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CINGSA files well maintenance surcharge
Cook Inlet Natural Gas Storage, in compliance with an order from the Regulatory Commission of Alaska, has filed for a surcharge mechanism Kristen Nelson Petroleum News
In an August order on a tariff revision filed by Cook Inlet Natural Gas Storage Alaska LLC, the Regulatory Commission of Alaska required CINGSA to file a proposed well maintenance surcharge mechanism by Oct. 31.
Well maintenance, whether by wireline, coiled tubing or drilling rig, creates irregular costs for CINGSA, and there was considerable discussion during the tariff revision hearing on how those costs should be passed on to customers.
At issue are costs CINGSA incurs for storage well maintenance at its facility on the Kenai Peninsula, which provides natural gas storage for local utilities allowing gas to be injected into the facility when the utilities can obtain a surplus over their needs, and then withdrawn when needed, typically in the winter months.
Lumpy activities In CINGSA’s Oct. 31 submittal of a well maintenance surcharge mechanism, CINGSA President John Sims said RCA noted in its tariff order that “‘normal’ well maintenance activities generate fairly lumps and unpredictable costs from year to year.”
In its discussion of the well maintenance issue in Order U-18-043(15), RCA noted that an annualized estimate of $300,000 for well maintenance “appears to be broadly in line with annualized costs for ‘normal’ well maintenance activities,” including well cleanouts and replacement of subsurface safety valves, work “generally completed with wireline gear rather than a drill rig.”
The commission said that even maintenance performed with wireline gear creates “fairly lumpy and unpredictable costs from year to year” and said that in the next suitable proceeding the commission “will entertain proposals for a different approach to establishing a normalized well maintenance expense allowance for wireline activities to be included in rates.”
By comparison, the commission said, work which requires mobilization of a drilling rig generates substantially higher costs than work done by wireline, creating “challenges for which normal ratemaking methods are ill equipped.”
In the tariff revision proceedings CINGSA proposed establishment of a tracker mechanism to ensure recovery of all well maintenance costs, RCA said, but the commission found “the record in this proceeding inadequate to properly develop a tracker mechanism.”
Tariff surcharge Instead, RCA required CINGSA to implement a tariff surcharge for maintenance activities requiring a drilling rig. The commission said it was requiring the tariff surcharge “because of the outsized nature of drill rig costs together with CINGSA’s critical role in Cook Inlet’s gas deliverability infrastructure.”
Because of the costs involved, CINGSA “might not undertake adequate well maintenance efforts if … it were forced to forego recovery of these costs until its next rate case. Inadequate or delayed maintenance of CINGSA’s wells is not in the public interest,” RCA said.
The commission said the tariff surcharge mechanism would “allow CINGSA to recover actual, prudently-incurred well maintenance expenses associated with work that requires a drill rig.”
Well maintenance for this purpose “primarily mitigates or remediates engineering rather than geological and geophysical risks, and thus excludes the drilling of new wells or sidetracks,” the commission said. There will be a separate surcharge for each well maintenance work package and total well maintenance costs to be recovered will be specified. The surcharge may only be imposed for work requiring a drilling rig and excludes costs of CINGSA personnel, with total costs to be amortized over three to five years unless a longer period is required and supported, with the dollar amount applied to firm storage service customers measured by contracted injection and withdrawal capacities.
Well maintenance provision In its proposal, CINGSA said that, as directed by the commission, each surcharge will be filed as a separate tariff advice letter with recovery over three or more years and “applied to FSS Customers on a pro rata basis.” Once approved by the commission, CINGSA said, the provision will apply to all its customers - its four firm storage service customers and the six entities with interruptible storage service agreements.
As defined by the commission in its order, well maintenance for the purposes of the surcharge provision is activities required to return a well to a previous fully functional capacity, primarily mitigating or remediating engineering rather than geological risks and excluding the drilling of new wells or sidetracks.
Such work generally relates to the mechanical integrity or functional integrity of a well, the company said.
Wireline can be used for things such as placing and removing wellbore hardware and once work on a well has been completed, wireline is used to remove plugs and protective sleeves. A coiled tubing unit may be used, CINGSA said, for jobs such as fluids handling, drilling, cleanouts, setting and retrieving plugs and perforating.
A drill rig is used to lift the tubing string to allow replacement; a workover rig may be used for operations on a minimal scale.
The well maintenance work package must use a drill rig, but CINGSA said “any Well Maintenance Work Package with a Drill Rig will also involve Wireline and other auxiliary equipment necessary to comply” with a sundry approval for the work from the Alaska Oil and Gas Conservation Commission. “As a result, CINGSA believes that it is appropriate to include these other equipment costs as part of the Eligible Well Maintenance Costs, all of which are to be recovered by a Surcharge where a Drill Rig is also used,” the company said.
CINGSA has requested that RCA approve the proposal at the end of a standard 45-day notice and review period.
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