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Vol. 12, No. 3 Week of January 21, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Harbour slams RCA ruling

Questions impact of abandoning precedent to use Henry Hub pricing for Inlet gas

Alan Bailey

Petroleum News

On Jan. 10 Regulatory Commission of Alaska Commissioner Dave Harbour issued a second dissenting statement lambasting RCA’s majority decision to reject the proposed Cook Inlet natural gas supply contract between Marathon and Enstar. Harbour thinks that the commission majority is bowing to popular demand to keep gas prices down, while discounting the risk of future gas supply shortages.

Enstar announced its new contract with Marathon in November 2005, saying that the contract would ensure adequate gas supplies through to 2016. The price that Enstar would pay for the gas would be based on a 12-month trailing average of the Lower 48 Henry Hub gas market futures.

RCA rejects contract

Following a lengthy public hearing, RCA issued an order on Sept. 28 rejecting the gas pricing in the contract. The order represented a majority decision, with commissioners Harbour and Mark Johnson dissenting.

The commission did allow the supply of gas under the new contract, but only if the contract pricing reduces the average cost of gas to Enstar.

In support of its September decision, RCA said that gas pricing indexed to Henry Hub had not resulted in additional Cook Inlet exploration. The commission also said that Enstar had not demonstrated that the new contract would result in reliable gas supplies.

If the commission majority had been more reluctant to change the course of gas price precedents, it would “still mourn with me local, rising utility bill prices, while courageously recognizing that the price signal was our responsible effort to support sustained supplies,” Harbour said in a partial dissent to the Sept. 28 order.

Following a flurry of filings questioning the commission’s decision, the commission on Dec. 29 issued another order, with a majority decision partially reconsidering its September order. In this new order the commission majority withdrew its statement that Henry Hub gas pricing had not resulted in additional Cook Inlet exploration, but instead said that the pricing had not resulted in increased net Cook Inlet gas reserves. The majority held to its position that the pricing formula in the contract was too high and that, in reality, the contract did not guarantee gas supplies for Enstar.

Commissioners Harbour and Johnson partially dissented from the Dec. 29 order.

Delay shut the door

Harbour, in his Jan. 10 statement, criticized the delay to the end of the year in the majority issuing its latest order. That delay has shut the door on further consideration of options for resolving the issues relating to the Marathon/Enstar contract, Harbour said.

“The majority waited until the end of December, the eve of the extended time for reconsideration, to suggest belated remedies,” Harbour said. “… The importance of this point is that with more time and options, the commission might have available to it an option which more responsibly supports public interest considerations.”

Harbour said that further consideration of the majority order rejecting the contract would have confirmed flaws in the arguments against the pricing model in the contract. That could then have led to actions such as considering a proposal by Enstar for resolving the impasse over the contract.

“Had it (the commission majority) done that before Dec. 15, 2006, there would have been time by year-end to act on that expanded record,” Harbour said. “The majority, having created this problem with its own delay, disingenuously laments this loss of options by reluctantly concluding we cannot further consider the tariff filing ‘because the statutory timeline for this tariff filing has run.’ … I can only hope that the majority’s skill in reforming (while affirming) its position upon reconsideration finds Marathon and Enstar still willing and able to continue their efforts with us to finalize a long-term gas supply agreement.”

Insulated from criticism

Harbour said that the commission majority has insulated itself from criticism because “the supply squeeze that could materialize in the wake of (the contract’s) … rejection will not be fully realized for years.” If on the other hand Marathon and Enstar agree on an amended contract, the majority will take credit for reducing the cost of Southcentral Alaska gas.

“The majority will then be able to proclaim to an appreciative populace that its action forced industry to provide gas to consumers at lower prices, and that admiring public will have no idea how close it came to losing a long-term, secure supply of natural gas,” Harbour said.

Harbour also questioned the impact on the Alaska investment climate of tossing out an established precedent to use a Henry Hub gas price index.

“In its deviation from precedent, the majority also created the prospect that other regulated industries could begin to attach some additional risk premium to planned investments throughout Alaska requiring regulatory approvals based on the commission’s precedent; though any of those lost investments, likewise, will remain forever unknown,” Harbor said.

“I have great respect for the majority’s ability to portray a popular result, but greater regret that I could not have more effectively communicated the flaws in that portrait and the virtue of supporting a secure gas supply along with the reliable precedent and healthier investment climate our predecessors passed on to us,” Harbour concluded.

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