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Vol. 12, No. 17 Week of April 29, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Cook Inlet gas market in transition for Enstar

Gas deliverability challenges require close management of load balancing and a new look at gas supply contracts and arrangements

Alan Bailey

Petroleum News

Although the escalating price of natural gas in Southcentral Alaska is providing gas consumers with some obvious evidence of gas supply constraints in the region, the hour-by-hour, behind the scenes juggling of gas production and transmission to meet peak loads forms a less visible aspect of the gas supply situation. Long gone are the days when a gas producer could simply open the spigot a bit more when a cold winter day pushed up the burn rate on house heating systems.

In fact, the deliverability of the gas — the rate at which gas can be flowed through the gas transmission lines from production wells — causes more concern at the moment than the absolute amount of gas remaining in Southcentral’s Cook Inlet basin, Tom East, regional vice president for Enstar Natural Gas Co., told Petroleum News April 10. Enstar is the major gas utility for Southcentral Alaska.

“I personally believe that there’s a lot of gas still in the Cook Inlet. … What I’m more concerned about is deliverability,” East said. “… — how much gas can be delivered in any one day or any one hour.”

Deliverability issues have caused Agrium’s Kenai Peninsula fertilizer plant to close down during the winter. And last year the Kenai Peninsula LNG plant had to change its operations to make additional gas available to Enstar through an exchange agreement, East said.

Contract changes

Tighter deliverability is driving a transition to tighter gas supply-demand management.

“The producers want us to manage our transmission system a lot tighter than we used to,” East said.

In the days of abundant gas the producers would deliver however much gas Enstar needed, with the accounting of volume nominations and balancing of gas usage done on a monthly basis. Nowadays, the producers are asking for nominations of supply requirements at least daily, with daily balancing of the usage. Producers have to manage the swings in gas demand from one hour to the next.

And tight deliverability, emphasized by lessons learned from an exceptionally cold Southcentral winter in 2006-07, will likely lead to new forms of supply contract with relatively short durations of perhaps five years (traditional “full-service” contracts cover both base load and peak demand gas, and tend to run for long time periods).

“Things are shifting and probably this winter was the shifting point,” said Curtis Thayer, Enstar’s director, corporate and external affairs.

Some producers are indicating a preference for contracts that separately deal with base loads vs. the supply requirements to meet peak demand. Under that type of arrangement there would be three separately priced components of the gas supply: the relatively constant base load, the seasonal swing in demand between summer and winter and the needle peaking loads during the coldest days of the winter (the needle peaking doesn’t represent particularly large volumes of gas but requires exceptionally high gas delivery rates).

“Right now those (supply components) are all bundled into one price that we pay,” East said. “… We’ll now probably end up with multiple contracts, where we’ll have some suppliers provide base load, some provide peaking and some provide needle peaking, and each one of those components will be at a different price.”

That type of contractual arrangement would also dovetail into the increasing use of gas storage in the Cook Inlet — both Marathon and Chevron now operate gas storage facilities to hold excess gas from the summer to meet peak winter demand.

“The costs associated with moving gas into storage and pulling it out … that’s a cost component that 10 years ago didn’t exist,” Thayer said.

Enstar is also considering operating its own gas storage to meet peak demand.

“We’ll probably end up doing a study and looking at developing our own storage or maybe purchasing storage capacity from a producer,” East said. “If we start having multiple rates for base load, peaking and needle peaking we could take a look at what the differential is between the base load and the needle peaking, and with that differential we could possibly develop our own storage … and provide the needle peaks ourselves.”

Need long-term supplies

A move towards shorter-term gas supply contracts could provide gas producers with new opportunities to enter the Southcentral gas market. On the other hand, Enstar needs assurance of long-term gas supplies for its customers and prefers long-term contracts — the company does not want the uncertainties of a spot market, for example. And, unlike in the Lower 48, there are few alternative sources of gas in Southcentral Alaska if one supplier fails to deliver.

“It’s good for us and our customers to know that there’s a long-term gas supply, and knowing what the price and terms are,” Thayer said. “… It’s not fair for us to be the spot market — we’d be the only utility in the box. … We can’t shut off residential customers and tell them we didn’t have the gas today.”

Thayer also expressed concern about the practicalities of establishing several relatively short-term contracts, given the lengthy and expensive process for Regulatory Commission of Alaska contract approval.

Rejected Marathon contract

Enstar is disappointed that RCA rejected the company’s proposed new Cook Inlet gas supply contract with Marathon, a traditional full-service contract that Enstar has said would have ensured adequate gas supplies for Southcentral gas consumers through to 2016. RCA rejected the contract on the basis that its pricing formula, indexed to prices in the Lower 48 Henry Hub gas market, was too high.

“The Marathon contract took about two years to negotiate and 12 months to go through the regulatory process,” Thayer said. “We (now) have 20 months until we have unmet contract requirements in 2009. … We need to do something in record speed.”

Thayer said that, with the Marathon contract now defunct, Enstar has issued a request for proposals for gas supplies.

And, given the absence of a contract covering all of Enstar’s supply needs from 2009 onwards, Enstar has expressed concern about Marathon and ConocoPhillips’ application for an extension to the federal export license for the Kenai Peninsula LNG plant. Enstar says that utility gas must take precedence over gas for the LNG plant, despite the importance of the LNG plant to the Kenai Peninsula economy.

