Southcentral Alaska residents may feel that they’re suffering from sticker shock at escalating natural gas prices but they’re still paying considerably less than consumers in the Lower 48. That was a key message that Tony Izzo, president and CEO of Enstar Natural Gas Co., delivered to an Anchorage Chamber of Commerce audience Nov. 14.
And Enstar, faced with a projected shortfall in gas supplies after 2009, has just agreed to a new contract with Marathon Oil Corp. for the supply of about 60 bcf of natural gas from 2009 through at least 2018. That contract, when added to existing supply contracts, should ensure that Enstar obtains adequate gas supplies through to 2016, Izzo said.
“We just concluded negotiations with Marathon for some new supply,” Izzo said. “… It has to be filed with the Regulatory Commission of Alaska for the state to review and approve.”
Plentiful cheap gas from the Cook Inlet as an offshoot of oil exploration and production has become a thing of the past and dwindling gas supplies have become a major concern in Southcentral Alaska. Izzo emphasized a particular need to focus on ensuring adequate supplies during the next 10 years, after which a gas line delivering North Slope gas to Southcentral could become a reality. Izzo thinks that his company’s new contract with Marathon will ensure continuity of supplies during that critical 10-year period.
“The good news is that we’ve finally been able to negotiate supply for that period of serious uncertainty between now and … when we might see North Slope gas,” Izzo said.
The projected supply volumes assume that Unocal (now part of Chevron) will exercise its options for the delivery of gas to Enstar at pre-agreed prices over the same time period.
Pricing a key to future supplies
Izzo emphasized the importance of gas pricing in ensuring future gas supplies. For more than 30 years Cook Inlet gas prices have been linked to oil prices, he said. That arrangement made sense when gas supplies exceeded demand.
But, with new Cook Inlet gas production now needed to meet projected supply shortfalls, gas prices in the Cook Inlet area have to link to Lower 48 prices, Izzo said. That linkage will ensure that oil and gas companies will be able to achieve adequate returns on exploration investments that compete with exploration elsewhere.
“If you’re a producer and you’re coming here for approval to spend $150 million in the Kenai to look for resupply, you’ve got to go back to Houston or California or some headquarters and justify why that $150 million makes sense to invest here … versus investing it in the Gulf of Mexico or in Asia or anywhere else,” Izzo said.
If prices weren’t linked to the Lower 48 the customers that we serve would have to switch to fuels such as propane because the natural gas just wouldn’t be there, he said.
A mix of contracts
Izzo said that Enstar’s existing contract with Marathon and the contract for supply of some gas from the Beluga gas field are both still indexed to oil prices. But current contracts with Unocal are indexed to prices at the Henry Hub gas market in the Lower 48. And the new contract with Marathon is indexed to the 12-month trailing average of Henry Hub closing prices, with a price floor of $4.25 and a cap of $15, both indexed to inflation.
The mix of prices from Enstar’s existing supply contracts will result in an overall weighted cost to Enstar of $5 per mcf for Cook Inlet Natural gas from Jan. 1 2006, Izzo said. That compares with a cost of about $2 per mcf five years ago, he said.
The $5 cost to Enstar will result in a price of $6.70 per million British thermal units to the gas consumers, delivered to the house, after the gas has passed through Enstar’s delivery pipeline network. But although the price to consumers has increased significantly in recent years, Izzo emphasized that the increase was entirely a result of increases in the prices that Enstar pays the producers for the gas — Enstar’s own delivery costs have dropped, he said.
“A lot of folks don’t realize that over the years we’ve actually decreased our price to deliver it by more than 10 percent,” Izzo said.
Cheaper than elsewhere
Izzo compared the cost of natural gas in Southcentral Alaska with the cost of other fuels. Fuel oil, the cheapest fuel apart from natural gas, costs $18.77 per million Btu and propane costs $29.06 per million Btu. Electricity rates in Anchorage range from $28.26 to $35.07 per million Btu. If all natural gas users in Southcentral Alaska were to switch to fuel oil there would be a $560 million increase in annual fuel costs at the January 2006 gas price, Izzo said.
“Gas plays a really critical role in terms of the impact on the (Alaska) economy,” Izzo said.
And the cost of natural gas for consumers in other states is much higher. For example, natural gas costs per million Btu are $14.87 on the west coast, $11.63 in Idaho and $17.78 in Alabama.
“In the northeast and south you’re looking at over $19 delivered (to the house),” Izzo said. “… So although we’re linked to Lower 48 prices we’re not directly connected.”
In Alaska, the complexity of the gas supply situation has increased, with more producers coming into the market. The Alaska gas industry is also looking at gas storage options to alleviate supply problems, Izzo said.
Tariff structures
Izzo also said that throughput volumes drive current gas tariff structures; that type of tariff structure does not encourage gas conservation. Although high gas prices can cause people to use less gas, the resulting lower volume of gas throughput causes the utilities to have to increase their fees to cover a shortfall in revenues; the end result is escalating tariffs. However, Enstar encourages the use of less gas as “the right thing to do,” Izzo said. And new conservation-oriented rate structures are possible in the future.
“We need to look at new rate designs,” Izzo said. “We will be proposing some to the state at some point … where we will encourage conservation.”
Izzo also commented on a gas line that Enstar has proposed between the Nenana basin, southwest of Fairbanks, and Anchorage, following the approximate route of the Parks Highway. Exploration for natural gas is in progress in the Nenana basin, where there might be as much as 3 trillion to 5 trillion cubic feet of natural gas, Izzo said. That could provide a 50-year gas supply, he said.
“We have achieved some federal support. We are working with Native corporations … on the conceptual engineering for a spur line,” Izzo said. “It’s critical to understand what the cost of that line will be … so we can figure out what (the gas) will really cost.”
Izzo also commented on possible alternative electricity sources such as wind power or coal-fired power stations. Given the long lead times required to develop these types of facility, alternative energy sources will not impact the energy supply situation in the near future.
“I see no impact in the immediate near term, meaning now and 10 years out,” he said.
