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Inlet utilities don’t see gas issue fixed Tell working group ability to contract longer-term natural gas deliveries improved, but fear snatching defeat from jaws of victory KRISTEN NELSON Petroleum News
Representatives of Cook Inlet’s major natural gas dependent utilities think tax relief enacted by the state of Alaska for Cook Inlet storage and natural gas exploration has enabled them to contract for natural gas, but they fear changes in the state’s tax credit system could block development of gas needed to meet future needs.
Municipal Light & Power, Enstar, Chugach Electric Association, Matanuska Electric Association and Homer Electric Association all depend on natural gas supplies in Cook Inlet to serve customers. The electric utilities use natural gas to produce power and Enstar delivers natural gas to customers for home heating.
Representatives of the utilities told the Senate Oil and Gas Tax Credit Working Group Oct. 1 that credits have improved their ability to contract for Cook Inlet natural gas, but have provided only a short-term fix.
End of long-term contracts In the past, Chugach Electric Association didn’t need to consider its supply of gas. But five years ago everything changed, Mark Fouts, director of Chugach’s corporate planning and analysis, told the working group. The utility had 20-year contracts for its needed gas volumes, including transportation and guarantees that the producer would meet 100 percent of demand.
But in 2005, when Chugach went out to contract for long-term supplies, it found things had changed.
After five years of negotiations the best offer the utility could get was from ConocoPhillips for three years of supply, with a possibility of three additional years - and the utility would be responsible for transporting the gas and providing gas storage and peaking gas.
The next contract the utility got, with Marathon, was only for two years, and again, without transportation and with only limited peaking gas.
There was a period where deliverability of gas was a very significant issue, Fouts said. Marathon put in a compressor to move gas, but Chugach had to pay for it, with the compressor meeting Chugach’s needs, as well as everyone else’s.
Hilcorp investment Fortunately Hilcorp showed up, Fouts said, began investing in legacy fields and added more compression on the west side, adding security to deliverability.
But Hilcorp wasn’t interested in providing swing gas, so Chugach invested in Cook Inlet Natural Gas Storage Alaska to provide peaking gas and significantly improving deliverability in Cook Inlet.
Chugach began gas transport in 2010 and in 2011 led transport infrastructure improvements. Hilcorp consolidated four separate gas lines in 2014 and in 2015 expanded critical infrastructure improving gas delivery.
But while transportation is improved and CINGSA has met Chugach’s storage needs, Fouts said one thing was not taken care of: the need for a long-term supply. Hilcorp is only going out as far as 2023, he said. And while BlueCrest and Furie have gas, none is coming off the Furie platform yet and the BlueCrest platform is three years away.
Fouts said it took five years to get the transportation system in order and will take five to 10 years to get supply under control.
What is needed is long-term, 20-year supply, he said, and while Hilcorp has contracted to supply natural gas in the short-term, Furie and BlueCrest are still developing.
Those new developers, he said, have spent money based on tax credits.
Asked if the experiment in tax credits has worked and should be suspended, Fouts said gas for the next 20 years is the issue and the state continues to have an important role in long-term gas supply.
ML&P, Enstar Mark Johnston, general manager of Municipal Light & Power, said he thinks the experiment of tax credits for Cook Inlet worked, that tax credits have provided security for long-term supply and diversity among producers.
There are sufficient supplies today, he said, but if tax credits aren’t continued Cook Inlet could go back to where it was, with local governments running ads warning consumers that they might need to turn down the heat because of gas shortages.
He said he hoped the state would look at a long-term solution, and not wait until there’s a problem to solve it.
Moira Smith, vice president and general counsel of Enstar, said that in spite of suggestions that there is long-term stability, “what we’ve achieved is only short-term in nature.” Southcentral is an isolated system reliant on a single supply basin, she said.
John Sims, Enstar vice president of corporate resources and business development, urged caution in making changes. He said the experiment with tax credits has clearly brought new players the market and said Enstar’s primary focus is to ensure that the activity continues.
Smith said Enstar sees a period of relative stability with new players, but if components of the existing system are changed, legislators need to be mindful of the impact those changes will have.
MEA, HEA Tony Izzo, fuel supply manager for Matanuska Electric Association, said a lot has changed recently. When MEA went out to contract for a 2015 supply five years ago, it could only get a contract for 20 percent of what it needed and the price was so ridiculous the company didn’t even take the contract.
With the investment Hilcorp has made and significant new players things are different, he said, but additional gas the U.S. Geological Survey noted in its assessment isn’t commercially available.
And Izzo said he’s not looking at the number of new players, he’s looking at the gas that he can get under contract - gas which is behind pipe and producers who can perform.
The tax credit impact is good news and bad news, Izzo said. There are multiple new players who have spent significant dollars and there is temporary energy security, but the bad news is reserves are not behind pipe in any significant volume.
Furie has announced one contract, he said, but additional investment would be required there. Izzo said that as a buyer he doesn’t like single point-of-failure contingencies, such as the single pipe from Furie’s platform.
It’s temporary energy security, he said, and in the Lower 48 it would have them running for the hills.
Izzo said uncertainty over receipt of tax credits has frozen lines of credit in some cases and he believes the difference will mean an additional price of 30-40 percent higher than what we’re paying now.
It was grim for a buyer five years ago, Izzo said, and tax credits were a positive thing. He said he feels like we’re in the 11th hour about to snatch defeat from the jaws of victory.
Mike Salzetti, manager of fuel development for Homer Electric Association, which recently signed a contract with Furie, said in 2009 it was hard to even find anybody willing to talk to with supply and firm deliverability. Then HEA signed the CINGSA agreement and tax credits were established and things started to pick up. HEA was able to sign contracts out to the 2018 timeframe.
He said the contract with Furie gives HEA three years of firm gas and two one-year options to extend.
He said the tax credit system could potentially use a little tweaking, but encouraged legislators to look at a tax system with predictability.
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