MEA files contract
Electric utility agrees with Hilcorp on gas supply for new power plant
Matanuska Electric Association, or MEA, has submitted a new gas supply contract with Hilcorp Alaska to the Regulatory Commission of Alaska, or RCA, for approval. MEA says that the supply agreement is the first contract for gas supplies for the utility’s new 170-megawatt gas-fired power plant at Eklutna, north of Anchorage, slated to go into operation at the beginning of 2015 — MEA’s current electricity supply contract with utility Chugach Electric Association expires at the end of 2014. The new gas supply contract runs through to March 2018.
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With MEA being a regulated utility, RCA must approve the new contract before it can go into effect.
In common with other Southcentral Alaska power and gas utilities, MEA has been facing ever tightening gas supplies from the aging gas fields of the Cook Inlet basin. The utilities had been considering the import of gas in the form of liquefied natural gas as early as 2014-15 to bolster Cook Inlet supplies. However, gas producer, Hilcorp, a newcomer to the Cook Inlet and now the dominant gas producer in the region, has been re-invigorating oil and gas fields that it has purchased in the basin and has said that it can meet local utility gas needs through to the first quarter of 2018.
MEA, in particular, had been experiencing difficulty finding a source of gas for its new Eklutna plant. The plant is dual fuel, enabling the use of diesel or perhaps propane rather than gas to power its turbines. However, these alternative fuels would be expensive compared with gas.
Other Hilcorp contractsIn July Chugach Electric and Enstar Natural Gas Co., the main Southcentral gas utility, signed gas supply agreements with Hilcorp, ensuring that those utilities also have sufficient gas to meet their needs through to March 2018. Although these new gas supply contracts bring welcome relief to utilities facing something of a gas supply crisis, Petroleum News understands that the utilities, worried about the gas supply situation beyond early 2018, are still investigating the LNG import option for some gas supplies after the new Hilcorp contracts expire.
And RCA has yet to approve any of the new contracts.
The Alaska Department of Natural Resources, or DNR, has estimated that there may be enough gas remaining in the Cook Inlet basin to supply local utilities through to the late 2020s. However, the extent to which this gas would be developed when required depends on the economic viability of gas development, the rate of drilling of gas wells and the vagaries of finding some gas which is not at this point definitively known to exist in the basin. In 2011 DNR published a report saying that, based on operational fields and known prospects at the time, it appeared economically feasible to meet the utilities’ gas needs to 2018, and possibly through to 2021.
And locally produced Cook Inlet gas would presumably be cheaper than gas imported as LNG or gas delivered at some time in the future by pipeline from the North Slope.
Contracted volumesMEA’s new contract with Hilcorp allows for a modest volume of gas supplied in late 2014, for use during power plant commissioning; a total volume of 2,018 million cubic feet in the first quarter of 2015; and then annual volumes ranging from 7,331 million to 7,596 million in subsequent contract years. Based on these numbers, the contract specifies average daily supplies — routine “base load” supplies — ranging from 19.9 million cubic feet per day at the beginning of 2015 to 20.9 million cubic feet per day in the last year of the contract. The contract specifies a schedule of monthly gas deliveries, based the average daily rates but allowing for some variability in gas demand from one month to another. Volumes of gas delivered during a month in excess of the volume specified in the monthly schedule will be considered “swing gas,” gas needed to meet especially high power demand, the contract says.
The contract also contains provisions for the possible supply of short-term “emergency gas,” to support any extraordinary, unanticipated power demand.
PricingThe price of base gas supplied under the contract would range from $6.18 per thousand cubic feet in 2014 to $8.03 per thousand cubic feet in 2018, with higher prices applying to swing and emergency gas. The prices through 2017 match gas price caps specified under a consent decree agreed between Hilcorp and the State of Alaska to address anti-trust concerns following Hilcorp’s takeover of both Chevron’s and Marathon Oil’s Cook Inlet gas fields.
In a letter to RCA accompanying the new contract Joe Griffith, general manager of MEA, said that after 30 months of searching for a gas supplier for the Eklutna power plant, MEA had determined that no other Cook Inlet gas producer could offer the reliability of supply and deliverability that Hilcorp could muster.
“There are other producers of gas in Cook Inlet, but none compares to Hilcorp in terms of the number of producing wells or total reserves, and Hilcorp is making substantial investments to increase its established reserves,” Griffith wrote, adding that only Hilcorp has significant gas reserves on the west side of the Cook Inlet, available for delivery to MEA through the pipeline system on that side of the inlet.
Some of the smaller Cook Inlet gas producers have raised concerns about Enstar’s new gas supply agreement with Hilcorp — the producers have told RCA that they worry that Hilcorp may lock the smaller producers out of the utility gas market.
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