henry Hub price indexing for Cook Inlet gas.
“We delete our statement that Henry Hub pricing has not produced noticeable results,” the commission said. “We instead now conclude that Henry Hub pricing has not resulted in any increased net (gas) reserves.”
And the commission re-affirmed its position that Enstar had not demonstrated the reliability of gas supply under the new contract.
“Enstar’s witness testified that Enstar’s experts had not reviewed Marathon reserves letter and further testified that he did not know how Marathon’s existing supply commitments impacted Marathon’s ability to supply gas under APL-5 (the new contract),” the commission said.
The commission also withdrew its statement that Enstar’s average cost of Cook Inlet gas was the best proxy for a market price for gas in the Cook Inlet region. But the commission upheld its position that the new contract could go into effect based on pricing below Enstar’s average cost of gas. That position merely reflects Enstar’s existing tariff provisions, the commission said.
“Under Enstar’s tariff … a contract decreasing the cost of gas supply not only does not require our approval … it may become effective without Enstar even notifying us that it has entered into the contract,” the commission said.
And the commission declined to provide guidance on how the new contract should use Enstar’s average gas cost to determine gas prices. Instead, Enstar should consider how its tariff provisions might be revised to accommodate the new contract, the commission said.
The commission refused to consider Enstar’s proposed modifications to the new contract, citing earlier RCA guidance on what would be acceptable contract features.
“As to Enstar’s request for approval of specific modified terms, we must respect the statutory timeline, our customary practices, and the rights of other participants in the process to provide input,” the commission said.
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