“We really support it (the LNG license extension) as long as we have long-term gas supply contracts,” East said. “… We’re tying our support to having at least a five-year gas supply contract.”

Enstar also wants to see the regulatory process for the gas supply contracts speeded up, so that RCA can approve a contract in a timely manner.

“The time crunch is now to get all that done,” Thayer said.

Realistic pricing

But what about the gas pricing issues that caused so much angst during the RCA hearings on the now-defunct Marathon contract?

Gas producers need to be able to spend money to develop deliverability in the Cook Inlet region, East said. The Cook Inlet is an expensive place to develop gas reserves, he said.

“We think that you have to pay a fair market price because, even although we’re not physically connected with the Lower 48, economically we are (connected),” East said. “The producers compete within their own companies for projects. … They have to get a certain price to develop a (gas) infrastructure here.”

And East said that Chevron’s new Cook Inlet exploration and development plans demonstrate the incentives emanating from the robust pricing in that company’s gas supply contract with Enstar.

On the other hand, the exceptionally large hike in Enstar’s gas rates in the past year resulted from a “perfect storm” in 2006, Thayer said: high oil prices resulting from the problems at the Prudhoe Bay oil field coincided with the impact of hurricane Katrina on Lower 48 natural gas prices. One major Enstar gas supply contract was indexed to oil prices, while the other major contract was indexed to Lower 48 gas prices.

In 2006 Aurora Gas also stopped deliveries under its low-priced Moquawkie contract with Enstar — Enstar subsequently sued Aurora for breach of contract.

“The lawsuit is for the customers,” Thayer said. “If there is any monetary worth from those lawsuits it will go back into rates.”

Some people have accused Enstar of being indifferent to gas prices, because the company simply passes the prices on to its customers. But gas prices tend to push down demand volume, thus reducing Enstar’s revenues, Thayer and East said. High prices also increase the levels of bad debt and can increase the amount of fraudulent gas use, they said.

“High prices are nothing but bad for us,” East said.

And, despite the price hikes, Southcentral gas consumers still enjoy the lowest prices in the United States, Thayer said. In fact, the Enstar fees for transportation of the gas have dropped over the years, thanks to efficiency improvements such as automated meter reading and upgraded technology for handling customer calls, he said. Enstar’s customer base has also grown, thus enabling the company’s fixed costs to be spread across a larger number of customers.

“We’ve been growing by about 3,000 customers per year,” Thayer said.

Enstar recovers its operations and equipment costs through a base rate prorated to the volume of gas that a consumer uses. But the company is considering moving to a flat-fee per gas meter base rate, East said.

Pipeline alternatives

What about alternative gas supplies through a pipeline connected to the North Slope?

Enstar has been involved in evaluating a potential gas pipeline following the Parks Highway route to the Nenana basin, southwest of Fairbanks — a group of companies has been exploring for gas in the Nenana basin. The Parks Highway pipeline could perhaps extend to Fairbanks, to form a spur line from a North Slope export gas line.

However, Enstar is also looking into the possibility of constructing a small-diameter, 600 million-cubic-feet-per-day gas line direct from the North Slope into Southcentral Alaska.

“We think we could do that in five years,” East said “… We’re waiting to see how the governor’s (North Slope gas line) proposal comes out and how this (idea) could tie in with that.”

The direct North Slope line might cost in excess of $2.7 billion to construct, compared with a U.S. Department of Energy estimate of $5 billion to find half of the gas that remains in the Cook Inlet basin, Thayer said.

“Do you put it all in Cook Inlet and hope for the best?” Thayer said.

On the other hand, the economics of building a pipeline from the North Slope would depend on demand from industrial consumers.

“I really think we need to have some big loads in order to justify the money that’s spent for deliverability,” East said.

And, although a gas spur line from Fairbanks would prove substantially cheaper than a direct line from the North Slope, the spur line option depends on timely decisions regarding a North Slope gas line to the Lower 48.

“We cannot run the business depending on that occurring in the next two years or five years,” Thayer said.

Southern Kenai Peninsula

At the southern end of the Southcentral gas pipeline network Enstar is considering building a new pipeline extending south from the Kenai Kachemak pipeline that delivers gas from the Ninilchik and Happy Valley gas fields on the Kenai Peninsula. A new pipeline could deliver gas from prospective gas fields in the southern Kenai Peninsula and provide access to market for new gas discoveries, as well as hooking the town of Homer into the gas supply network.

Enstar is considering two possible pipeline routes — one due south from the Happy Valley field to connect with a Chevron gas discovery at the Red Well, and the other following the coastline to connect with Pioneer Natural Resources’ Cosmopolitan prospect near Anchor Point. Enstar already has a certificate for supplying gas to Homer and will be applying in 2007 for a certificate for a pipeline to the Red Well. What happens next will depend in part on whether Cosmopolitan or the Red Well proves economic, and what volumes of gas they can deliver.

“The first thing is to bring it (the pipeline) north into the grid and then all of the customers can share in that cost,” Thayer said. “But then you can still can go from either point (Cosmopolitan or the Red Well) … down into Homer. One or other will win out, depending on the volume.”

But, whatever options the future holds, tight gas supply management in Southcentral Alaska appears to be here to stay.

“It’s so much more complicated than it used to be and it’s going to be even more complicated in the future,” East said.

And Thayer emphasized that in more than 40 years of business serving Southcentral customers Enstar has always managed to keep the gas flowing.

“The one thing is we’ve always kept people warm,” Thayer said.

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