Did Enstar accidentally create competition in the Cook Inlet basin?
The natural gas utility for Southcentral Alaska recently signed a gas supply contract with ConocoPhillips for peaking volumes, or natural gas available when local demand spikes on extremely cold days. Because the contract is non-firm, ConocoPhillips isn’t required to provide the gas unless it has volumes available that it wants to sell.
ConocoPhillips isn’t alone. Enstar has been unable to secure any firm commitments for peaking gas, and the ConocoPhillips contract is the fifth non-firm peaking contract in Enstar’s portfolio.
That’s a mixed bag. The contracts give Enstar five lines of defense against demand spikes, but without a firm contract the utility isn’t guaranteed to have supplies available.
There might be a silver lining, though, at least according to recent comments the Alaska Department of Natural Resources filed with the Regulatory Commission of Alaska. The RCA is currently reviewing the contract, which Enstar hopes to start using in 2011.
“Although this creates some supply uncertainty to consumers, it also offers the opportunity for the creation of a more dynamic and competitive Cook Inlet gas market,” Kevin Banks, director of the Division of Oil and Gas, wrote to the RCA on Sept. 14.
Shopping for best priceAs DNR sees it, Enstar can now shop for the best price among five contracts.
Historically, long-term contracts in the Cook Inlet basin kept supplies reliable and prices low, but made producers unwilling to explore because new supplies wouldn’t fit in the local market. With Enstar now free to choose — at least in situations where more than one company makes peak volumes available — producers have more incentives to explore.
For consumers to fully realize those benefits, Banks wrote, the structure of buying and selling Cook Inlet natural gas needs to change. DNR wants blind bidding, where only Enstar knows the price and volume bid by each producer, rather than the current system where much of that information is available to everyone.
“Historically, this has mattered little, as gas was sold under firm requirements and other contracts,” Banks wrote. “However, as the Cook Inlet market matures and the promise of competition grows, these arrangements could blunt benefits that competition might otherwise offer.”
Under the current system, DNR believes natural gas prices would “reflect what the highest-cost supplier requires, or the dominant supplier demands.” With blind bidding, DNR believes prices would “reflect what (producers) require in compensation.”
DNR believes this new structure would more closely resemble nominations on the trans-Alaska oil pipeline, where only the RCA gets to review confidential bidding data.
“This would allow the (RCA) to ensure that bids are being awarded in a manner that ensures that consumers enjoy the lowest possible peak-load gas prices, while reducing opportunities for tacit (rather than directly-coordinated) collusion,” Banks wrote.
Silver lining only a liningIf Enstar did create competition, it remains in its infancy.
Since the contract deadlock of 2008, the RCA has approved several firm supply contracts, proving that while production is declining, enough short-term volumes remain.
Enstar’s inability to get firm peaking contracts, though, suggests that producers are nervous about deliverability, or how much natural gas can be called upon at any given time. Non-firm contracts give the producers wiggle room if that gas isn’t available.
With the newly proposed contract, Enstar will be able to ask for supplies on peak days from four different companies: Marathon Oil under two contracts, Union Oil Company of California (a subsidiary of Chevron), Armstrong Cook Inlet and now ConocoPhillips. The Armstrong contract won’t become effective until the North Fork unit comes online sometime in early 2011, possibly after the coldest months of the year.
Whether those companies will bid depends on how much gas is coming out of wells and how many other users in the region are also asking for additional gas. If none of those companies come through, Enstar can ask ConocoPhillips to divert gas bound for the Kenai liquefied natural gas export terminal, but only if the diversion won’t harm the plant.
If that backstop doesn’t come through, Enstar would be forced to enact emergency plans created by the regional utilities to scale back regional demand during a supply crunch.