Vol. 14, No. 20 Week of May 17, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Chugach contract

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Following nearly five years of looking, Chugach Electric gets a gas supply

Eric Lidji

Petroleum News

Chugach Electric Association filed a supply contract with state regulators on May 12 to buy some 66 billion cubic feet of gas from ConocoPhillips over the next seven years.

The contract is the result of nearly five years of solicitations and negotiations, and is the first long-term gas supply agreement filed by the electric utility in more than 20 years.

Under the proposed contract, ConocoPhillips would provide 100 percent of Chugach’s unmet gas needs through April 2011, about half of its unmet gas needs between June 2011 and December 2015, and about 25 percent of its unmet gas needs in 2016.

Chugach supplies electricity directly to most of Anchorage, and indirectly to homes and businesses throughout the Railbelt region that runs from Homer to Fairbanks.

About 90 percent of the new gas volumes will be priced using a “Production Area Composite Index” averaging five production areas in Texas, Oklahoma and Louisiana.

The Regulatory Commission of Alaska proposed such an index during an Enstar Natural Gas supply contract case last year. The index, or price basket, was meant to approximate a spot market for Cook Inlet gas by comparing it to gas prices in other producing regions.

ConocoPhillips and fellow Cook Inlet producer Marathon, the two companies looking to supply Enstar, refused to accept the RCA-proposed price cap under the basket approach.

Chugach said gas prices under its index averaged 9 percent below the Henry Hub price of gas over the past four years. Henry Hub is currently $4.42 per thousand cubic feet.

The remaining gas under contract, some 10 percent, covers peak loads, or times of increased electric demand. These peaks are less common with electricity than natural gas use in Alaska. Chugach said proposed renewable energy sources could cover these peaks.

Through March 2011, the price for these peak loads will be 95 percent of the average monthly price of Kenai liquefied natural gas shipped to Japan. From March 2011 through the end of 2013, the peak load will be priced at 120 percent of the national average.

Chugach said both of these prices have historically been below Henry Hub.

The contract requires the approval of the Regulatory Commission of Alaska. Chugach asked the commission to cut the public notice period to 30 days from 45 days.

The utility hopes to start buying gas under the contract as soon as Jan. 1, 2010.

Chugach still needs gas

The proposed contract gives Chugach all the gas it needs through 2010, but leaves the utility with about one-third of its 2011 needs and half of its 2012 needs unaccounted for.

But while regional demand for electricity, and by extension gas, could grow in the coming years, Chugach expects its gas needs to ease starting in 2013, as a more efficient power plant comes online, and two regional utilities stop buying wholesale power.

Chugach currently uses some 27 billion cubic feet of natural gas per year. It expects that need to drop to about 17 bcf in 2014 and 11 bcf in 2015.

Chugach is the largest electricity producer in Alaska, supplying its own customers in Anchorage as well as selling power to other utilities across the Railbelt. Chugach is extremely dependent on natural gas, using the fuel to make 93 percent of its electricity.

Contract eases export debate

With the contract, ConocoPhillips fulfilled the final term of a 2008 agreement to get state support for an extension of the export license at the Nikiski liquefied natural gas plant.

Chugach originally appealed the U.S. Department of Energy’s decision to extend that license to 2011 from 2009, but is now withdrawing that appeal because of the contract.

On May 8, three Anchorage-area senators —Bill Wielechowski, Johnny Ellis and Bettye Davis, all Democrats — publicly asked the Palin administration to require Cook Inlet producers to sell their gas to utilities in Alaska first before shipping it to Asia, citing the Chugach appeal.

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