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Vol. 15, No. 18 Week of May 02, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Enstar, CEA in agreement

Two largest gas users support each other in new round of contract deliberations

Eric Lidji

For Petroleum News

Some might shudder at the prospect of more gas supply deliberations in Southcentral, but two recent contracts are getting a much more agreeable reception than 2008 proposals.

The two largest gas users in the state, Enstar Natural Gas and Chugach Electric Association, recently signed separate supply contracts with Marathon Oil Co. Both utilities sought approval from the Regulatory Commission of Alaska in early April, and now both of the utilities are publically supporting each other before the RCA.

On April 20, Chugach CEO Brad Evans asked the RCA to approve the new Enstar-Marathon contract. Though not offering details, Evans noted that while the Enstar contract differs from Chugach’s 2009 contract with ConocoPhillips and its 2010 contract with Marathon, those “differences are to be expected due to differing operating characteristics. Overall, Chugach believes, this is a reasonable and constructive contract.”

On April 23, Enstar President Colleen Starring made a similar assessment about the proposed contract between Chugach and Marathon Alaska Production Co., or MAP.

“Based on our experiences with the challenges of negotiating to purchase natural gas to supply our customers’ needs, we believe that Chugach’s contract with MAP is a fair deal for Chugach’s customers under current market conditions,” Starring wrote to the RCA.

Starring added that by approving Chugach’s multi-year contract, the RCA would prevent Chugach from having to buy gas at the last minute “when its bargaining leverage is negligible.” If the contract is not approved, she wrote, “Chugach may be required to curtail service to its residential and industrial customers throughout Southcentral Alaska.”

In their letters, both Evans and Starring stressed the importance of “regulatory certainty.”

According to Evans, utilities need to know they can get supply contracts approved and recover costs through rates, while producers need pricing that encourages future exploration and development in the Cook Inlet. “Both utilities and producers need to know the process of reaching an agreement and securing regulatory approval can be accomplished as expeditiously and cost effectively as possible,” Evans wrote.

Starring believes this certainty will improve market conditions in the region. “Timely approval of both contracts will reduce the risk that potential gas suppliers may perceive of a protracted regulatory review process that ends in contract rejection,” she wrote.

Mutual support not a given

This hand-holding contrasts with the battles between the utilities in 2008, when Enstar Natural Gas wanted approval for supply contracts with Marathon and ConocoPhillips, and Chugach Electric Association argued the contracts set a bad precedent in the market.

The biggest debate in the Cook Inlet gas market is always price. Unlike the spot markets in the Lower 48, regulators set Alaska gas prices through long-term contracts. In the past, proposed and utilized mechanisms have tied Alaska gas to the Henry Hub price, to oil prices, and to indices of various gas producing basins and various gas consuming basins.

Because the RCA approves gas contracts, but does not regulate gas producers, utilities become intermediaries that must negotiate contracts on terms regulators will approve.

Chugach challenged the price terms in two contracts Enstar submitted in 2008, saying they made Cook Inlet a superb investment for producers, rather than making the region reasonably economic for the sake of keeping prices as low as possible for consumers.

Chugach argued that the higher prices would set a precedent for all future negotiations.

This debate prompted a war of words, both within the formal context of contract hearings as well as informally though public speeches by utility executives and industry watchers.

Some asked the RCA to approve the contracts, in order to ensure supplies would be available to meet expected shortfalls. Others asked the RCA to reject the contract, and tell Enstar to go back to the bargaining table with the producers to get lower pricing terms.

The RCA ultimately rejected the contracts, and Enstar ended up taking advantage of a previously unused provision in its tariff that allows it to buy gas without regulatory approval as long as the contract does not increase the utilities total average cost of gas.

The move gave Enstar the supplies it needed, but didn’t resolve the larger dispute.

In August 2009, the RCA approved a contract between Chugach and ConocoPhillips.

While many hailed the first major supply contract approved by the RCA since 2001, two commissioners who voted to approve the contract also noted in a dissenting opinion that the larger issue of how to establish natural gas prices in Cook Inlet remained unresolved.

In 2009, the RCA also approved a contract between Enstar and Anchor Point Energy LLC for supplies coming from the North Fork unit in the southern Kenai Peninsula.

Adjusted Nymex pricing

The new Chugach and Enstar contracts use similar pricing mechanisms, but arrive at slightly different prices, one of the “differences” Evans referred to in his letter.

On April 2, Chugach submitted a contract to buy 42.3 billion cubic feet of gas from Marathon over the next two to four years. On April 9, Enstar submitted a contract to buy 16.5 bcf of gas from Marathon over the next two years, 90 percent of its needs.

Both contracts use natural gas futures on the New York Mercantile Exchange as a base that gets adjusted according to factors like demand, shut-in wells and price “collars.”

The Chugach contract begins with a floor of $5.90 and a ceiling of $8.90 per thousand cubic feet and rises to $6.50 and $9.50. The Enstar contract includes a price floor of $6.85 per thousand cubic feet and a price ceiling of $9.70 per thousand cubic feet.

The comment periods for Chugach and Enstar end on May 7 and May 13, respectively.

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