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Vol. 21, No. 10 Week of March 06, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

New Enstar supplies

Secures both Hilcorp and Furie gas contracts for the period from Q1 2018

ALAN BAILEY

Petroleum News

Enstar Natural Gas Co., the main Southcentral Alaska gas utility, has formed new agreements with Hilcorp Alaska and Furie Operating Alaska for gas supplies starting on April 1, 2018.

The Hilcorp contract, which Enstar has filed with the Regulatory Commission of Alaska for approval, runs for five years until March 31, 2023, and provides a foundation for Enstar gas supplies from 2018, when all of the utility’s current gas supply contracts are expected to expire. The utility already has a Hilcorp contract in place up to the end of March 2018.

Moira Smith, Enstar vice president and general counsel, mentioned the Furie contract during a presentation to the Alaska House Resources Committee on March 2. Gas will presumably come from Furie’s new Kitchen Lights gas field offshore in the Cook Inlet.

22 billion cubic feet per year

The new Hilcorp contract, with a base, committed supply of about 22 billion cubic feet per year, will account for 70 percent of Enstar’s anticipated gas requirements, thus leaving open some space in Enstar’s gas portfolio for other Cook Inlet gas producers. That 70 percent figure approximately represents Hilcorp’s share of gas production from the Cook Inlet basin, Smith told Petroleum News.

Smith provided little information to House Resources about the Furie contract beyond saying that it had been signed in the previous week and would, together with the Hilcorp contract, ensure that 90 percent of Enstar’s gas needs would be met through to 2021. A chart shown with the presentation confirmed that the contract runs from 2018 to 2021 and suggests an annual gas supply of somewhere around 6 billion cubic feet. The Furie contract will also, presumably, require Regulatory Commission of Alaska approval. Furie already has a gas supply agreement with Homer Electric Association for the delivery of 12.4 million cubic feet per day of gas from Kitchen Lights, starting in April 2016.

To ensure that Cook Inlet gas producers have a further opportunity to participate in gas supplies for Enstar, on Feb. 26 Enstar issued a request for proposal for meeting the remaining 10 percent of the utility’s future gas needs, Smith told House Resources.

Below consent decree

The weighted average price of gas under the new Hilcorp agreement starts at $7.56 in 2018, escalating at around 2 percent per year, pricing that is lower than that in the gas pricing consent decree between the state of Alaska and Hilcorp that has become a something of a benchmark in recent utility gas supply contracts.

The new contract also includes provisions for the committed delivery of “swing gas” to meet high winter gas demand. Enstar stores summer produced gas in the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula, to be available to boost gas deliveries during cold winter weather. The terms of the new contract will enable the utility to use a combination of stored gas and contracted gas to meet peaks in delivery needs. Jared Green, Enstar president, told House Resources that gas storage on the Kenai Peninsula eliminates about one-third of Enstar’s deliverability requirements.

“We consider this to be incredibly good news,” Smith told Petroleum News in response to the new agreement with Hilcorp. “The contract we signed is the most significant contract … since the Unocal contract in 2001. … We think it’s huge, in terms of providing stability and security to the inlet, not only on the producers’ side but also on the consumers’ side, from the point of view of having reasonable, below consent decree prices that will be stable and have some certainty around them, projected out to 2023.”

“We are pleased to confirm a natural gas sales agreement with Enstar,” Hilcorp spokeswoman Lori Nelson told Petroleum News in a March 3 email. “The terms of the agreement provide both security of supply for consumers and Hilcorp proper lead time to make the investments necessary to meet our commitments. We remain focused on serving Alaskans’ energy needs.”

Firm supplies needed

Green told Petroleum News that the new contract reflects parameters set in a request for proposal for new gas supplies that Enstar had issued in 2014. Enstar, rather than just extending its existing Hilcorp contract by a year or two, has been anxious to establish a firm gas supply for five years beyond existing contracts.

“We want to have a clear line of sight for a firm gas supply a few years out,” Green said.

John Sims, Enstar director of business development, commented that the need for planning by both the gas producers and the utilities also renders the use of short term contracts difficult. Having, say, two-year contracts becomes problematic because of the length of time that it takes to actually make gas available to market. And how do you make investment decisions when a contract has perhaps just one year left to run, he asked.

Inna Johansen, Enstar’s manager of gas supply, said that moving to a new contract, rather than continuing to extend the existing Hilcorp contract, became a natural decision, in view of the need for more supply flexibility to meet deliverability requirements. The existing Hilcorp contract did not meet all of Enstar’s deliverability needs, she said.

Seasonal swings

The new contract accommodates seasonal swings in gas demand by specifying higher guaranteed gas delivery rates in the winter than in the summer: Delivery rates range from 30 million cubic feet per day in May through September, to 100 million cubic feet per day in December through February. Moreover, Enstar can opt to manage weather fluctuations and its gas storage inventory by calling on additional gas on a daily basis, in maximum volumes that are also seasonally specified. Finally, Enstar can also invoke what is referred to as a “needle peak call option.” Under this option, if Enstar has notified Hilcorp by March 15 in the previous year of its intent to invoke the option, the utility can purchase up to 20 million cubic feet per day of additional gas during the months of December, January and February.

The contract incorporates a mechanism for adjustments to the committed annual gas volume specified in the contract, to allow for weather variability or customer conservation in gas usage. Enstar and Hilcorp can also agree on the supply of additional gas, beyond the volumes specified in the contract, at negotiated terms for volume, period, price and interruptibility.

Specific pricing

The specific pricing for specific tranches of gas purchased under the Hilcorp agreement depends both on the year in which the gas is purchased and the rate at which the gas is supplied. For year one of the contract the price ranges from $6.40 per thousand cubic feet at a supply rate of 5 million cubic feet per day or less, to $7.69 per thousand cubic feet at a rate in excess of 89 million cubic feet per day. If Enstar invokes the needle peak call option the prices go up slightly. And gas purchased under the daily call or needle peak call options has its own pricing, with the daily call pricing being somewhat higher than the regular pricing.

The weighted average price of $7.56 that Enstar has quoted for year one of the contract presumably reflects a likely distribution of supplied volumes and delivery rates across the year.

In response to a question from Rep. Paul Seaton about gas pricing needed for gas production viability, Green commented to House Resources that the wide differences in utility gas demand between winter and summer in Southcentral Alaska make gas production from Cook Inlet particularly expensive if gas wells have to lie idle during periods of low demand. The export of gas through ConocoPhillips’ liquefied natural gas plant on the Kenai Peninsula can create a better balance of gas production throughout the year, but current low LNG prices have made this option unattractive.

“That’s effectively gone right now,” Green said.



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