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March 2009

Vol. 14, No. 9 Week of March 01, 2009

Cook Inlet natural gas storage: Regulate or no?

As RCA ponders whether it needs to involve itself in Cook Inlet gas storage, producers and Enstar submit comments on regulation; Division of Oil and Gas wants to know intentions

Alan Bailey

Petroleum News

The Regulatory Commission of Alaska is currently determining the scope of a docket for an investigation of natural gas storage needs around Cook Inlet. And at an RCA public meeting Feb. 25 the commission reviewed the status of its scoping effort and described some comments it has received from Cook Inlet gas producers and from Enstar Natural Gas, the main Southcentral Alaska gas utility.

Following a Feb. 11 presentation on Cook Inlet gas storage by Alan Dennis, royalty manager in Alaska’s Division of Oil and Gas, Commissioner Tony Price undertook preparation of an RCA gas storage scoping document. Dennis told the commissioners that the division has been discussing with several entities the possible establishment of new gas storage leases in depleted underground gas field reservoirs on state lands in the Cook Inlet region.

To help successfully complete these negotiations, the division wants to know RCA’s intentions regarding gas storage regulations, Dennis said.

Simple but complex

The principle behind gas storage is simple: Gas warehoused in storage facilities during the summer can bolster the flow of gas for heating and power generation during cold winter days when gas demand is high.

But things become more complex when it comes to sorting out the business circumstances under which storage should operate. How should storage operators recover the cost of operating storage facilities? And should storage facilities be available to anyone that needs them, in the same way that third-party access is available to common-carrier pipelines?

There are currently three storage facilities in operation around Cook Inlet — at Pretty Creek on the west side of the Inlet and in the Kenai and Swanson River fields on the east side. Chevron through its subsidiary Union Oil Company of California operates the Pretty Creek and Swanson River facilities, while Marathon operates the Kenai facilities. Chevron and Marathon, both major Cook Inlet gas producers, operate the facilities as a means of storing their own gas, to ensure that they can meet contractual commitments for the winter delivery of utility gas.

But the division thinks the provision of additional gas storage would add flexibility to the Cook Inlet gas market, especially if this storage were to be available to third-party users, rather than just to the storage operators.

Should RCA regulate this type of access? If so, should the commission also regulate producer owned facilities? And what role could the commission play in encouraging gas storage development? The way in which utility gas is priced will likely play a critical role in determining how much new gas storage is developed.

Enstar: enough regulation

Enstar, in its comments to the commission, said RCA’s existing role in reviewing utility rates would suffice to enable the commission to oversee the operation of any future utility gas storage operation.

“The commission has extensive regulations and substantial expertise in utility and pipeline rate making,” Enstar said. “For this reason, Enstar doubts that new, storage-specific regulations are necessary or could be successfully developed to address all of the many permutations … that any particular storage project could take.”

An RCA gas storage docket should focus on obtaining information about Cook Inlet natural gas deliverability, assessing gas storage strategies used in the Lower 48 and clarifying RCA’s jurisdiction over Cook Inlet gas storage, Enstar said.

In a letter to RCA Chairman Robert Pickett, Carri Lockhart, Marathon’s Alaska production manager, said there might be scope for the development of gas storage with third-party access but that RCA should carefully consider how to stimulate this type of development. Experience in the Lower 48 suggests that market-based gas storage rates rather than gas storage regulation encourage the development of new gas storage facilities, Lockhart said.

“Therefore, the environment for the development of storage capacity for third-party use in the Cook Inlet basin must recognize that market-based prices are needed,” Lockhart said. “Whether the commission regulates third party storage — an issue still to be resolved — utilities should be permitted to contract for storage capacity at market prices, and to pass through the associated costs.”

Dismay

Union Commercial Manager Donald Page expressed Chevron’s dismay at the possibility of RCA regulating producer-owned storage facilities of the type that Union operates in the Cook Inlet basin.

“Union strongly objects to the Regulatory Commission of Alaska ... opening a docket that would have the effect of regulating gas storage which Union as a producer has developed to meet its own contractual commitments,” Page said. “… Union requests that commission exclude producer-owned storage used solely to store the producer’s own gas from the scope of any docket it chooses to open.”

However, RCA has yet to determine its position.

During the Feb. 25 RCA public meeting, Commissioner Kate Giard expressed concern that much more information is needed about daily Cook Inlet natural gas supplies, to assess gas storage needs. She said that she has been unable to find any data that demonstrates a Cook Inlet gas deliverability issue.

“There are contract issues in the Cook Inlet. There are pricing issues in the Cook Inlet. There are disputes. But I’m not confident that there are deliverability issues,” Giard said, adding that she does not see how it is possible to make a decision about gas storage without the appropriate data.

But Commissioner Tony Price said that there is a need for quick action by the commission, so that development of new gas storage facilities can proceed. He said he hopes to have a recommendation for the commission prepared by March 11.

“I’m completely convinced that (gas) deliverability is a crucial issue in the Cook Inlet,” Price said. “… We may need to address some things to solve some of those (deliverability) problems … so that investment decisions can move on.”






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