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Vol. 13, No. 50 Week of December 14, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas supplies for CEA?

RCA wants to know why electric utility doesn’t have contracts for gas after 2011

Alan Bailey

Petroleum News

The Regulatory Commission of Alaska announced Dec. 4 that it is opening an investigation into the “adequacy and accessibility” of current and future natural gas supplies for Chugach Electric Association Inc., a major electric utility in Anchorage. Chugach generates more than 90 percent of its electricity from natural gas but has no contracted gas supplies beyond 2011, despite more than two years of negotiations with Cook Inlet gas producers.

The commission is concerned that the lack of new gas supply contracts may be putting Chugach’s long-term gas supplies at risk. And, because of some statements made by a Chugach witness during the 2007 RCA certification hearing for the Beluga pipeline, the commission is also worried about potential problems with Chugach’s shorter-term supplies. The Beluga pipeline connects to Chugach’s Beluga power plant on the west side of Cook Inlet and ships gas to the power plant under a supply contract with Marathon Oil Co.

“We find that Chugach may have short-term gas supply problems and, because new gas supply contracts have not yet been filed with us, may have long-term gas supply problems,” RCA said in its Dec. 4 order. “We are concerned that, despite Chugach’s efforts to secure new gas supplies at reasonable prices, its negotiations with potential suppliers may not be progressing toward a timely and acceptable conclusion.”

The commission will hold a prehearing conference on Dec. 12 to establish a procedural schedule for the investigation — the investigation must be completed by Dec. 4, 2009.

Alerted RCA

In February Chugach alerted RCA to the looming problem with its gas supply contracts.

“In the Lower 48 utilities use gas almost exclusively for peaking and maybe for shoulder load. They don’t use it for base load. … (But) we don’t have any significant alternative to gas in the short term,” Chugach attorney Eric Redman told the commissioners.

And determining an equitable price for gas forms the core issue in establishing new gas supplies. Chugach currently pays prices that are indexed to a basket of different hydrocarbon products including Texas crude oil, but finding a pricing formula for new contracts is proving problematic.

The Cook Inlet does not have a properly functioning, competitive gas market, said Suzanne Gibson, Chugach Electric Association vice president of corporate planning and regulatory affairs.

“A competitive market is made up of many buyers and many sellers that actively engage in negotiations which result in transactions and price change points,” she said.

When it comes to the future pricing of Cook Inlet gas, Chugach fully understands that the gas producers need to make returns from Cook Inlet gas development compete with returns from gas developments in the Lower 48, Redman said. But the problem Chugach faces is how to transition through the replacement of the electric utility’s entire gas supply.

“We and the producers are stuck trying to get to the other side of the stream,” he said.

Enstar contracts

A 2001 gas supply contract between Unocal and Enstar Natural Gas Company, the main gas utility in Southcentral Alaska, uses gas prices indexed to prices at the Henry Hub gas market in the Lower 48. However, in 2006 RCA rejected a new Henry-Hub-indexed Marathon contract with Enstar; the commission viewed the pricing in this contract as too high. And for new Enstar supplied contracts with Marathon and ConocoPhillips the commission has recently required a price cap that relates to a basket of North American production basin price points.

In its February presentation to RCA, Chugach said that it views Henry Hub pricing as too high. And Chugach is seeking different gas pricing from Enstar, because Chugach experiences a much lower swing in seasonal demand than Enstar, Gibson said.

“Prices that would represent Enstar’s level of service would not be acceptable to Chugach,” she said.

LNG license

Chugach has also opposed extension of the federal license to extend the export license for the LNG plant on the Kenai Peninsula, unless the gas producers reach agreements with Chugach for future gas supplies. In June the U.S. Department of Energy approved the export license extension but Chugach has since appealed for reconsideration of the terms under which the license extension was granted. That appeal is still proceeding through the U.S. Court of Appeals for the 9th Circuit.

In granting an extension to the LNG license DOE must ensure not only that local gas needs can be met, but also that those needs will be met, Chugach said in its appeal.

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