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Chugach gas contract extended
After years of concern that Cook Inlet’s natural gas supplies might dry up and imports could be required, further evidence has surfaced that Hilcorp Alaska’s development program in the basin is paying off, with Chugach Electric Association applying to extend its natural gas sale and purchase agreement with Hilcorp Alaska by four years.
Key provisions of a tariff amendment filing by Chugach with the Regulatory Commission of Alaska include: extending the term of the agreement from March 31, 2019, to March 31, 2023; reducing the contract price of natural gas from $8.03 to $7.35 per thousand cubic feet starting in contract year five (April 1, 2018, to March 31, 2019) followed by 2 percent annual increases in contract years six through nine; increasing the annual contract quantity in contract year five from 3.3 billion cubic feet to 6.9 bcf, and providing 5.5 bcf in contract years six through nine; allowing Chugach to purchase additional minor volumes as needed in contract years five through nine.
The amendment is effective Aug. 1; Chugach is requesting RCA approval by Sept. 7, or as soon as possible thereafter.
2012 consent decree Hilcorp acquired the Cook Inlet gas production, transportation and storage assets of Marathon Alaska Production in 2012. The purchase was the subject of a 2012 consent decree among the state of Alaska, Hilcorp and Marathon, approved by state Superior Court in January 2013. Among other requirements and limitations the consent decree established price caps for natural gas from 2013 through 2017.
Chugach was not a party to the consent decree, but the gas sale and purchase agreement Hilcorp and Chugach signed in July 2013 fell under the decree. That agreement was approved by the commission in September 2013 and provided for up to 100 percent of Chugach’s natural gas needs from Jan. 1, 2015, through March 31, 2018, at agreed-upon prices, volumes and service conditions.
The 2013 agreement was amended in 2014 to extend the term through March 31, 2019, and expand the time horizon for non-firm purchases. A second amendment, approved earlier in 2015, was administrative in nature.
Third amendment This third amendment, Chugach told the commission, “provides Chugach with the assurance that Chugach will have contractual rights to secure its entire gas supply requirements through March 31, 2023 from the supplier most able to deliver such gas supplies in the Cook Inlet Region.”
It also “provides Chugach with the option to purchase a portion of its gas supplies from other firm gas suppliers to the extent that such other options become available and economical,” the company said.
In addition to adding contract years six through nine, the amendment reduces the contract price of natural gas by 8.5 percent from the consent decree price starting in contract year five, followed by 2 percent increases in years six through nine.
In contract year five the amendment allows for a volume increase of up to 1.1 bcf over contracted volume levels with 24 months prior notice, and in contract year six allows for annual contract volume increases up to 2.6 bcf over contracted volume with 18 months prior notice. Contract years seven through nine allow for annual contract volume increases up to 2.6 bcf over contracted volume level with 18 months prior notice.
Alternative suppliers Chugach said the provisions allowing for additional gas volumes in contract years five through nine “provide Chugach with added flexibility in the overall management of its gas supply requirements,” while the amendment also allows Chugach “to augment its firm gas supply requirements from other independent suppliers.”
Chugach submitted load forecasting data with the third amendment and said its projected load requirements through March 31, 2023, “can be fully met by Hilcorp under the Third Amendment.”
Chugach said it actively investigated other supply options, including “diligence discussions and negotiations with other independent gas suppliers” in Cook Inlet, and in November 2014 issued a request for proposal for firm continuous delivery of base, swing and emergency gas to seven suppliers in the region, receiving response from three.
“Ultimately, Chugach determined that the underlying pricing, volume and optionality provisions coupled with Chugach’s firm deliverability requirements were best matched by extending the GSPA with Hilcorp. Importantly, the flexibility (call option provisions) afforded by the Third Amendment provides alternative gas supply arrangements if market conditions allow,” Chugach told the commission.
Chugach said none of the other suppliers “have the necessary production, reserves, and deliverability infrastructure to assure the same level of reliability and optionality to be the primary gas supplier to Chugach.”
The filing is available on RCA’s website under TA408-8. The commission is accepting comments through 5 p.m. Aug. 21.
- KRISTEN NELSON
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