More utility gasMEA signs new full service supply agreement with Hilcorp for 2018 to 2023 ALAN BAILEY Petroleum News
Matanuska Electric Association has formed a new gas supply agreement with Hilcorp Alaska covering the period April 1, 2018, to March 31, 2023, MEA announced April 19. The utility has asked the Regulatory Commission of Alaska to approve the agreement. The gas will fuel MEA’s power plant at Eklutna, north of Anchorage.
The supply contract, a full requirements contract covering swings in gas demand levels between summer and winter, has a gas price of $7.55 per thousand cubic feet in its first year of operation. The pricing is about 6 percent lower than the 2017 price of $8.03 stipulated in MEA’s current Hilcorp gas supply agreement - that agreement is linked to a consent decree negotiated between Hilcorp and the state of Alaska, MEA says.
The new contract will cover all of MEA’s gas supply needs during the contract’s term. However, in the interests of potential supply diversification, the contract includes a provision allowing a one-time reduction by MEA of the contracted gas volumes, if the utility finds alternative gas supplies at lower prices.
Minimum annual gas supply volumes committed under the contract range from 5.9 billion cubic feet in the first year of the contract to 6.1 billion cubic feet in the contract’s final year, while maximum volumes range from 6.6 billion cubic feet to 6.9 billion cubic feet. The gas price escalates at a rate of 2 percent per year. Delivery rates can vary, with a maximum of 28 million cubic feet per day.
“We’re just really happy about the contract,” Tony Izzo, MEA general manager, told Petroleum News on April 20. “We think it provides a level of certainty for us in uncertain times.”
Will meet demand swings Izzo emphasized that, while Hilcorp has committed to fully meet MEA demand swing requirements, the gas price remains the same for all supply levels, including the provision of needle peaking supplies on cold winter days, if necessary. And, although the utility must pay the cost of transporting the gas from gas fields to the Eklutna plant, MEA does not use gas storage facilities and does not, therefore, incur the storage costs that other utilities have to build into their gas supply costs.
Izzo said that the minimum annual volumes stipulated in the contract are comfortably below MEA’s anticipated demand but, should demand in one year fall below the minimum, there is a mechanism in the contract for rolling a cost adjustment for the unused gas into the gas pricing for the following year. The adjustment mechanism is more cost effective than would be purchasing gas storage capacity in the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula to hold any excess gas, although the purchase of gas storage, in the event of a major undershoot in gas usage, would be possible as a contingency measure, Izzo said.
Under a provision referred to as the turndown option, MEA has a one-time opportunity to reduced the annual contracted supplies from Hilcorp by up to 1.25 billion cubic feet, to enable the utility to purchase gas from other gas suppliers and, hence, to diversify its supply portfolio. This option can be invoked at any time up to the end of the contract but will trigger a 25 cent increase in the contract price of the Hilcorp gas from the date on which the option is invoked. To make economic sense for MEA, any new gas supply agreement requiring the turndown option would clearly need to be priced at a lower level than in the Hilcorp contract. And the new agreement would require Regulatory Commission of Alaska approval before the turndown option would be invoked.
Intent to diversify Izzo said that, originally, MEA had planned to diversify its supplies through the establishment of supply agreements with more than one gas producer. However, Gov. Bill Walker’s 2015 veto of Cook Inlet production tax credit payments and the subsequent uncertainty over state tax credit provisions had brought negotiations with an alternative gas supplier to a halt. And, with a need for certainty in its gas supply arrangements, MEA had opted for a Hilcorp contract that would meet all of the utility’s needs, albeit with the possibility of using the turndown option should opportunity arise.
The new contract also includes terms under which MEA could purchase additional short-term interruptible gas supplies to support the temporary sale of power from the Eklutna plant to other electricity utilities on the Railbelt power transmission grid. Essentially, MEA would issue a pre-specified form to quickly initiate the temporary gas supply at some agreed price.
Provisions in the new contract with Hilcorp require priority for MEA in the delivery of gas on the west side of Cook Inlet. This recognizes the fact that gas delivered to MEA’s Eklutna plant has to come through an Enstar Natural Gas Co. gas transmission line from the west side - it is not possible to deliver gas north from Anchorage to Eklutna, Izzo said.
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