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Vol. 16, No. 6 Week of February 06, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

RCA approves CINGSA

Commission OKs the certificate and tariff for planned Kenai gas storage facility

Alan Bailey

Petroleum News

Just a month or so after approving a certificate of public convenience and necessity for Cook Inlet Natural Gas Storage Alaska’s planned Kenai gas storage facility, the Regulatory Commission of Alaska has approved a tariff for the facility.

In a final order issued Jan. 31 the commission said that it was approving the tariff because all issues raised during a tariff hearing had been resolved. Tariff approval is, however, subject to some adjustments to the tariff’s specification of the gas storage service area.

CINGSA is fast tracking the development of its facility in the Sterling C sands of the Cannery Loop gas field, on the south side of the City of Kenai, to head off a potential Southcentral Alaska utility gas shortfall in the winter of 2012-13. The company had asked RCA for facility certification by Dec. 1 and tariff approval by the end of January in order to be able to proceed with facility construction and obtain project financing in a timely manner.

CINGSA is a joint venture between Semco Energy and MidAmerican Energy Holdings Co., while Semco is also the parent company of Enstar Natural Gas Co., the main Southcentral Alaska gas utility.

Significant challenge

Being the first gas storage that RCA has had to regulate, the tight time frame for the CINGSA project has presented some significant challenges to everyone involved in the regulatory process.

And during the RCA tariff hearing much discussion focused on the question of the cost of any gas losses from the facility, a cost traditionally passed through to gas consumers — it is impossible to completely eliminate any gas loss from a storage facility, so that relatively minor losses are generally viewed as part of the cost of doing business, along with the cost of gas used as fuel to power the facility’s compressors.

The parties involved in the RCA hearing negotiated tariff language requiring RCA approval for the recovery of the costs of extraordinary gas losses and prohibiting the recovery of the cost of losses resulting from negligence. However, Commissioner Paul Lisankie disagrees with the approval of the gas-loss section of the tariff. CINGSA has not been sufficiently specific in stating what gas losses consumers would have to pay for, Lisankie wrote in a minority dissenting opinion.

Other tariff concerns included the specification of the costs that CINGSA would be able to recover from its gas storage fees, and the manner of reconciling the facility’s initial fees, based in part on cost estimates, with subsequent fees adjusted to reflect actual costs.

CINGSA will charge fees to reserve storage capacity, to reserve withdrawal capacity and for actual gas injections and withdrawals.

Initial rates

Initial inception rates will be based on capital expenditures and the known cost of debt at the point of facility startup, plus estimates of the facility’s other costs. After one complete year of facility operation, CINGSA will revise the rates using actual costs, including the actual costs of operation, with CINGSA absorbing any cost overrun during that first year. After five years of operation CINGSA will submit a complete, revised tariff to RCA for approval, using information gleaned from experience of operating the facility.

And, under an agreement associated with the tariff, Alaska Electric and Energy Cooperative, the wholesale power supplier to Homer Electric Association, has joined CINGSA’s list of initial customers, with Enstar, Chugach Electric Association and Municipal Light & Power being the other customers.

In a separate order, also issued on Jan. 31, RCA approved the ability of Enstar, CINGSA’s largest customer, to recover gas storage fees from gas consumers — there had been some concern that RCA might approve the gas storage facility but at a later date limit Enstar’s ability to recover its gas storage costs.

However, the commission does require all CINGSA customers to file any firm storage agreements with the commission for review and approval.

Approval decision

In its order approving the facility tariff the commission provided a full explanation of its December decision to approve CINGSA’s certificate — normally the commission would consider both the certificate and the tariff in a single hearing, but in the interests of early approval for the storage facility CINGSA had asked the commission to deal with the certificate first.

A key element in the approval decision was testimony by all parties involved in the RCA hearing that the Cook Inlet basin needs a gas storage facility of the type that CINGSA wants to build, and that CINGSA has the financial wherewithal and management ability to build and operate the facility.

As production from the aging Cook Inlet gas fields declines, a storage facility available for hire by third-party companies will enable utilities to warehouse summer gas to boost gas deliverability in the winter and to provide contingency gas supplies in the event of a gas-field equipment failure. The pumping of summer gas into the facility will also enable gas wells to continue operating year round, thus avoiding gas reservoir damage from well shut-ins in the summer and reducing the need for expensive gas supply contracts involving large gas delivery swings.

Gas to meet peak winter demand is becoming increasingly expensive, hearing witnesses testified. And, without new gas storage, peak gas deliverability will before long fall short of peak winter demand at any price, witnesses also said.

“We also find based upon the testimony of the Enstar, Chugach and ML&P witnesses that those utilities urgently need those (storage) services,” the commission wrote in its Jan. 31 order. “We find based upon CINGSA’s choice to develop the Cannery Loop reservoir, and the utilities’ choice to sign binding contracts (precedent agreements) that obligate them to support CINGSA’s Cannery Loop project … that CINGSA’s Cannery Loop project is now the only facility that can meet the utilities’ urgent needs.”

Reservoir integrity

Vincent Goddard, president of Inlet Fish Producers of Kenai, whose business facilities sit over part of the proposed Sterling C storage reservoir, has raised questions over the physical integrity of the Cannery Loop reservoir. Goddard and his companies, collectively referred to as Inlet Entities, presented evidence to RCA, saying that an old gas well, the KU 13-8 well, in his property presents a significant risk of gas migration from the reservoir and that the well needs remediation.

However, the RCA commissioners say that they are relying on the Alaska Oil and Gas Conservation Commission’s technical analysis of the storage reservoir and that CINGSA must comply with any AOGCC stipulations relating to the reservoir integrity — under Alaska statutes AOGCC regulates the safety and integrity of gas wells and gas storage reservoirs. In early December AOGCC approved gas injection into CINGSA’s facility while requiring the remediation of three existing wells. AOGCC did not mandate remediation the KU 13-8 well but did require CINGSA to install gas detection equipment next to the wellhead.

On Dec. 14 the Inlet Entities asked AOGCC to reconsider the question of whether the KU 13-8 well should be remediated and AOGCC is reconsidering that aspect of its injection order.

Field monitoring

RCA said that it is concerned about the possible cost to gas consumers of gas losses, especially if the KU 13-8 is not remediated. But the commission cited a report commissioned by MidAmerican from consultancy firm Netherland, Sewell and Associates. The report said that there are risks associated with well remediation. Moreover, the report continued, routine field monitoring techniques could detect a gas leak through the well. And were a leak to be discovered, the well could subsequently be fixed.

Another issue relating to the viability of the CINGSA storage facility is the question of whether the Southcentral Alaska gas pipeline infrastructure will have the necessary capacity to handle the flow of gas to and from the facility. In testimony to RCA Enstar said that operation of the facility may require the installation of additional gas compressors on the Enstar gas transmission line from the Kenai Peninsula to Anchorage, with the conversion of the Cook Inlet Gas Gathering System under Cook Inlet to allow the flow of gas from the east side to the west side of the inlet perhaps providing another route for CINGSA gas.

Because CINGSA will not commence gas injection into its facility until April 2012, there is sufficient time for the companies involved in gas storage usage to figure out the required routing of the stored gas and then implement any necessary pipeline infrastructure upgrades, RCA said in its order.

“In our view, making these changes is not CINGSA’s responsibility,” the commission said.

In its final order, RCA rejected a request by Kenai Landing, a landowner in the area of the CINGSA facility, to intervene in the CINGSA hearing. Kenai Landing is concerned about CINGSA’s right to requisition land for the facility, but the commission said that the petition to intervene had come too late in the regulatory procedure for acceptance.

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