CINGSA appeals RCA native gas sales ruling to Superior Court

Cook Inlet Natural Gas Storage Alaska LLC has appealed to the Alaska Superior Court over a Regulatory Commission of Alaska order relating to the disposal of native gas found in the CINGSA gas storage facility, south of the city of Kenai. The disputed RCA order rejected a proposed but disputed procedure for the sale of the native gas and instead imposed an RCA-determined scheme. The term “native gas” refers to original gas in place in the subsurface storage reservoir, as distinct from gas injected into the reservoir in connection with storage facility operations.

The dispute over disposal of the native gas originated during the drilling of one of the storage facility’s wells in conjunction with the development of the facility. The well encountered an unanticipated pocket of undiscovered gas in one of the sand bodies in the Sterling C sands that were earmarked for gas storage and had been assumed to be empty. Ultimately, by the spring of 2014, CINGSA determined that the discovery amounted to a total volume of 14.5 billion cubic feet of gas, an unanticipated windfall gas resource.

It turned out that a substantial amount of the discovered gas could be used to overcome a technical problem that CINGSA had encountered because of some unexpected reservoir characteristics and related well performance - the additional gas would enable the company to achieve gas injection and withdrawal rates that the company had agreed on with its customers.

However, 2 bcf of the 14.5 bcf was surplus to requirements and could be sold.

CINGSA made a tariff filing with RCA, requesting permission to sell the surplus native gas, with the profits from the sales going to CINGSA. CINGSA argued that, since the investors in the storage facility had underwritten the risks associated with the gas storage project, the investors were entitled to gain from any unanticipated windfall associated with the facility development. Moreover, the excess native gas was of no benefit to CINGSA’s customers, CINGSA said.

But the state of Alaska and some of CINGSA’s customers for firm gas storage services disagreed, saying that CINGSA’s customers had themselves taken risks when signing up for CINGSA’s services and that the profits from the native gas discovery should be used to offset the cost of storage for the facility’s users. RCA has characterized the case as unique, with no previous regulatory proceeding or court case addressing the same circumstance.

At the end of August CINGSA and its customers filed a stipulation, setting out an agreement in which CINGSA could sell the surplus native gas, splitting the proceeds 50/50 between itself and its firm customers. The state and Tesoro, operator of a gas-consuming oil refinery on the Kenai Peninsula, objected, with the state saying that the proposed settlement raised new issues in the case and Tesoro arguing that CINGSA’s firm customers had, in effect, already paid for the drilling of the well that had found the native gas.

In early December RCA tossed both the contested settlement agreement and CINGSA’s tariff filing, saying that it could not accept a contested stipulation and that the sale of native gas could not be incorporated in the storage utility’s tariff. But the commission did agree that CINGSA could sell 2 bcf of surplus natural gas, albeit subject to conditions mandated by the commission.

Those conditions essentially require CINGSA to distribute the proceeds from the gas sales in proportion to the 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. The base gas proportion used in the calculation would itself be adjusted in proportion to the length of the customer agreements relative to the depreciable life of the facility. Base gas is the gas, belonging to CINGSA, pumped into the storage reservoir to maintain reservoir pressure.

In appealing RCA’s decision to state Superior Court, CINGSA claims that RCA’s order to distribute sales proceeds to third parties is unconstitutional in that the assets to be sold are “undisputedly owned by CINGSA.” Moreover, the agency, in developing “an arbitrary and unfounded allocation formula,” exceeded its lawful authority and “violated its own prior orders and regulations,” CINGSA claims. CINGSA also claims that RCA has exceeded its lawful authority in a number of other respects, including the entire rejection of CINGSA’s tariff filing; the rejection of the disputed settlement between CINGSA and its customers; and the ignoring of relevant Alaska and U.S. precedent.

RCA has previously stated that CINGSA found the native gas at the core of the dispute while engaged in an activity regulated by the commission. The commission, therefore, has the authority “to determine a just, fair and reasonable resolution” to the matters at issue, RCA has said.

- ALAN BAILEY