The Agrium fertilizer plant on the Kenai Peninsula is typically viewed as the Cook Inlet canary in the mine for natural gas supply, with its production already curtailed and its long-term existence in question due to shortages and rising prices for natural gas, the plant’s feedstock.
But Agrium isn’t the only indicator of natural gas shortages in Southcentral Alaska.
Scott Pfoff, president of Aurora Power, which buys and sells natural gas, told Petroleum News Oct. 5 that “for a middleman to survive there has to be excess deliverability. Well, that’s pretty much shrunk to nothing.”
“And there is a supply crisis, in my opinion, in Cook Inlet, that’s already upon us.”
Aurora Power, and its sister company, Aurora Gas, were mentioned frequently at Regulatory Commission of Alaska hearings in September on a temporary gas supply contract for Fairbanks Natural Gas, formerly an Aurora Power customer. Both Fairbanks Natural Gas and Enstar Natural Gas Co., with which Fairbanks cut a temporary gas-supply deal, mentioned Aurora Power and Aurora Gas, and there was confusion in the record and in an initial Petroleum News story about the roles of the two similarly named companies.
Pfoff said he was in Anchorage to talk to people about the roles the companies play, and their relationship with Fairbanks Natural Gas.
He also talked about the natural gas supply situation in Cook Inlet.
Too few producers, too little exploration
Pfoff said there is a lack of investment, a lack of exploration and very few producers in Cook Inlet. The producer count went down by one when Chevron acquired Unocal, “and those two operations merged and that has had a very dramatic impact, in my opinion, on the market.”
“Basically, Aurora Power finds itself without anybody willing to sell it gas and we run the risk of going out of business.”
Pfoff said that at a minimum Aurora Power will “have to substantially reduce our customer base in the very near future” and will have to start “giving notice to customers that we’re going to be unable to supply their gas.”
“Agrium is on the bubble physically. … They’re going to get cut when it gets too cold” and gas is needed for heat and power.
“We’re on the bubble contractually, commercially. We’re going to get cut because our contracts … are lower in the queue and we are going to be the first to get cut.”
Pfoff said Chevron, “my biggest supplier of gas for the last 10 years has basically cut me off.”
As for the hearings before the Regulatory Commission of Alaska, Pfoff said Aurora Power “did not tell Fairbanks (Natural Gas) we were not going to sell them gas because it was not economic. We told them we’re not going to sell them gas because we didn’t have the gas to sell to them.”
Pfoff said there are “a lot of commercial and contractual issues here, but the real problem, the real problem that’s driving all of the problems is the lack of reserves and deliverability as a result of lack of investment and exploration.”
Aurora Power founded first
When Aurora Power was started in 1994 “there was basically plenty of gas,” Pfoff said. “All I needed was a producer, or several producers, to want to capture a little bit more of the market through my company and sell gas to me and then I was in business. If I could deliver gas to customers at a price that was less than what they were otherwise paying and pocket a margin for myself, I was in business.”
Within several months Aurora Power had its first contract with the Tesoro refinery and then pursued large commercial customers such as hotels and office buildings. The business was successful, Pfoff said, and has been successful, “right up to recent times.”
Pfoff said Aurora Power hasn’t kept exact numbers, “but we have a pretty good idea that we’ve saved our customers at least $15 million since we’ve been in business.” Aurora Power made money, too, he said, and “took a fairly substantial amount of those profits and reinvested them back directly into Cook Inlet in oil and gas exploration” through Aurora Power’s ownership in Aurora Gas.
$70 million invested
Aurora Gas was formed in 2000 by Aurora Power and Orion Resources. Ed Jones and Andy Clifford, of Orion, provided “the technical expertise that we didn’t have then in Aurora Power,” Pfoff said.
Under the original ownership Aurora Gas acquired the Nicolai Creek gas field and brought it on production. “That pretty much exhausted our (financial) resources,” he said, but proved that the company could put gas on production, “and then we hit the street looking for capital,” which the company found in 2002 with Kaiser Francis Oil Co. of Tulsa, Okla.
Kaiser Francis has invested $50 million since then, and by virtue of that equity infusion today owns about 93 percent of Aurora Gas; Aurora Power owns some 5 percent, he said.
So Aurora Power and Aurora Gas are not interchangeable entities: “Aurora Power has a small ownership in Aurora Gas, but Aurora Gas has no ownership or economic interest whatsoever in Aurora Power,” Pfoff said.
There are synergies: Pfoff is president of both companies; they share office space; and “the two companies really do work together towards a common goal to each others mutual benefit. But we’re two separate companies,” he said.
Between the Kaiser Francis investment and revenues from wells, “we’ve spent about $70 million as a company (Aurora Gas) in the last four and a half years pursuing oil and gas … pretty much all gas exploration in Cook Inlet,” Pfoff said.
