CEA presents Beluga purchase reasonsReports indicate $26.3 million benefit and 2 percent electricity rate drop as a result of partial ownership of Cook Inlet gas field ALAN BAILEY Petroleum News
Chugach Electric Association has filed a document with the Regulatory Commission of Alaska indicating that the electric utility’s partial ownership of the Beluga River gas field could result in a net present value of $26.3 million dollars and an approximately 2 percent drop in the rates that the utility charges its customers for electricity supplies.
The utility is in the process of purchasing a 30 percent portion of ConocoPhillips’ interests in the field but requires commission approval before the deal can be completed. Chugach Electric and Municipal Light & Power, the Anchorage utility that is buying 70 percent of ConocoPhillips’s interests, have asked the commission for expedited approval of their purchase.
A joint purchase In August 2015 ConocoPhillips announced that it wished to sell its Cook Inlet gas field assets and in February of this year Chugach Electric and ML&P announced that they were jointly purchasing the oil company’s one-third ownership interests in the Beluga River field. Hilcorp, the other field owner, would become field operator.
The motivation behind the utilities’ purchase of gas field interests is the securing of power station fuel gas at what the utilities anticipate to be below market cost. Essentially, the utilities would supply themselves with their own gas at the cost of gas production. ML&P, an entity owned by the Municipality of Anchorage, has already been enjoying the benefit of a relatively cheap gas supply since it purchased its original one-third interest in the Beluga River field in 1996. According to a February press release from the utilities, the benefits to ML&P over the years have exceeded $350 million, with the utility’s ratepayers saving an estimated $239 million in fuel gas purchasing.
Economic analyses The document that Chugach Electric has now filed with the commission says that the utility commissioned consultancy firms National Economic Research Associates Inc., Ryder Scott Co. and Petrotechnical Resources of Alaska to each conduct an economic analysis of the proposed purchase. NERA’s estimate of the value of the portion of the gas field interests that Chugach Electric would acquire takes into account proven gas resources in the field down to a depth of 7,000 feet. ConocoPhillips is currently producing gas from reservoirs down to that depth, the document says.
NERA has estimated that the purchase of gas in the Cook Inlet gas market to fill Chugach Electric’s unmet gas supply needs would cost the utility about $7.84 per thousand cubic feet. By comparison, the cost of the utility’s own gas, extracted from the Beluga River field, would be $5.78, a net savings of more that $2 per thousand cubic feet. The relatively cheap gas from Beluga would drop the overall cost of Chugach Electric’s gas supplies from $7.84 to $7.40 per thousand cubic feet, resulting in an annual gas cost savings of $2.6 million, a figure that translates to the net present value of $26.3 million for the purchase of the field interests, the document says.
Tax credits The document also says that, if Chugach Electric can acquire state tax credits which currently apply to the portion of the field that the utility is purchasing, the credit acquisition would boost the net present value of the purchase from $26.3 million to $30.3 million. But, because these tax credits sunset this year unless a new producer has commercial production before May 1, 2016, Chugach Electric is seeking commission approval of the purchase that ensures an effective date prior to that May 1 deadline.
The results of the NERA economic analysis also consider some of the risks and uncertainties associated with the Beluga gas field deal, and the impact of different assumptions on the deal’s economic value to Chugach Electric. Scenarios included higher and lower market prices for Cook Inlet gas; higher and lower field costs; and lower than anticipated gas reserves. It turned out that the cost of utility-owned gas appears favorable under a range of possible future gas market prices. Only two scenarios appeared unfavorable: low gas reserves in the field, 35 percent below a reserves estimate conducted by Petrotechnical Resources of Alaska; and a combination of somewhat lower than expected gas reserves with higher than expected field costs.
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