|
RCA approves Enstar gas supply contract New contract will meet Enstar’s previously unmet needs through to March 2018; Rokeberg concurs but expresses concern about gas market Alan Bailey Petroleum News
The Regulatory Commission of Alaska, or RCA, has approved a new gas supply agreement between Enstar Natural Gas Co. and Hilcorp Alaska. The new contract will ensure that Enstar can obtain all of the gas that it needs until March 31, 2018, the date at which the contract terminates. Hilcorp has recently filed similar gas supply agreements with two other Southcentral utilities, Chugach Electric Association and Matanuska Electric Association, but RCA has yet to rule on these other contracts.
The utilities had been facing pending shortfalls in gas supplies because of production declines in the Cook Inlet gas fields. However, Hilcorp, now the dominant Cook Inlet gas producer, has been pursuing an aggressive development program in gas fields that it purchased from Chevron and Marathon Oil Co. Hilcorp has said that it can fill previously unmet utility gas needs through to March 2018: The three new gas supply contracts form the tangible manifestations of that statement.
Commissioner Norman Rokeberg, while supporting the RCA decision, given what had been a pending crisis in Southcentral Alaska utility gas supplies, expressed his concern that the three new Hilcorp contracts may stifle competition in the Cook Inlet gas market, thus deterring independent gas producers from exploring for more gas.
Specified gas volumes The contract with Enstar that RCA has just approved allows for estimated annual supplies of gas ranging from 15 billion cubic feet in the first year of the contract, running from April 1, 2014, to March 31, 2015, to 21.5 bcf in the contract’s final year. There is a clause in the contract that allows for variations in delivery rates at different times of year, to account for Enstar’s need for more “base load” gas in the winter than in the summer. However, the contract also has a provision allowing Enstar to purchase some additional gas in the summer for storage for winter use.
Under the contract Enstar can buy “discretionary gas,” gas that the utility may want beyond normal contracted volumes, if Hilcorp has sufficient gas available. And the contract contains provisions for dealing with some situations in which either Hilcorp or Enstar is unable to meet the contract’s specifications for the volumes of gas delivered or purchased.
Consent decree pricing Following an investigation by the State of Alaska and the Federal Trade Commission into Hilcorp’s purchase of Marathon’s Cook Inlet assets, the state and Hilcorp agreed on a consent decree that sets, among other things, maximum price levels that Hilcorp can charge for the sale of its gas to local utilities. The state and federal authorities were concerned about Hilcorp’s dominance of the Cook Inlet gas market following the Marathon purchase. The consent decree allowed the purchase of Marathon’s assets to proceed.
The gas prices in the Enstar contract follow the maximum allowed under the consent decree, with prices for base-load gas ranging from $6.86 per thousand cubic feet in year one of the contract to $8.03 per thousand cubic feet in the contract’s final few months. There are higher prices for emergency gas supplies and for “swing load” gas, gas volumes needed above the volumes specified as base load and typically required in severe winter cold.
Rokeberg critique In his critique of the contract, Commissioner Rokeberg says that, while he concurs with commission approval of the contract, he also has misgivings. Praising Hilcorp’s efforts to make more gas available to Southcentral utilities and recognizing that recent concerns about gas supply shortages had compelled Enstar to enter into new gas supply agreements, Rokeberg said the commission had found that the contract, which would ensure a reliable supply of gas for Enstar, is necessary and serves the public interest.
But the three new Hilcorp utility gas supply contracts, taken together, tie up substantial volumes of gas demand through a single gas supplier for an extended period of time, locking up the utility gas market and potentially impeding new exploration investment by smaller exploration and production companies, Rokeberg said. The state Legislature has enacted many laws to encourage gas exploration in the Cook Inlet basin, but the new gas supply contracts may have the unintended consequence of undermining the impact of those laws, he said.
Supplier oligopoly And, while the consent decree had enabled Hilcorp to move ahead with “extraordinary efforts” in its newly acquired Cook Inlet assets, the decree has also “assisted in the concentration of gas suppliers into an oligopoly of fewer sellers who produce an (almost) identical … product,” Rokeberg wrote. Furthermore, the price caps in the consent decree have become a “benchmark and de facto ‘price mechanism’” for all gas supply agreements filed with the commission this year, creating a “stair-step” price mechanism and discounting other possible pricing models.
Railbelt consumers, who now pay the highest natural gas prices in North America, “are now confronted with the possibility of escalating prices when several explorers have found natural gas but will be hindered in bringing it to the market,” Rokeberg wrote.
Possible solutions to the Cook Inlet gas market problem include the re-opening of the liquefied natural gas facility or of a mothballed fertilizer plant, both on the Kenai Peninsula, or industrial uses for gas associated with a future North Slope gas line, Rokeberg suggested. Or there may be the possibility of the direct sale of gas to entities that transport gas through Enstar’s pipeline system, he wrote.
|
