Further Furie gas supply reduction
for Petroleum News
Enstar Natural Gas Co. has filed a tariff advice letter asking the Regulatory Commission of Alaska to approve a second amendment to its gas supply agreement with Furie Operating Alaska, reducing the volume and rate of firm gas supplies from Furie’s Kitchen Lights gas field.
GSA dates back to 2016Following the Kitchen Lights field startup in late 2015, in April 2016 the commission approved a gas sales agreement between Enstar and Furie. That agreement involved the delivery of about 6.2 billion cubic feet per year of gas, starting in April 2018 and ending in March 2021. The agreement guaranteed delivery of 10 million cubic feet per day in the summer and 22 million cubic feet per day in the winter. The contract was contingent on Furie having at least three production wells in operation by the end of 2016.
In the event, Furie was unable to meet the drilling deadline, having drilled but not completed that third well in 2016. And, with Furie saying that the subsequent state veto of oil and gas tax credit payments had disrupted its planned drilling program, the company did not complete the well in 2017 either. Then, in October 2017 the RCA approved an amendment to the gas sales agreement, deferring the need for the third well until July 31, 2018. In 2018 Furie completed the third well and continued to drill a fourth Kitchen Lights well.
Production problems in 2019In early 2019 Furie encountered a major problem with the Kitchen Lights field, when hydrate plugs blocked the subsea pipeline that carries gas to shore, while also causing obstructions in the field’s onshore gas processing facilities. The company declared a force majeure event, with production from the field stopping in late January. After putting much effort into dealing with the blockage problem, the company brought the field back online in April 2019.
As a consequence of continuing financial pressure on the company, in August 2019 Furie filed for bankruptcy relief. The bankruptcy case is still continuing in the U.S. Bankruptcy Court for the District of Delaware - at this stage the court has approved Kachemak Exploration LLC as purchaser of the Kitchen Lights field, although HEX LLC also wants to acquire the field.
Second GSA amendmentFollowing production challenges associated with the system blockages in 2019, and the consequent failure to comply with the production specifications that had been agreed with Enstar, in December 2019 the RCA approved a second amendment to the gas sales agreement. The revised agreement involved an extension to the timeframe of the agreement and a reduction to the amount of firm gas to be delivered. Deliveries would firm up at 1.138 billion cubic feet per year at the beginning of 2020, increasing to 3.650 bcf per year in April 2020. On April 1, 2021, firm delivery would drop to 3.103 bcf per year, then dropping further to 2.373 bcf per year on April 1, 2022. Guaranteed daily delivery rates would start at 12.5 million cubic feet per day, dropping to 6.5 million cubic feet per day over the same time period.
In its application to the RCA for approval of the revised contract, Enstar said that it remained committed to securing a diversified gas supply portfolio.
“While Furie has missed certain deadlines and has experienced production difficulties, it does have four producing wells, and Enstar is hopeful that Furie will be able to meet its amended contractual commitments,” Enstar told the commission.
Further changes proposedThe further changes to the Furie gas supply agreement that Enstar filed on March 4 requesting RCA approval include a component of a settlement agreement with Furie over the 2019 shutdown of the field, as well as changes to firm gas supply volumes. The settlement agreement involves the in-field transfer to Enstar during 2020 of 250 million cubic feet of gas with a total value to Enstar of $1.7 million. Changes to firm gas supply volumes involve reductions in those volumes in the extended term of the gas supply agreement, starting on April 1, 2021. From that date the firm delivery would be set at 1.551 bcf per year, dropping to 1.186 bcf per year from April 1, 2022. Similarly, daily deliverability would drop in the latter half of the contract, falling to 3.25 million cubic feet per day on April 1, 2022.
Enstar said that it will notify the commission if the Furie bankruptcy proceedings result in a transfer of the gas sales agreement to another entity, or if the bankruptcy court “provides any modifications.”
- ALAN BAILEY