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Through to 2018 Chugach Electric’s new Hilcorp contract will ensure adequate gas supplies Alan Bailey Petroleum News
Chugach Electric Association, a major electricity utility in Southcentral Alaska, has asked the Regulatory Commission of Alaska to approve a new gas supply agreement with gas producer Hilcorp Alaska. The new agreement, together with Chugach Electric’s existing contracts, will ensure that the utility has sufficient gas to meet its anticipated power generation needs through the first quarter of 2018, Chugach Electric says.
Faced with pending gas supply shortages from the Cook Inlet basin, Southcentral utilities had been anticipating having to import gas into the region within the next couple of years or so. But with Hilcorp, a newcomer to the basin, pursuing an aggressive development program across many of the basin’s gas fields, the utilities have recently been talking about the projected gas shortfall moving out to 2018. The new supply agreement with Chugach Electric, which runs from the beginning of 2015 to early 2018, would appear to confirm that more optimistic view of the gas supply situation.
Price-cap pricing According to a July 12 tariff advice filed with the Regulatory Commission of Alaska by Chugach Electric, the utility anticipates purchasing about 17.7 billion cubic feet of gas from Hilcorp during the term of the purchase agreement, with pricing following price caps specified under a consent decree agreed between Hilcorp and the State of Alaska to address anti-trust concerns following Hilcorp’s takeover of both Chevron’s and Marathon Oil’s Cook Inlet gas fields.
The price for base gas — the relatively uniform volumes of gas purchased by Chugach Electric on a routine basis — will range from $7.13 per thousand cubic feet in 2015 to $8.03 per thousand cubic feet in 2018. There are higher prices for “swing load gas,” used to meet high winter demand, and for any extra emergency gas supplies. However, Chugach Electric says that it anticipates meeting its seasonal swings in gas usage by storing gas in the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula during the summer and retrieving the excess summer gas during the winter.
Under the new supply contract Chugach Electric will purchase about 2.43 billion cubic feet of gas in 2015, 5.22 billion cubic feet in 2016, 7.98 billion cubic feet in 2017 and 2.01 billion cubic feet in 2018.
Flexibility However, the contract does accommodate some flexibility in the volumes of gas purchased at the base rate by allowing Chugach Electric to adjust the base volume up or down 5 percent annually and up or down 3 percent monthly. The gas prices cover the basic production taxes and royalties that Hilcorp pays for gas production but do not cover the cost of transporting the purchased gas around the Cook Inlet gas pipeline system.
Chugach Electric has an existing gas supply agreement with ConocoPhillips and another agreement, previously with Marathon but taken over by Hilcorp. Those two contracts cover Chugach Electric’s gas supply needs until the end of 2014, after which the new gas supply agreement with Hilcorp will come into play. The old Marathon contract expires at the end of 2014, with the ConocoPhillips contract continuing until the end of 2016 but only meeting some of Chugach Electric’s needs. After the end of 2016 the new Hilcorp contract would be Chugach Electric’s sole source of gas, unless the utility chooses to take less gas than it needs by using the contract’s flexible terms.
Phil Steyer, director of government relations and corporate communications for Chugach Electric, told Petroleum News in a July 16 email that flexibility in the new contract could open up future opportunities for other gas suppliers.
In its tariff advice Chugach Electric says that it prefers not to be dependent on a single gas supplier but that at present there are no additional independent gas sellers capable of meeting the utility’s gas volume and deliverability requirements.
Drop in gas usage Chugach Electric’s ability to fill its gas supply needs through to 2018 stems in part from a predicted substantial drop in the utility’s gas usage between 2013 and 2015. That drop in usage will result from Homer Electric Association and Matanuska Electric Association bringing their own power generation facilities on line rather than buying Chugach Electric’s power, and from Chugach Electric’s use of a new, modern combine-cycle power station in Anchorage, a power plant that is much more efficient than the utility’s old power station on the west side of Cook Inlet.
According to Chugach Electric’s tariff advice, the utility’s annual gas demand will drop from more than 20 billion cubic feet in 2013 to around 8.5 billion cubic feet in 2015 and thereafter.
However, Homer Electric and Matanuska Electric will need to purchase gas to fuel their new power generation plants. Homer Electric has said that it has secured adequate gas supplies for its new facilities through to March 2016 and is optimistic about meeting its needs through 2018. Matanuska Electric has been seeking gas supplies for a new power station it is constructing at Eklutna, north of Anchorage — that power station is slated to come on line in 2015.
Steyer said that the new contract with Hilcorp will help his utility but still leaves questions over the long-term gas supply situation from the Cook Inlet.
“While the contract with Hilcorp is positive news regarding Chugach’s fuel supply in the near-term, we remain concerned about the long-term continued supply of gas for Southcentral Alaska,” Steyer said.
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