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CEA proposes price for Beluga field gas Asks RCA to approve internal billing of $5.57 per mcf for gas used for power generation from its share of Cook Inlet gas field ALAN BAILEY Petroleum News
In a June 21 tariff advice to the Regulatory Commission of Alaska, Chugach Electric Association has asked for approval for a price of $5.57 per thousand cubic feet for gas that the utility obtains from its share of the Beluga gas field on the west side of Cook Inlet. Although gas production costs may vary considerably from one field to another, depending on factors such as the size, age and complexity of the field, the filing sheds some light on the cost of gas production from a major Cook Inlet gas field and, hence, the price threshold for producer profitability in the Cook Inlet gas market.
Earlier this year utilities Chugach Electric and Municipal Light & Power purchased ConocoPhillips’ interests in the Beluga River field, a transaction that resulted in Chugach Electric owning 10 percent of the field. ML&P, which already owned a portion of the field, now owns a 56.67 percent interest. Hilcorp Alaska, the other field owner, with 33.33 percent, is field operator.
The electric utilities’ interest in part owning the field is their ability to obtain gas supplies at below market cost - the utilities need to be able to recover their shares of the field operating costs but do not need to make a profit on the gas production.
The gas transfer price The $5.57 gas price that Chugach Electric has proposed is the utility’s internal Beluga field gas price, referred to as a gas transfer price, or GTP. The GTP and associated Beluga gas supply volumes are added to the utility’s portfolio of gas prices and supply volumes that ultimately determine the cost of the gas fuel that the utility uses. That fuel cost forms a major factor in the price that the utility charges its customers for electricity.
Currently Chugach Electric is applying an interim GTP of $5.88 to its gas from the Beluga field. According to RCA tariff filings the utility is also obtaining gas at $1.88 per mcf through a ConocoPhillips contract which expires in December, and at $7.42 through a supply agreement with Hilcorp Alaska. The ConocoPhillips contract is indexed to gas prices in the Lower 48, while the Hilcorp pricing is based on a consent decree agreed between Hilcorp and the state of Alaska.
Essentially, Chugach Electric has determined the new GTP, which will apply from Oct. 1, 2016, by estimating future operating costs and dividing these by projected gas usage. A new GTP will be calculated on an annual basis, starting in 2017.
Because the GTP is based on estimated future costs and gas volumes, the tariff arrangements include a mechanism for reconciling actual costs and gas usage with the estimates used for the GTP calculation. Essentially, a balancing account will capture the discrepancies between actual data and estimated data over the course of a calendar year, with these discrepancies being factored into the GTP calculations for the next pricing cycle - cumulatively over time the internal price of the gas will accurately reflect the actual cost of gas production.
Several cost elements The proposed GTP is based on estimated costs and gas production levels from April 22 to Dec. 31, 2016, Chugach Electric told the RCA. The cost elements consist of Chugach Electric’s share of operating and maintenance expenses; administrative and general expenses; the field depreciation, depletion and amortization expense; an asset retirement obligation; the cost of interest on loans; and a margin on the cost of the loan interest. The loans were required to fund the purchase of Chugach Electric’s portion of the gas field - the margin presumably protects the viability of the financing.
The asset requirement obligation is equivalent to what is often referred to as dismantlement, removal and restoration, an amount of money set aside to pay for the eventual dismantlement and abandonment of the field.
In taking over some of ConocoPhillips’ interests in the Beluga River field, Chugach Electric picked up portions of two existing contracts, with already approved gas pricing, under which ConocoPhillips supplied gas to local gas and power utilities. One of those contracts was with Enstar Natural Gas Co. and one was with Chugach Electric itself. Since these contracts will remain in effect for a while, Chugach Electric proposes using its revenues from the contracts to offset some of its Beluga field costs.
The price calculation According to the June 21 tariff advice, Chugach Electric’s estimated Beluga field operating costs for the period of the GTP calculation amount to $5.8 million. Subtracting the revenues from the existing Chugach Electric and Enstar supply contracts, and also subtracting a royalty adjustment, leaves a net revenue requirement for the field of $1.5 million. Chugach Electric expects to obtain from the Beluga field a total volume of gas of 280,035 mcf, excluding the gas supplied under the contracts transferred from ConocoPhillips. Dividing the net revenue requirement by the gas volume used and adding 8 cents per mcf for field depreciation results in the GTP of $5.57 that Chugach Electric has proposed to the RCA.
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