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Vol. 15, No. 32 Week of August 08, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Enstar gets new GSA

Contract with ConocoPhillips would provide non-firm supplies on peak days

Eric Lidji

For Petroleum News

Enstar Natural Gas recently signed a natural gas supply contract with ConocoPhillips.

The contract is for non-firm supplies over the next few years, but the exact terms and pricing of the deal won’t be known until Enstar submits it to the Regulatory Commission of Alaska for approval. The company expects to file the contract in mid August.

Enstar announced the contract in comments to the U.S. Department of Energy supporting an extension of the federal license that allows liquefied natural gas exports from Alaska.

ConocoPhillips and Marathon Oil jointly own the LNG export facility on the Kenai Peninsula and have asked the government to continue exports through March 31, 2013.

Enstar said the ConocoPhillips contract would provide supplies during that period. Non-firm supplies typically cover volumes above average demand, such as on very cold days.

Enstar previously negotiated two supply contracts with Marathon that provide firm gas commitments during the proposed extension period, which would begin April 1, 2011.

Enstar, the largest natural gas user in Alaska, said its 2010 contracts were “the result of extensive negotiations and are the best terms the producers were willing to offer.”

Starring: Gas would be diverted

In her Aug. 2 letter to the DOE, Enstar President Colleen Starring said ConocoPhillips and Marathon both “agreed to divert gas from the Kenai LNG export facility to the local market to meet their contractual obligations and, during periods of high gas demand, to make interruptible gas sales” as part of their contractually agreements with Enstar.

Currently, despite the recently approved contract with Marathon, Enstar anticipates a 900 million cubic foot shortfall in 2011 and a 1.1 billion cubic foot shortfall in 2012.

“Neither Marathon nor ConocoPhillips was willing to meet all the unmet needs of Enstar’s customers for gas during the export period on a firm basis, meaning that Enstar will be relying on as-available, non-firm volumes (including flowing gas diverted from the LNG export facility) to meet forecasted peak needs of its customers,” Starring wrote.

However, neither the ConocoPhillips nor the Marathon contracts require the companies to divert gas to the local market if those diversions “will result in any material operational difficulties or technical harm to the LNG Facility.” If Enstar can’t get enough gas from ConocoPhillips or Marathon to meet peak local demand, Starring said the company would “be obliged to find other gas supplies, rely on fuel-switching or electricity imports by local electric utilities, and/or ask customers to conserve gas on peak days.”

Enstar still supports exports

Despite those uncertainties, Enstar still supports an extension of the export license.

Starring said the facility is needed until Enstar, through its parent company Semco Energy, can complete an in-field gas storage facility in Cook Inlet. The company is currently seeking regulatory approval for the project and doesn’t expect it to come online anytime before late 2012. Until that storage facility is up and running, Enstar said diversions from the LNG plant are “a critical supply resource on the coldest winter days.”

Enstar also supports the extension because demand for exports in the summer offsets seasonal swings in Alaska during the winter, allowing producers to draw on wells more evenly throughout the year, thus maintaining deliverability and protecting reservoirs.

Enstar also wants the export license extended to maintain supplies. Marathon can contractually reduce deliveries to Enstar by 14 million cubic feet per day if the LNG facility shuts down between 2011 and 2013. “Said more simply,” Starring wrote, “DOE’s denial of the requested LNG export license extension would likely put Enstar and its customers in a worse gas supply position during the export license extension period.”

Some support for exports …

The DOE received seven other comments on the extension request.

Aside from Enstar, only two comments supported an extension. All three members of the Alaska Congressional delegation noted that the facility not only provides local jobs and revenues, but also is de facto storage that levels seasonal swings in demand.

The delegation also noted that ConocoPhillips and Marathon Oil, the owners of the plant, were not asking to ship more gas to Asian markets, but for more time to ship volumes already approved for export during a previous extension request granted in early 2009.

At that time, the DOE gave ConocoPhillips and Marathon permission to ship 99 trillion British thermal units of liquefied natural gas to Asia between 2009 and 2011, but because the companies decreased the number of tankers sailing overseas, they now anticipate having about half of that allotment unshipped by the time the deadline arrives next April.

The Resource Development Council echoed the Congressional delegation, and added that studies have indicated that the Cook Inlet basin can meet local demand through 2013.

And some oppose exports

Of the five comments opposing an extension, four came from citizens in the region who worried about exporting natural gas at a time when Cook Inlet reserves were in decline.

Those concerns echoed comments from seven Democratic state lawmakers who said they couldn’t support exports unless the companies first agreed by contract to meet local needs. They noted that despite the recent supply agreements Marathon negotiated with Enstar and Chugach Electric Association, shortfalls remained in 2011 and 2012, and increased considerably in 2013, during the final months of the proposed extension period.

The companies have requested an expedited decision, preferably by early September.

This year, the facility exported 11.5 billion cubic feet of LNG through the end of May.

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