Current legal problems
Aurora Power was the company that had a contract to provide natural gas to Fairbanks Natural Gas, which sends liquefied Cook Inlet natural gas by truck to Fairbanks. Pfoff said Aurora Power started selling natural gas for the Fairbanks market in January of 2002. That contract, he said, was for “all their requirements up to a limit.”
Aurora Power was the middleman in the deal: “They knew they were contracting with a middleman. We made it clear to them that we did not have our own production,” he said.
Pfoff said Aurora Gas was optimistic it would one day have a lot of gas, but Fairbanks Natural Gas contracted with Aurora Power, and Fairbanks Natural Gas “knew that our business was buying and selling gas.”
The contract “contemplated the possibility that we would be unable to get their gas — there’s a clause in it that specifically deals with that,” he said.
Pfoff also said that Aurora Power’s contract was not actually with Fairbanks Natural Gas but with Northern Eclipse, which liquefied the natural gas and sold or transferred it to Fairbanks Natural Gas. He said Aurora Power never approved the assignment of its contract with Northern Eclipse to any other entity.
Reserve estimates and deliverability in the Cook Inlet basin declined between 2002 and 2004. “People started to get worried about deliverability in the inlet and not having enough gas and Aurora Power was no exception. We weren’t immune to this problem and we started giving Fairbanks Natural Gas warnings that there was a supply problem coming.” That was sometime in 2004, Pfoff said.
A year ago Aurora Power notified Fairbanks Natural Gas it could no longer supply their gas. Aurora Power stopped supplying gas to Fairbanks Natural Gas Nov. 1, 2005.
The price of gas in the contract was a concern, Pfoff said.
“But it rapidly transitioned to being a lot more than just about price. We kept trying to tell them that it was more than price — that we had, we have supply issues. And frankly, I don’t think they believed us.”
Aurora Gas did have some gas and that company entered into a series of short-term contracts with Fairbanks Natural Gas “and basically supplied them as long as we could.”
Fairbanks Natural Gas was before the Regulatory Commission of Alaska in late September asking for approval, which it received, of a short-term contract with Enstar Natural Gas for gas supply through next year — until Fairbanks Natural Gas can get a proposed LNG facility operating on the North Slope.
Also issues with Enstar
There was discussion at the RCA hearing as to whether Fairbanks Natural Gas would take legal action against Aurora Power.
Pfoff said some of the confusion between Aurora Power and Aurora Gas arises because Enstar is suing both companies over a contract Aurora Gas has with Enstar, a contract it acquired when it acquired west-side leases from ConocoPhillips Alaska and Anadarko Petroleum.
“And that contract has a provision that contemplates the possibility that producing gas from the fields might not be economic. We gave notice to Enstar six months ago that in our opinion production was not economic. They disagreed and have sued us and … because Aurora Gas plans to sell the Gas to Aurora Power, rather than to them, they’ve also sued Aurora Power.”
Pfoff said under the Moquawkie contract with Enstar “four of our five fields are dedicated to that contract.” Nicolai Creek is not dedicated to that contract. Fields included in the contract are Kaloa, Lone Creek, Moquawkie and Three Mile.
Alaska Oil and Gas Conservation Commission production for the fields shows a general production decline over the last year at those fields, with the exception of Lone Creek, which was not in production a year ago and produced 70.4 million cubic feet from one well in August.
The Albert Kaloa field produced 54.4 million cubic feet in August from one well, down from 79.6 million cubic feet last September. Moquawkie produced 48.6 million cubic feet in August from one well, down from 108.6 million cubic feet last September. Three Mile Creek produced 43 million cubic feet in August from two wells, down from 120 million cubic feet from one well last year.
Pfoff: gas expensive; contract price low
Pfoff said that “from our standpoint this gas has been extremely expensive on a per-mcf (thousand cubic feet) basis to develop and produce. It’s probably the most expensive, high-cost gas in the Cook Inlet to develop and produce because of the remote location, the lack of infrastructure. These are shallow sands with recoveries per well that are probably much smaller than other fields.” Pfoff said Aurora gas is only getting 2 billion to 3 billion cubic feet per completion from the wells.
“And the irony is that despite having the highest cost gas to develop and produce we’ve got the lowest price contract with Enstar.”
He said Aurora Gas runs “the risk of getting driven out of business” over the contract.
“I’m trying to convince Kaiser Francis to drill another well yet this year before we bring the rig back across (the inlet).” The drilling program is shorter than planned this year, “but with issues like this looming over our head, I don’t know if we’re going to get approval to drill the well or not.”
“And so the irony, again, is that we’re faced with a shortage of gas. You’ve got a small company that’s willing to take the risk to drill wells and go out there and try to put more gas into the system and yet we have a purchaser that is not being very sympathetic to our situation.”
