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Aurora and Enstar reach settlement
Alan Bailey Petroleum News
The lawsuit that has embroiled Aurora Gas and Enstar Natural Gas Co. since Aurora suspended its gas supplies to Enstar from the western Cook Inlet Moquawkie field on Oct. 1, 2006, has finally come to an end. In a settlement agreement signed April 18 the companies agreed to terminate the contract as from the date when Aurora suspended the Moquawkie supply.
Aurora has agreed to pay Enstar $11,225,000, which Enstar said in a May 6 letter to the Regulatory Commission of Alaska represents an “essentially full recovery of the increased gas costs incurred from October 2006 through May 2008,” as a result of Enstar having to replace Moquawkie gas with gas from a more expensive source. Aurora has also agreed to pay an additional $100,000 to Enstar “in connection with terminating the litigation,” Enstar also told RCA.
Enstar says that it will use its net proceeds from the settlement to reduce the gas cost adjustment that it charges its customers to reflect the cost of Enstar’s gas supplies.
“By applying this amount to the next GCA (gas cost adjustment) annual revision, Enstar estimates that the 2009 GCA will be reduced by $0.31 per mcf, for estimated annual savings of approximately $54 for an average residential customer,” Enstar told RCA.
Uneconomic Aurora Gas has said that its decision to cease delivery of Moquawkie gas to Enstar in 2006 resulted from gas production becoming uneconomic at the contract price of $3 per thousand cubic feet for gas from Aurora Gas’ core production area around the Moquawkie field. The core area includes all of Aurora Gas’ producing gas fields apart from Nicolai Creek.
One particular issue that Aurora raised was the question of the way in which the State of Alaska uses what the state terms “prevailing value,” a weighted average price of all Cook Inlet utility gas, to calculate state royalties. The prevailing value had risen well above the $3 contract price, thus rendering Aurora’s effective price for the Moquawkie gas much lower than $3.
And Aurora said that the terms of its contract with Enstar provided for suspension of gas supplies if the gas deliveries were uneconomic.
Enstar vehemently disagreed with Aurora’s position and sued for breach of contract. Enstar claimed compensation for the need to switch to higher cost gas supplies as a result of the loss of deliveries from Moquawkie. Enstar also challenged Aurora’s right to sell Moquawkie gas to some other customer following suspension of supplies to Enstar, saying that such sales reduced gas reserves to which Enstar had a legal right.
No more drilling In response to the litigation Aurora Gas shut down all of its exploration and field development work in the core Moquawkie area. And the company’s Cook Inlet drilling rig has remained idle ever since.
The April 18 settlement makes no admission as to who was right or wrong in the Moquawkie litigation. However, the settlement recognizes that the Moquawkie contract is defunct and includes compensation for Enstar.
But the settlement requires RCA approval and on May 9 the commission issued a public notice of the proposed Enstar tariff changes as a result of the compensation from Aurora. Comments are required by June 9.
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