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RCA OKs North Fork Commission gives green light to natural gas supply contract with Enstar Alan Bailey Petroleum News
In what must be record time, driven presumably by growing concerns about tightening Southcentral Alaska utility gas supplies, the Regulatory Commission of Alaska issued a letter order Nov. 5, approving the new gas supply contract between Anchor Point Energy LLC and Enstar Natural Gas Co. for the supply of gas to Enstar from the North Fork gas field in the southern Kenai Peninsula. Enstar had filed a tariff amendment for the new contract with RCA on Sept. 21.
“We have considered the filings presented by Enstar in support of the proposed Anchor Point Energy gas supply agreement and the additional information filed in response to our request,” said RCA Chairman Robert Picket in the Nov. 5 letter order to Enstar. “Based on the record presented in the tariff proceeding, we find that the public interest is best served by approval of the Anchor Point Energy GSA at this time.”
The RCA order came as a result of a majority decision by the commissioners, with Commissioners Kate Giard and Janis Wilson dissenting.
Gas needed With the rate at which its gas supplies can be delivered during peak winter demand already under significant strain, Enstar is facing a shortfall in its total contracted gas supplies from 2014. A contracted commitment of 1.2 billion cubic feet per year from North Fork will provide a modest but welcome addition to the utility’s supply volumes.
“Enstar is pleased to add a new, independent producer to its gas supply portfolio,” said Colleen Starring, president of Enstar, in a Nov. 6 response to the contract approval. “This agreement represents an important step toward meeting our customers’ needs.”
The gas supply agreement involves the construction of a $4.5 million, 8-mile pipeline by Anchor Point Energy, west from North Fork to Anchor Point, and the construction by Enstar of a new 21-mile, 8-inch-diameter pipeline from the existing Kenai Kachemak pipeline, south along the coast to meet the North Fork line at Anchor Point. The estimated cost of Enstar’s new line is $23.3 million.
Anchor Point Energy is owned by the five working interest owners of the North Fork unit. Armstrong Cook Inlet, a subsidiary of Denver-based Armstrong Oil and Gas, is unit operator and has been working since 2007 to develop the North Fork field.
“We’re real excited that the contract got approved,” Bill Armstrong, CEO of Armstrong Oil and Gas, told Petroleum News Nov. 6. With the uncertainty surrounding contract approval now removed, Anchor Point Energy will move ahead with developing the pipeline for exporting gas from North Fork, and probably with a 3-D seismic survey, as a precursor to drilling more wells in the unit, he said. Under the terms of the contract Anchor Point Energy has agreed to drill two new gas wells at North Fork.
“If everything goes smoothly we’ll be producing gas maybe by January 2011,” Armstrong said.
Anchor Point residents will obtain a gas supply as a consequence of the chosen pipeline route. And Armstrong thinks that the construction of a pipeline system into the North Fork area will open up the possibility of developing further new gas fields in the southern Kenai Peninsula.
Futures index The gas pricing in the new contract is indexed to a three-month average of natural gas futures on the New York Mercantile Exchange, but with an inflation-adjusted price floor of $6.85 per thousand cubic feet and an inflation-adjusted price ceiling of $9.90 per thousand cubic feet. Armstrong has previously said that it requires a gas price in the range $7 to $10 to make the North Fork field viable.
Gas pricing has been a major bone of contention in Southcentral Alaska utility gas supply contracts submitted to RCA in recent years, with the commissioners rejecting as too expensive several new contracts between Enstar and Cook Inlet gas producers, while recently approving a new gas supply contract between ConocoPhillips and Chugach Electric Association, a major Southcentral Alaska power utility.
But the commission had received relatively few public comments on this new Anchor Point Energy contract — the Alaska Department of Natural Resources, the Kenai Peninsula Borough, the Mayor of Anchorage and several business organizations all expressed support for contract approval.
Conspicuously absent from the list of those who commented was the State of Alaska’s Department of Law, whose Regulatory Affairs and Public Advocacy section has typically proved vociferous in responding to the terms of new utility gas supply contracts.
Giard concerns RCA Commissioner Kate Giard, expressing concern about pricing precedents set in the new contract, cited the absence of any comment from the Department of Law as a supporting reason for her dissent from the contract approval.
“Certainly pricing terms which allow the price to reach from floor to ceiling in one year should have generated the interest of the public advocate who well knows that these terms are likely to be repeated in future contracts with a far greater ratepayer impact,” Giard said. “It would be very unfortunate for Alaska’s ratepayers, if the public advocate’s voice is silent in future gas supply contracts, particularly given the attorney general’s finding of market power by producers in Cook Inlet.”
The question of whether the new contract is in the public interest has not been tested in RCA’s record, Giard said.
Commissioner Paul Lisankie took an opposite view of the lack of comments from the Department of Law, saying that the absence of Department of Law opposition to the contract tended to confirm his view that RCA should approve the contract.
Janis Wilson, the other dissenting commissioner, gave no specific reason for her position, simply stating that she did not believe that the new contract “at this time serves the public interest.”
The Alaska Department of Law’s Regulatory Affairs and Public Advocacy section has a history of successful evaluation of and intervention in regulated utility issues, achieving about $4 million in consumer rate refunds in 2009 for example, Daniel Patrick O’Tierney, chief assistant attorney general, told Petroleum News Nov. 12. But RAPA does not necessarily comment on every utility proposal that is filed with RCA, given competing demands on the section’s resources, he said.
“In this case, the commission queried the utility about many aspects of the small gas supply contract that the attorney general might have also considered, and the commission apparently found the utility’s responses to be satisfactory in approving the contract,” O’Tierney said. “Although also within its authority, the commission did not suspend the filing for further investigation and request RAPA participation in any such proceeding.”
Homer opposition The only public opposition to contract approval has come from the Homer area, where residents had hoped to obtain a gas supply from North Fork, given that Homer is just 10 miles south of the field.
In fact, a couple of people, including Alaska Rep. Paul Seaton, R-Homer, frustrated by the lack of progress in providing Homer with natural gas, have responded to the new contract by asking RCA to remove Homer from Enstar’s service area.
Although a contract signed several years ago between a previous North Fork operator and Enstar involved the delivery of gas to Homer, that contract was contingent on the drilling of a new well at North Fork and an increase of the proven reserves in the field to 14.1 billion cubic feet. And none of those conditions were ever met.
The original North Fork well, drilled in 1965, was believed to have discovered a gas pool amounting to 12 billion cubic feet.
The new North Fork contract follows the 2008 drilling of a second well at North Fork by Armstrong Cook Inlet and commits to the eventual delivery of 10 billion cubic feet of gas from the field. And in March 2009 Ed Kerr, vice president of land and business development for Armstrong Oil and Gas, told the Alaska House Resources Committee that his company was “very comfortable” that North Fork holds natural gas reserves in the range 7.5 billion to 12.5 billion cubic feet. Enstar has recently told Petroleum News that a viable gas supply for Homer requires gas reserves of 25 billion to 30 billion cubic feet and a backup supply source. Hence the decision to ship the North Fork gas north rather than to Homer, Enstar said.
Meantime, Armstrong Oil and Gas is optimistic that North Fork represents the start of a new trend toward further gas development on the Kenai Peninsula.
“We’re just like any other oil company,” Armstrong said. “If the incentive is there to drill wells and the deal’s good for both parties, we’re good to drill wells. We think it’s a nice win-win situation for the state and the people of Alaska and for us. … We were really pleased that the decision was made this quickly.”
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