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Chugach has new contract with Marathon Electric utility applies to RCA for approval of gas supply contract to meet remaining natural gas needs from 2011 to 2014 Kristen Nelson Petroleum News
Chugach Electric Association has signed a gas supply contract with Marathon Alaska Production LLC, a contract which will help fill the gap in the utility’s natural gas needs through 2014.
A gas supply contract CEA signed last year with ConocoPhillips Alaska was the first such contract the Regulatory Commission of Alaska had approved since 2001. In the interim RCA rejected contracts Enstar Natural Gas Co. negotiated with producers, objecting to prices indexed to “city gate” market prices.
Until CEA negotiated its contract with ConocoPhillips last year, the utility had spent several years seeking new supply contracts extending beyond 2011.
The new contract with Marathon Alaska Production involves, as did the ConocoPhillips contract, price floors and ceilings.
CEA told the commission that the Marathon contract, submitted April 2, will meet the utility’s gas supply requirements beginning at the end of the first quarter of 2011. The utility said that because Marathon needs lead time “to plan, drill, and develop wells to meet Chugach’s gas requirements,” it is requesting a commission ruling on the contract no later than Oct. 2.
CEA said Marathon needs to make capital investment commitments this October for drilling which would take place in 2011 and 2012.
The utility said this contract, combined with expected Cook Inlet gas storage services, would “fill the balance of Chugach’s unmet needs for natural gas from April 2011 through December 2014,” and told the commission it believes the contract provides the needed gas volumes “at a reasonable price on terms that are fair, just and reasonable.”
The utility said it has no other means to acquire gas necessary to produce electric power for wholesale and retain customers.
27 bcf per year CEA told the commission it uses 27 billion cubic feet per year of natural gas in its power stations, all purchased from Cook Inlet gas fields. These needs have been met for more than 20 years under a series of long-term gas contracts, but “volumes available under these existing long-term contracts will run out in 2010 and 2011,” CEA said.
The utility said it has been working for the past six years to obtain replacement gas supplies, and in May 2009 signed its first significant gas supply contract in 20 years with ConocoPhillips Alaska and ConocoPhillips, a contract which the commission approved in August. The contract with Conoco meets 100 percent of CEA’s unmet needs until April 2011, some 50 percent of the utility’s unmet needs from May 2011 through December 2014, some 60 percent of its unmet needs in 2015 and 29 percent of its unmet needs in 2016.
Price of contract gas CEA told the commission that the Marathon contract price starts with a Nymex futures index price and varies due to the application of discounts and premiums according to the time period.
The utility said the key pricing feature is the price collar.
“The price collar bounds the price risk for both Chugach and MAP,” the utility said. “From an energy consumer perspective, the price ceiling caps the market price, creates price certainty, and reduces price volatility. From a gas producer perspective, the price floor reduces the investment risk by ensuring that the price will be sufficient to warrant expansion and maintenance of its gas supplies.”
CEA said the collar prices generally increase over time to reflect inflation, although a 5 percent discount is applied to the price of gas when storage is available to represent the shift in gas storage cost to CEA from Marathon.
The collar begins with a floor of $5.90 and a ceiling of $8.90 per thousand cubic feet and rises to $6.50 and $9.50. Comparison with Conoco contract CEA said different prices in its contract with ConocoPhillips and in its proposed contract with Marathon reflect the fact that prices in the ConocoPhillips contract were based on historical gas pricing data revised on a quarterly basis while the Marathon contract reflects futures prices averaged on a yearly basis.
“Chugach actively sought such pricing diversity in order to avoid concentration of price risk exposure on shorter or longer term markets, or past prices or future prices,” the utility told the commission.
CEA also said the price color for the entire term of the Chugach-Marathon contract “has the benefit of less price volatility risk” compared to the ConocoPhillips pricing. Chugach said that even with different pricing methods, the contracts the utility has with ConocoPhillips and the proposed contract with Marathon “provide a similar range of gas prices.”
RCA noticed the filing April 7 and is taking comments through May 7.
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