Providing coverage of Alaska and northern Canada's oil and gas industry
September 2017

Vol. 22, No. 37 Week of September 10, 2017

Court upholds RCA ruling on CINGSA gas

Agrees that storage facility customers are entitled to a significant portion of native gas found by accident in the facility

Alan Bailey

Petroleum News

The Alaska Superior Court has ruled in support of a Regulatory Commission of Alaska order for the disposition of some native natural gas that Cook Inlet Natural Gas Storage Alaska found by accident in its storage facility south of the city of Kenai. The RCA order required 87 percent of excess native gas to go to CINGSA’s customers, with CINGSA retaining the ability to sell the remainder of the gas.

Windfall gas discovery

The highly unusual case relates to the fact that, when drilling one of the wells for the facility, CINGSA encountered about 14.5 billion cubic feet of gas in a sand body in the storage reservoir, a windfall that appears unique in the history of U.S. gas storage facilities. It turned out that CINGSA was able to use 12.5 billion cubic feet of the discovered gas to overcome a technical problem with the reservoir - contention revolves around the sale of the remaining 2 bcf.

CINGSA had argued that, because the investors in the storage facility had borne the risk of the facility development, the investors, and hence CINGSA, were entitled to the unanticipated benefit of the native gas discovery. And, although the storage company had argued that the excess native gas did not form part of the storage operations and was not, therefore, subject to RCA regulation, the company did ask RCA to make an official ruling over the issue.

Utility property

RCA ruled that CINGSA, operating as a regulated business, had acquired the native gas through eminent domain. Thus, the found gas is public utility property, subject to RCA regulation, RCA said. Moreover, CINGSA’s customers are entitled to a portion of the gas because they assumed some of the risk associated with gas in the facility when they signed up for gas storage services, RCA argued.

The RCA formula for dealing with the excess native gas involves distributing the proceeds from native gas sales in proportion to the overall allocation of gas within the storage reservoir: CINGSA would obtain sales proceeds in proportion to the amount of base gas relative to customer gas in the facility, with CINGSA’s firm customers splitting the remainder of the proceeds in proportion to their storage space reserved in the facility. Base gas is the gas, belonging to CINGSA, pumped into the storage reservoir to maintain reservoir pressure.

In the Superior Court case CINGSA argued that the RCA ruling amounted to an unconstitutional take of the gas, given, the storage company argued, that the ruling would deprive CINGSA of its own private property.

The court ruling

In its ruling in the case, the Superior Court said that it was adjudicating over questions of law while deferring to RCA’s expertise in the factual basis of the case. The court found that the discovery of the native gas impacts the rate making for the facility and, therefore, comes under RCA jurisdiction. Moreover, there was no unconstitutional take of the gas, given that the excess gas was found in conjunction with public investment in the storage facility, the court found. CINGSA is not entitled to a windfall profit, financed by public funds and authority, the court said.

For the formula that RCA developed for the distribution of proceeds from excess native gas sales, the court deferred to the agency’s expertise, saying that RCA’s formula appears rational and was defended by consistent legal justification.

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