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Enstar, Marathon agree on new contract New agreement would alleviate gas supply shortfall in 2011 and 2012, with pricing based on three-month average of Nymex futures Alan Bailey Petroleum News
Enstar Natural Gas Co., the main Southcentral Alaska gas utility, has asked the Regulatory Commission of Alaska to approve a new gas supply contract with Marathon to fill 90 percent of Enstar’s current shortfall in contracted supplies in 2011 and 2012. The new contract provides for a supply of 6.8 billion cubic feet of gas in 2011 and 7.2 bcf in 2012, while Enstar’s projected gas supply shortfall is 7.9 bcf and 8.6 bcf in those years, Enstar said in an April 9 letter to the commission.
“Marathon has supplied Enstar with natural gas for more than 45 years,” said Colleen Starring, Enstar’s president, in announcing the new contract. “The new supply contract will help to meet our customer’s projected needs during the next two years.”
RCA approval The gaining of RCA approval for new gas supply contracts has become a major problem for Enstar in recent years, as the utility tries to deal with a combination of tightening natural gas supplies from the Cook Inlet basin and the periodic demise of aging gas supply contracts. The commission, although not a regulator of Cook Inlet gas producers, has a duty to approve utility gas supply agreements and has been concerned about rising gas prices.
However, the new Marathon contract follows a very similar pricing model to a gas supply contract between Enstar and Anchor Point Energy LLC that RCA approved in 2009 for gas from the North Fork gas field in the southern Kenai Peninsula.
As in the Anchor Point Energy contract, the gas price would index to a three-month rolling average of natural gas futures on the New York Mercantile Exchange. And the new Marathon contract includes a price floor of $6.85 per thousand cubic feet and a price ceiling of $9.70 per thousand cubic feet, compared with a floor and ceiling of $6.85 and $9.90 in the Anchor Point Energy contract. The price floors and ceilings in both contracts will be adjusted for inflation.
However, unlike the Anchor Point Energy contract, the new Marathon contract includes price tiering arrangements for increased gas supply rates during periods of high gas demand in the Alaska winter. The base, index price, as determined from the Nymex futures coupled with the price floor and ceiling, would apply to gas supplied at rates of up to 9 million cubic feet per day. But at rates above 9 million cubic feet per day, the price would rise to 140 percent of the index price.
29 mmcf per day maximum The maximum gas delivery rate under the contract is 29 million cubic feet per day, However, Marathon retains an option to reduce that maximum to 14 million cubic feet per day if wells that the company is forced to shut in during low summer demand fail to recover to previous production levels when subsequently restarted in the winter — the impact of factors such as water encroachment on wells shut-in during the summer in aging Cook Inlet gas fields has become a major concern, given the extreme swings in Southcentral Alaska utility gas demand between summer and winter.
However, there is a formula for reducing the price of gas delivered at a rate above 9 million cubic feet per day, if Marathon has to drop the maximum daily delivery rate below 29 million cubic feet.
And there is provision for Enstar to request gas in excess of daily contracted amounts, with a ceiling price corresponding to the equivalent price of heating oil.
On April 2, Chugach Electric Association, a major Southcentral Alaska electric utility, also applied for RCA approval of a new gas supply contract with Marathon, also using a Nymex futures index price coupled to a price floor and ceiling. An earlier CEA gas supply contract with ConocoPhillips, approved by RCA in 2009, has a base gas price indexed to a basket of prices in Lower 48 gas production areas, but with a different price formula for peak gas supplies.
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