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Chugach blames stalemate on price Electric utility facing supply shortages in 15 months, says price is the main sticking point in negotiations over new contracts Eric Lidji Petroleum News
Chugach Electric Association doesn’t expect to secure much-needed natural gas supply contracts any time soon, the electric utility told state regulators recently, but said the only thing standing in the way is agreeing on a price with producers in the Cook Inlet basin.
Chugach is searching for new supplies to replace existing contracts set to expire in 2010 and 2011. Explaining its supply problems to state regulators back in February, the utility said it expected to submit new contracts for regulatory approval by the end of the year.
“Obviously, that has not happened,” the utility wrote to the Regulatory Commission of Alaska on Dec. 23. “It would be misleading for Chugach to suggest that the filing of new Chugach gas supply contracts is imminent. No such filing appears imminent.”
Chugach insists the “basic problem” is not a shortage of natural gas in Cook Inlet, at least not for the next few years, but rather a continuing inability of the utility to reach an agreement with various producers in the region on how to price existing supplies.
Other than that explanation, Chugach would not detail the ongoing negotiations it might have with Chevron, ConocoPhillips and Marathon, citing confidentiality agreements.
Chugach would like to buy at least some of its gas in the future from “smaller, and/or independent, and/or new Cook Inlet gas producers,” believing a lack of opportunities to sell Cook Inlet gas is the primary reason behind the lack of exploration in recent years.
Over the longer term, beyond the contracts the utility needs to sign soon, Chugach hopes to reduce its overwhelming dependence on “geologically produced Cook Inlet natural gas,” by turning to alternative and renewable fuels, or natural gas from other basins.
Contracts based on volume The comments come as part of an investigation by the Regulatory Commission of Alaska into whether Chugach has enough natural gas to meet current and future demand.
Chugach is the largest electric utility in Alaska, responsible for generating 55 percent of the electricity used in the Railbelt, the population center of the state stretching from Fairbanks to Homer. Chugach uses natural gas to generate 93 percent of its electricity.
To get that natural gas, around 28 billion cubic feet each year, Chugach has four large supply contracts, one with Marathon and one each with Chevron, ConocoPhillips and Municipal Light & Power, the three owners of the Beluga River gas field on the western side of Cook Inlet.
Those contracts are based on volume, and expire when Chugach uses a set amount of gas.
At the utility’s current rate of use, Chugach expects the Marathon contract, which accounts for 52 percent of the utility’s total gas supplies, to run out in “mid-2010.”
Chugach expects its contracts with the three Beluga River producers to expire in April 2011. Chugach is unsure whether it will be able to use those contracts to make up for the shortfall in the Marathon contract, but even if it can, the utility has no supplies after 2011.
May involve state, public The debate over pricing Cook Inlet gas isn’t new and doesn’t seem close to resolution.
With a limited number of buyers and sellers in the region, natural gas in Cook Inlet is not priced on a spot market, but on long-term contracts approved by state regulators.
For years, the problem has been finding a system for pricing the gas so that producers earn fair return on investment, new companies have an incentive to explore for gas in the region and consumers aren’t paying exorbitant rates for natural gas and electricity.
Attempts to strike that balance over the past decade have involved linking the price of natural gas in Cook Inlet to the price of natural gas in other parts of the country.
In 2001, RCA approved a supply contract between Enstar Natural Gas and Unocal that tied Cook Inlet prices to Henry Hub spot prices. But in 2006, the RCA rejected a different contract between Enstar and Marathon that also used Henry Hub as a starting point.
The pricing dilemma came to a head again toward the end of 2008, when state regulators refused to approve two Enstar contracts with ConocoPhillips and Marathon because the producers wouldn’t agree to a price cap based on production basins in the Lower 48.
Chugach shouted from the sidelines in that case, arguing that any price approved for Enstar would set a large precedent for the other major natural gas buyers in the region.
In the four existing Chugach supply contracts, the price of natural gas rises and falls with oil and natural gas prices in the Lower 48, but remains well below the national average.
Chugach said it has been trying to negotiate new contracts since “at least 2004.”
In addition to the problem of price, Chugach said part of the difficulty in securing new supplies is that the utility “does not yet know how public officials in the State of Alaska will respond to what is obviously a major public policy issue and potential crisis.”
So far, Chugach said it has made “relatively little effort” to involve the state or the public in the stalemate around negotiations, but added, “Obviously, that may have to change.”
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