Commission conditionally OKs gas sales agreement

Regulatory Commission of Alaska calls for some changes in the natural gas sales agreement between Enstar and NorthStar Energy

Kristen Nelson

Petroleum News Editor-in-Chief

The Regulatory Commission of Alaska has conditionally approved a gas sales agreement between Enstar Natural Gas Co. and NorthStar Energy Group Inc. that will bring natural gas to Homer at the southern end of the Kenai Peninsula in Southcentral Alaska.

The agreement provides for 20 years of natural gas delivery from NorthStar’s North Fork field east of Anchor Point.

The commission, in a March 23 order, required some changes in the agreement.

In addition to amending the agreement, both companies have a lot of work to do before any pilot lights are lit on the lower end of the peninsula.

Dan Dieckgraeff, Enstar’s manager of finance and rates, told Petroleum News in August when the companies announced the sales agreement that it would probably take a year and a half to two years to begin delivering gas. Approval of the contract and the proposed rate by the commission is the first step, he said.

There is a single well at the field, drilled in 1965. NorthStar has to drill at least one additional well before the gas sales agreement becomes effective, and must raise proved reserves at the field from 12 billion cubic feet to 14.5 bcf.

Then there are the pipelines: NorthStar will build the eight miles from North Fork to Anchor Point. Enstar will build the 11 miles from Anchor Point to Homer, and the local distribution lines.

NorthStar, for its part, hopes to do more than provide natural gas for Homer. Larry Snead, manager of land and contracts for NorthStar, said in August that building the pipeline from North Fork to Anchor Point is the most exciting part of the project for NorthStar, because that “allows us the opportunity to build a line north” later to hook up with the Kenai Kachemak Pipeline, allowing the company to move gas from the lower peninsula north.

Commission lowers floor price

The commission approved a proposal to charge Homer customers a $1 per mcf surcharge to permit delayed recovery of the contribution customers must pay to Enstar to build its line extension to Homer, a charge which customers normally must pay up front before they receive service, the commission said. The surcharge would continue until actual capital costs of the pipeline from Anchor Point to Homer are recovered, estimated to be approximately 10 years.

Alaska Attorney General opposes pricing method

The Attorney General also said North Fork gas should be priced based on the Moquawkie contract, where a known field was developed for production through an existing well and where a second well was also drilled, with a flat $2.75 per mcf price, adjusted for inflation. That differs from the recent Unocal contract, which required Unocal to explore for gas in new areas, and which Enstar used as a model, proposing a $3 per mcf floor price and the use of Henry Hub pricing index, because NorthStar is required to drill a new well and create redundant gas supply.

The commission agreed with Enstar, noting that the Moquawkie contract did not require drilling a new well before deliveries could begin. It disagreed, however, on the floor price, saying the record did not support NorthStar’s contention that the floor price should be 25 cents higher per mcf than the $2.75 Unocal floor, based on inflation, higher costs of capital and current elevated costs of gas.

Arbitrage, size of gas pipeline

The Attorney General argued against the 20-year term of the agreement, saying Enstar should have an opportunity to get out of the contract if it finds it can get gas more cheaply elsewhere. The commission said NorthStar argued that without the long-term contract, it would have no assurance that its investment would make financial sense, and that investors and financiers must be assured NorthStar “would obtain sufficient revenues over a long enough period to justify investment.”

The commission concluded that 20 years was a reasonable term, both for the companies and for Homer consumers, who have to retrofit their current heating systems to accept natural gas.

The commission added a transportation cap of 30 cents per mcf, noting the Unocal contract had a cap of $1 per mcf, based on a pipeline about three times as long and about three times the diameter.

The commission also said that when it comes to approving a tariff, it “will not approve transportation rates on NorthStar’s pipeline that are in excess of the charges necessary to support a 4-inch pipeline from North Fork to Anchor Point.” The commission said it understands that NorthStar hopes to find enough gas to eventually sell into the Southcentral market, and said it agreed with Enstar: “if NorthStar is successful ‘…the vast majority of the gas going through that line may be for other purposes and other people.’” On that basis, the commission said, it is placing “NorthStar on notice that we will only approve transportation charges that recover the costs of a pipeline four inches in diameter from its leases to Anchor Point.”

And, because Enstar’s affiliate, Alaska Pipeline Co., could be asked to build the NorthStar pipeline, the commission said it is requiring that NorthStar’s “transportation tariff filing must demonstrate that a valid, reasonably advertised, competitive procurement process was undertaken for the construction of the NorthStar pipeline.”

Commissioner disagrees with RCA decision

Petroleum News

That sales agreement is based on the Enstar-Unocal gas sales agreement, includes a floor price and indexes the price paid by Alaska consumers to a 36-month Henry Hub futures index price.

Giard said in a dissenting statement dated April 5 that Enstar “failed to meet its burden of proof that this (gas sales agreement) is in the public interest.” Girard agreed with the Alaska Attorney General’s argument that Henry Hub natural gas futures include Lower 48 transportation and tax costs, and said the Attorney General “provided evidence that the U.S. Average Wellhead Price Index is a more appropriate proxy, is nationally tracked and reported and linearly correlates to the prices of the Henry Hub Natural Gas Futures market.”

The commissioner said the shift to a national pricing proxy “created a substantial increase in natural gas costs for Enstar’s ratepayers,” with natural gas price increases ranging from 12.44 percent to 13.93 percent between 2002 and 2003.

“To the extent these increases are necessary to assure future supply meets expected demand, they are a rational expression of economic policy,” she said. “However, without adequate controls, this shift could create windfall profits and destabilize our economy.”

In addition to using the U.S. Average Wellhead Price Index rather than Henry Hub, Giard also said the commission should establish a price cap, because as a consequence of the commission’s approval of the Enstar-Unocal and Enstar-NorthStar sales agreements, “Alaska natural gas prices are utterly dependent on activities in the Lower 48.

“A series of events or a single dramatic event occurring in the Lower 48 could materially affect our economy.”

If a terrorist attack in the Lower 48 put a gas pipeline out of commission for a period of time, or unusually cold weather occurred, the Henry Hub price would increase.

“The result is an increase in Alaskan prices completely unrelated to the supply or demand in Alaska,” she said.

Giard said the commission should have required “a reasonable price cap” which would balance “the need to compete nationally for exploration and development dollars” with protection for Enstar’s ratepayers.

Giard also said the commission should eliminate the floor price. Indexing Alaska’s price to Henry Hub futures with no price cap “allows for unrestricted upward opportunity for price increases,” she said, and coupled with an inflation-adjusted floor to secure against future decreases in the Henry Hub price, “is known in pejorative terms as having your cake and eating it too.”