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RCA orders hearing on CINGSA native gas CINGSA wants to sell some of the gas that it discovered by accident in its storage reservoir; attorney general and others object Alan Bailey Petroleum News
The Regulatory Commission of Alaska has suspended a tariff advice submitted by Cook Inlet Natural Gas Storage Inc., requesting that the storage facility be allowed to sell some gas that it discovered by accident when drilling one of its wells. The commission has ordered a formal hearing into the gas sale proposal, with a pre-hearing conference scheduled for April 1 and a deadline of Oct. 27 for a commission decision on the tariff request.
Gas discovery The CINGSA facility stores gas in a depleted reservoir of the Cannery Loop gas field, to the south of the city of Kenai on the Kenai Peninsula. When the company acquired the rights to use the reservoir, there was a basic assumption that the reservoir was almost devoid of gas, the gas having long since been produced as part of gas-field operations. However, during development of the facility, one of the wells being drilled for the injection and withdrawal of stored gas hit a pocket of gas in a sand body that had apparently not been penetrated by a well during the time that the reservoir had been part of the gas field.
It turned out that CINGSA had found 14.5 billion cubic feet of unexpected gas, referred to as “native gas,” in its storage reservoir.
A 2 bcf excess CINGSA subsequently found a use for 12.5 bcf of the gas, as a means of overcoming some issues with the performance of the storage facility and hence enabling the facility to operate with full contractual flow rates. But, with 2 bcf of the native gas being surplus to requirements, and with CINGSA having acquired the subsurface rights to the reservoir, the storage facility proposes selling that surplus gas, to the profit of CINGSA’s shareholders.
Under CINGSA’s proposal the title to sold native gas would transfer to the purchaser of the gas, with the gas remaining in the storage reservoir until the purchaser chooses to withdraw it.
The state of Alaska attorney general and some of CINGSA’s customers have objected to CINGSA’s proposal, arguing that the facility’s ratepayers should benefit from any financial gain accrued from the native gas windfall. Essentially, with CINGSA recovering its costs through the rates that it charges its ratepayers, those ratepayers incurred significant risk in terms of unanticipated costs, should problems have arisen with the storage facility, the attorney general’s office said. And, having borne those risks, the ratepayers are entitled to any unanticipated gain arising from facility operations, the argument goes.
CINGSA position CINGSA has obviously taken a different position. Company officials have told Petroleum News that a group of shareholders had invested the entire $161 million that it had cost to construct the storage facility and, in so doing, had put that investment at risk. Apparently the original budgeted cost of the facility had been estimated at $189 million. Moreover, with the usage of the facility being based on 20-year contracts with the facility’s ratepayers, the shareholders, not the ratepayers, will be left holding the financial risk associated with the facility at the end of the contract terms.
“Really, CINGSA took that risk up front,” said Lindsay Hobson, CINGSA communications manager. “The lion’s share of the risk remains with the CINGSA shareholders.”
John Sims, director of business development, commented that CINGSA is fully committed to meeting its contractual obligations to its customers and that the excess native gas is of no benefit to those customers.
“It’s not needed to provide the service that we have agreed to provide to those customers,” said Jared Green, president of CINGSA.
Not the same CINGSA is unlike a regular gas or power utility that has a continuing business as long as there are consumers residential in the utility’s service area, and that has a multiplicity of assets to manage and pay for, Green said. CINGSA has a single asset and life expectancy defined by its customer contracts, he said. While, as a regulated utility, CINGSA can recover from its rates the cost of those components of its facility that are deemed to depreciate, a large portion of the facility’s asset base does not depreciate and does not, therefore, have costs that can be recovered from the rates - the facility’s shareholders bear the financial risk associated these non-depreciated components, Green said. An example is the base gas which CINGSA had to buy and inject into the storage reservoir, to maintain adequate reservoir pressure for facility operation, Sims commented.
Moreover, unlike a regular utility with a monopoly operation in its service area, a storage facility such as CINGSA must compete for custom with other storage operators, such as the gas producers, Green said.
The CINGSA facility has proved to be a resounding success, providing an essential service to Southcentral Alaska utilities and meeting its contractual obligations, Green commented.
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