|
Settlement in sight for CIGGS dispute Following nearly three months of negotiations, parties file agreement with Alaska commission on Cook Inlet gas gathering system Alan Bailey Petroleum News Staff Writer
Is the long-running saga of the CIGGS dispute about to come to an end? On Sept. 27 the parties to the dispute — Marathon Oil Co., Unocal Corp. (now part of Chevron), Agrium, the Cook Inlet gas producers, Enstar Natural Gas Co. and the state of Alaska — filed a settlement agreement with the Regulatory Commission of Alaska. RCA now needs to make a ruling on the proposed settlement.
The privately operated Cook Inlet Gas Gathering System, or CIGGS, transports gas from oil and gas fields in the Trading Bay area on the west side of the Cook Inlet to the fertilizer and LNG plants on the east side of the inlet. Marathon and Unocal jointly own CIGGS, while Agrium owns the Nikiski fertilizer plant.
CIGGS has operated as a private, unregulated system since the companies operating the Cook Inlet oil fields built the system in the 1960s to ship out excess gas from the west side of the inlet. The Alaska Right-of-Way Leasing Act, passed in 1972, mandates that all pipelines crossing state lands or state waters must be regulated as common carrier pipelines or gas utility lines. In general, a pipeline that is regulated in this way must offer service to anyone who needs to transport petroleum products appropriate to the operation of the pipeline.
However, a grandfathering provision in the Right-of-Way Leasing Act allows pipelines built prior to May 20, 1972, to remain exempt from regulation “so long as their original or present purpose and function remain.” As a result, CIGGS has remained a privately operated system, with access only available through commercial agreement with the system owners. Agrium petitions Since early 2004 Agrium has filed two petitions with the Regulatory Commission of Alaska to regulate CIGGS. The commission dismissed Agrium’s first petition but the second petition, filed in October 2004, remains open. Agrium argued that the private operation of CIGGS was an obstacle to getting new industrial gas supplies to Nikiski. As a result of gas supply problems the Nikiski fertilizer plant is under threat of closure.
Marathon has in the past said that commercial agreements present the simplest way of enabling new gas shippers to use CIGGS. The company said that millions of dollars of expenditure would be required to install the metering and control facilities needed to convert CIGGS into a regulated line. And Marathon has also told Petroleum News that major costs and delays resulting from the regulatory process for the Kenai-Kachemak pipeline on the east side of the Inlet demonstrate that regulation is less efficient than commercial agreement.
Aurora Gas operates five gas fields on the west side of the Inlet and sees pipeline access south of Granite Point as a major issue for companies wanting to develop fields in that area. In December 2004 Aurora shut in its Nicolai Creek field because of a commercial dispute regarding the use of CIGGS — Nicolai Creek connects into CIGGS.
In May 2005 RCA granted Aurora interim permission to use CIGGS for Nicolai Creek gas without prejudicing any of the arguments in the CIGGS dispute. But Aurora has been unable to agree to commercial terms for the use of CIGGS with either of the CIGGS owners.
On May 26, 2005, Marathon, Unocal, Agrium, the Cook Inlet gas producers, Enstar Natural Gas Co. and the state of Alaska entered mediation, to negotiate a resolution to the CIGGS dispute.
On June 24 the parties to the dispute notified RCA that they had executed a comprehensive agreement in principle “setting forth the principal settlement terms intended to resolve all outstanding rate and tariff issues.” Since then the parties have been hammering out the detailed commercial arrangements that they have now published in the settlement agreement filed with RCA. Regulated with guaranteed capacity According to a joint statement included in the RCA filing “Marathon and Unocal will open their Cook Inlet Gas Gathering System (CIGGS) to use by the public and will submit it to regulation under the Alaska Pipeline Act.” The settlement agreement includes provisions that address numerous issues relating to the operation of the system.
The CIGGS owners have guaranteed a minimum capacity of 40 million cubic feet per day for common-carriage service for third party shippers. The owners will retain firm rights to use the remaining capacity “subject to the terms and conditions set out in the settlement agreement,” so that the owners can continue to use the system for its present purposes.
Provisions relating to operating pressures address concerns of CIGGS owners about potential adverse impacts of third party shipper usage on operating pressures at the Steelhead production platform. The agreement allows the CIGGS owners to operate the system at pressures that “they deem necessary to optimize their production,” subject to meeting the obligation to maintain a guaranteed capacity for common carriage and a stated maximum pressure. Self-policing of imbalances The agreement recognizes that the CIGGS metering and control facilities were not designed for a common carriage system and that the system has little ability to withstand imbalances between how much gas a shipper puts into the system and how much a shipper takes out. As a result the parties have settled on a tariff regime that “relies heavily, in the first instance, on self-policing” to control imbalances. The CIGGS owners will, however, retain the ability to enforce compliance with system operating rules.
Shippers must meet rules governing the gas control and monitoring facilities required for connecting facilities. There are also circumstances under which the CIGGS owners can operate control valves at interconnection points.
The agreement also includes the detailed terms of a gas quality waiver that will allow Forest Oil Corp. to ship gas with a relatively high nitrogen content through CIGGS to Agrium’s fertilizer plant at Nikiski. The waiver will protect the interests of all businesses that receive gas from the system. Prepayments and tariffs Agrium and Aurora have agreed to make specific prepayments to the CIGGS owners, in recognition of costs incurred by the owners in the transition of CIGGS operation to a public service and as assurance of interest in shipping gas through the system.
The rate base for the use of CIGGS will be valued at the owner’s original investment cost and there is settlement rate methodology for calculating rates. The initial tariff rate will be $0.152 per mcf shipped, but after the first year of regulated service this rate may be modified if there is a “substantial and material” change in gas throughput in the system.
The agreement includes provisions permitting third party shippers to fund expansions to CIGGS and “contemplating streamlined procedures for transferring the facility to a willing third party or for abandoning it from public service at some time in the future.”
| 