Providing coverage of Alaska and northern Canada's oil and gas industry
January 2011

Vol. 16, No. 1 Week of January 02, 2011

Enstar gas up for bid

Southcentral utility to ask producers to bid for daily shortfall in firm supply

Alan Bailey

Petroleum News

On Jan. 1, in a sign of the times when it comes to tightening gas supplies from Alaska’s Cook Inlet basin, Southcentral Alaska gas utility Enstar Natural Gas Co. will start inviting local gas producers to bid to supply gas on a daily basis, to fill in shortfalls between gas supplies committed under contract and the volumes of gas that Enstar needs. The bidding system is necessary because the utility’s gas supply agreements no longer guarantee delivery of the total volumes of gas that customers will likely want to burn.

In a presentation to the Regulatory Commission of Alaska on Dec. 22, Enstar rolled out the details of how its new gas bidding system will work.

Daily bids

Essentially, every day (with some accommodations for weekends) Enstar will use weather forecasts in conjunction with past gas usage data to prepare an estimate of how much gas it will need on the following day. If more gas may be needed than will be available under firm, contracted volumes, Enstar will use a secure website to post a request for bids from qualified gas producers, to fill in the shortfall. Producers will then be able make confidential bids on the required volumes, with Enstar presumably accepting the lowest bid.

Bid prices will not include the cost of transporting the gas through the Southcentral Alaska gas pipeline network, so Enstar will have to add that transportation cost to the cost of the gas itself, Enstar spokesman John Sims told Petroleum News.

To guard against the possibility of actual demand being higher than estimated, perhaps as a consequence of lower temperatures than forecast, Enstar will add what it calls a “cover gas component” of, say, 10 million cubic feet to the volume that it puts out for bid, Sims said.

Interruptible supply

A producer will bid gas included in existing RCA-approved gas supply contracts as interruptible volumes, over and above the regular, guaranteed volumes that the producer supplies. But, because the additional volumes are interruptible, the fact that a producer has bid to fill an Enstar daily gas shortfall does not guarantee that the producer will actually be able to deliver all of the bid gas. And, so, Enstar will require a producer who bids to fill a daily gas shortfall to also bid what Enstar terms an “emergency gas component,” a volume of gas that could be made available at a significantly higher price that regular gas.

Then, if a producer whose daily bid was accepted becomes unable to deliver the entire bid gas volume, Enstar will go back to the emergency gas component bids and select an additional supply from those bids.

A spot market?

The Southcentral Alaska utility gas market has traditionally been characterized by long-term gas supply contracts, with no opportunities for short-term gas sales at open market prices. But although the new bidding system represents a step toward a short-term spot market for gas, the new system stops short of the type of open market that would necessarily drive prices to market equilibrium levels.

In particular, only those producers that have RCA-approved gas supply agreements with Enstar will be able to participate — in that way, any daily gas supply bid that goes through the system will involve gas pricing that the state regulators have already approved. All of the gas contracts that Enstar will use for the bidding system have excess gas clauses, Sims said.

Were Enstar to open the system to any Cook Inlet producer, a producer could bid a gas price higher than permitted in Enstar’s tariff, Sims explained. In that case, Enstar would have to absorb the component of the gas cost above the permitted maximum level, rather than being able to pass the entire cost through to gas consumers, he said.

In addition, bids made through Enstar’s system will remain confidential, at least for the time being, thus limiting the tendency of the system to cause the producers to compete on price. Enstar is still considering whether it may be possible to make the winning bids public at some point and does not yet know whether it will be necessary to indefinitely keep the bids confidential, Sims said.

Gas shortfalls

Enstar is currently projecting that its total firm, contracted gas supplies will fall short of demand by 800 million cubic feet in 2011 and by 200 million cubic feet in 2012, with that drop in unmet supplies representing an uptick in supplies from Anchor Point Energy’s new North Fork gas field in the southern Kenai Peninsula, and a modest increase in supply from a contract with Marathon Oil Co. However, the utility is projecting the shortfall to jump to 11.1 billion cubic feet in 2013, the year by which Cook Inlet Natural Gas Storage Alaska hopes to have its planned Kenai Peninsula gas storage facility in operation, to ease the gas delivery situation.

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