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Vol. 18, No. 9 Week of March 03, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

CINGSA brings lawsuit

Operator of gas storage project seeks declaratory judgment in property dispute

Wesley Loy

For Petroleum News

A natural gas storage project is up and running on Alaska’s Kenai Peninsula, serving as a kind of auxiliary fuel tank that gas and electric utilities can draw upon in winter when gas supplies tighten up.

Everybody is happy about the extra measure of energy security the storage project offers the region.

But quietly, a lawsuit is playing out in a dispute over the very foundation of the storage operation.

The suit isn’t meant to halt gas storage. Rather, it concerns who is entitled to payment for use of the subterranean “pore space” in which the gas is stored.

Cook Inlet Natural Gas Storage Alaska LLC filed the suit on April 2, 2012, in state Superior Court at Kenai.

The suit names the city of Kenai, the state Department of Natural Resources and Cook Inlet Region Inc. as defendants, and seeks a declaratory judgment sorting out the dispute.

The case currently is in the discovery and deposition stage.

Safe supply

CINGSA is a certificated Alaska public utility. Its major owner is Calgary-based AltaGas Ltd., which owns Enstar Natural Gas Co., the main gas utility for Southcentral Alaska.

CINGSA uses a depleted reservoir in the Cannery Loop gas field to hold gas. The company’s customers include Enstar and two Anchorage electric utilities, Chugach Electric Association and Municipal Light & Power.

The storage utility went into operation in spring 2012.

Establishing gas storage has been a high public policy priority in Alaska, as winter deliverability from declining Cook Inlet gas fields has become strained.

Gas is the dominant fuel for heating and for generating electricity in Southcentral, the state’s population center. Storing up gas in warmer months, when consumption is much lower, provides a ready and reliable supply for the region during winter.

The CINGSA project is on the south side of the city of Kenai. Much of the storage reservoir is beneath the meandering Kenai River, famed for its Chinook and sockeye salmon.

The lawsuit says CINGSA, on Aug. 1, 2011, entered into a state lease under which the company was granted natural gas storage rights.

Earlier, on April 22, 2011, CINGSA entered into a similar lease with CIRI, an Anchorage-based Alaska Native corporation.

The state and CIRI leases cover most of the storage reservoir.

The suit says CINGSA, after reviewing the chain of title and relevant conveyance instruments and governing law, had “concluded” that the state and CIRI held the underground storage rights in the area.

But after CINGSA entered into the state and CIRI leases, the city of Kenai raised a claim to ownership of the storage rights.

CINGSA is asking the court for a declaratory judgment that the city holds no such ownership interest.

Payment due?

“The city supports the project and thinks what CINGSA is doing is good,” Bruce Falconer, attorney for the city of Kenai, told Petroleum News on Feb. 27.

But the city has a responsibility to stand up for its interests, he said.

“It wants to be paid for the use of its land for a public project,” Falconer said.

CINGSA was able to move forward with its storage project after the city granted the company a “right of entry.”

CINGSA says it filed the suit at the city’s request after negotiations failed. The city denies making such a request.

The suit says the state is the owner of the mineral estate in about 528 acres, while CIRI owns the subsurface including mineral rights in 579 acres.

But the city’s answer to the suit contends: “The City owns over 86 percent of the land and the associated natural gas storage rights where CINGSA’s natural gas storage project is located.”

The city cites “the American Rule,” followed elsewhere in the country, which says the landowner, not the mineral rights owner, should be paid for natural gas storage rights.

The city isn’t looking to supplant the state and CIRI as lessors of the storage reservoir, Falconer said.

Rather, the likely remedy for the city is a one-time payment, he said. CINGSA has the power of eminent domain as a public utility.

An appraisal done for CINGSA valued the pore space at close to $1 million, Falconer said.

The state, in its answer to the lawsuit, defends its storage lease with CINGSA as valid.

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