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Enstar: protection, not guarantees New gas supply contract with Conoco gives Enstar another place to turn when demand peaks, but only on a non-firm basis By Eric Lidji For Petroleum News
A newly proposed gas supply contract between Enstar Natural Gas and ConocoPhillips would give the utility a fifth and sixth line of defense when extreme cold causes natural gas consumption to peak in Southcentral Alaska, but still leaves Enstar without a guaranteed supply.
Under the non-firm contract, Enstar can ask ConocoPhillips for natural gas from the local Cook Inlet basin when demand peaks, but ConocoPhillips isn’t obligated to provide the gas unless it has it available.
The contract also requires ConocoPhillips to divert supplies bound for the liquefied natural gas export terminal for local use, as long as the diversion won’t harm the LNG plant. (See related LNG export story on page 5 in this issue.)
The contract employs a mechanism used to price excess volumes in a contract between Enstar and Marathon Oil that regulators approved earlier this year. The mechanism sets a price cap based on Heating Oil Futures Contracts on the New York Mercantile Exchange, although the actual price would be based on several market factors, including weather, time of year, the availability of natural gas from other producers and regional demand.
The contract would run from Jan. 1, 2011, to March 31, 2013.
While Enstar and ConocoPhillips have signed the contract, it still needs the approval of state regulators. Enstar asked the Regulatory Commission of Alaska to make a decision by Dec. 1, 2010, but didn’t formally request an expedited review process.
Another non-firm option The contract would give Enstar another supply option when demand spikes.
Based on a recent forecast, Enstar has estimated it could be facing a deliverability gap of around 40 million cubic feet of natural gas on the coldest days of 2011 and 2012.
Enstar now has six ways to fill that gap: non-firm volumes from four existing contracts, non-firm volumes in this newly proposed contract and diversions from the LNG plant.
If none of those suppliers — Marathon, Union Oil Co. of California (a subsidiary of Chevron), Armstrong Cook Inlet and now ConocoPhillips — can meet the need, Enstar would be forced to use the 2009 Gas Emergency Agreement Letter, a document that requires Enstar, Chugach Electric Association, Anchorage Municipal Light & Power and Golden Valley Electric Association to work together to minimize the impact of a natural gas shortage.
At a test emergency exercise in September 2009, those four utilities reduced daily natural gas consumption by 38 mmcf, just shy of the forecasted shortfall in 2011 and 2012.
Enstar believes this deliverability crunch will continue for at least two more years, until the company can develop storage where excess natural gas produced in the summer months can be kept until it’s needed in the winter, when demand is 12 times higher.
Local gas and LNG get knotted The contract would further intertwine the fates of the local natural gas system and the LNG export facility. ConocoPhillips and Marathon want the U.S. Department of Energy, or DOE, to extend the license allowing exports by another two years, to March 31, 2013.
Some, including Alaska Gov. Sean Parnell, generally want local needs are met before exports continue. The clause in the proposed contract might alleviate that concern, but it doesn’t go as far as the demand made by seven Democratic lawmakers that DOE force the companies to meet local demand entirely before shipping any gas overseas.
Even with this newly proposed contract, Enstar expects a 900 mmcf shortfall in 2011, a 1.1 billion cubic foot shortfall in 2012, about 3 percent of total expected demand.
Enstar supports continued exports because the plant moderates seasonal swings and serves as a back-up on cold days. Enstar also needs the plant to remain in operation, though, because without it, Marathon is contractually allowed to curtail gas deliveries.
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