Enstar waging war on small inlet producer

G. Scott Pfoff

President, Aurora Gas LLC

While all eyes are on the continuing saga of the North Slope gas pipeline project, a smaller war is being waged in the Cook Inlet natural gas market. Enstar Natural Gas Co. has initiated litigation against a small producer, Aurora Gas LLC, over a contractual dispute involving the producer’s obligation to continue sales of natural gas to the utility. While Enstar happily purchases large quantities of natural gas from Chevron USA at prices of $8 per thousand cubic feet, the utility aggressively seeks to beat Cook Inlet’s only true “small producer” into submission and require that the company continue to make sales of gas at $3 per thousand cubic feet.

Worse yet, the newer contracts that the utility has entered into with large producers at much higher prices will result in Aurora having to make royalty payments based on the “prevailing value” of gas in Cook Inlet; in other words, the more big oil gets for its gas, the less Aurora gets for its gas.

Under the pretense of looking out for the consumer’s best interests, the utility is actually pursuing a course of action that attempts to shield its shareholders from any risk at the potential expense of the local ratepayers. Should they lose this questionable litigation, they will look to ratepayers to foot the bill for their efforts.

The really upsetting part of this situation is that even if Enstar prevails in its efforts to force Aurora Gas to continue sales of gas at prices less than half of what it is paying the big guys, the ratepayers and citizens of Alaska lose. The analogy of shooting the cow to get her milk comes to mind. At $3 per thousand cubic feet, it is impossible for Aurora to continue its efforts to bring additional reserves to market. Its core operating area is on the west side of Cook Inlet in an area devoid of infrastructure where it is very expensive to operate. The company gave this enterprise a courageous effort, spending over $70 million since 2001 in an honest attempt to prove up additional reserves. The results have been mediocre, but the company wants to continue the effort.

Furthermore, Aurora has gainfully employed scores of local workers in its past five years of operations in Cook Inlet; however, most of these jobs will be lost without additional investment in its search for gas. Unfortunately, it looks like Aurora Gas will devote most of its resources in the coming year to fighting a lawsuit rather than drilling for gas.

It is important to know that the Enstar contract contains a provision that contemplated the possibility that continued production at the contract price might become uneconomic, in which case the seller has the right to suspend deliveries and sell the gas elsewhere. Aurora is not trying to “break” its contract with the utility, it is simply trying to invoke a contractual right that was bargained for at the time the contract was entered into and subsequently approved by the regulators.

The shortage of gas in Cook Inlet and the need for more companies (and small producers in particular) to join the search are well known. Enstar’s actions in this matter certainly do not seem like the actions of a utility that is trying to encourage investment by small producers.