Marathon tells Alaska commission CIGGS’ issues are commercial, not regulatory

In response to Agrium filing, pipeline operator says change in regulation won’t solve inlet’s gas supply problems, and asks who would pay millions for work and equipment required to convert pipeline to common carrier

Kristen Nelson

Petroleum News Editor-in-Chief

Agrium, which owns the fertilizer plant at Nikiski, is arguing to the Regulatory Commission of Alaska that if the Cook Inlet Gas Gathering System were a common carrier pipeline, Agrium would have access to natural gas from the west side of the inlet (see story in Oct. 17 issue of Petroleum News). Agrium does not have enough gas for the plant and is in a dispute with Unocal, the former owner of the plant, over the amount of gas Unocal is delivering to the plant, which is no longer enough to allow the plant to run at full capacity.

Marathon Oil, operator and joint owner with Unocal of the Cook Inlet Gas Gathering System, has told the commission that changing the regulatory status of the gathering system will not change the amount of gas available in Cook Inlet, and could make less gas available to customers because the gathering system can only carry so much gas without an expansion.

Agrium’s current petition to the commission, filed Oct. 1, is its second attempt to get the commission to regulate the Cook Inlet Gas Gathering System, which runs up the west side of the inlet from Trading Bay to Granite Point and then crosses under the inlet to Nikiski, as a common carrier. The commission denied the first request in April.

Marathon filed its response Oct. 21. On Nov. 4 the commission denied Agrium’s request for expedited consideration of its request, saying “Agrium has not presented compelling reasons for us to depart from our usual procedures ...”

Who will bear the costs?

Additional millions of dollars would be required, “If expansion is required to avoid curtailing the deliveries currently being made by Marathon and Unocal into CIGGS…”

Marathon said that, at its request, NANA Colt engineers have met with Agrium to explain the costs. Marathon accused Agrium of ignoring the costs and said “…all indications are that Agrium is seeking short-term economic advantage and intends to leave others, presumably the CIGGS owners, holding the bag for the expense of conversion and possible expansion.”

Issue is gas

Marathon also noted that Agrium has said it cannot use the gas from Enstar’s pipeline because it needs high-pressure non-odorized gas for the fertilizer plant.

But, Marathon told the commission, the LNG facility, owned by Marathon and ConocoPhillips, is “faced with the same concerns” and has done feasibility studies and identified de-oderization equipment and other facilities “that would enable the LNG plant to take and use low-pressure oderized gas from the APL (Enstar’s Alaska Pipeline) line. Agrium could do the same. Presumably, Agrium does not want to make capital investments at its plant site just before it leaves Alaska. If capital investments are to be made for Agrium’s short-term benefit, Agrium wants the CIGGS owners to make them.”

Capacity also an issue

Marathon said that in recent commercial discussions it has received “preliminary expressions of interest from third parties in shipping gas over CIGGS in volumes that exceed the amount of excess capacity that is presently available to CIGGS.”

If the gathering system were converted to common carriage, Marathon’s and Unocal’s production in Cook Inlet could be curtailed, “impeding their ability to meet their commitments to their customers, including utilities. Common carriage over CIGGS, unless implemented with a priority to capacity for existing shippers, could thus actually reduce the total gas production available to the Cook Inlet gas market as a whole,” Marathon said.

Enstar Natural Gas Co. has petitioned to intervene, telling the commission that it “receives gas from CIGGS for transportation and gas supply. Changes in the way that CIGGS operates may have a substantial impact on Enstar’s ability to obtain and deliver gas.”

Vexatious litigation

“Agrium evidently made a serious business mistake when it purchased the fertilizer plant from Unocal without having adequate commitments for the gas supply needed to run the plant. One of Agrium’s responses to its gas supply problems has been to engage in vexatious litigation in this Commission, filing pleading after pleading against Marathon and its pipelines, in this matter and others, all in the hope of obtaining some short term advantage from this Commission or in the hope that Marathon can somehow be persuaded, coerced, or browbeaten to help solve problems arising out of Agrium’s own business judgments. Marathon is sympathetic to Agrium’s problems, although not to its regulatory tactics.

“Marathon is continuing to sell gas to Agrium when it can, but Marathon cannot solve Agrium’s gas supply problems,” Marathon told the commission.

Aurora wants in on Agrium application, says it has gas stranded on west side of Cook Inlet

Aurora told the commission that most of its 100,000 acres of oil and gas leases are on the west side of Cook Inlet, and, if that acreage is developed, gas could be delivered through the gathering system.

“In the event CIGGS is determined to be or becomes a public utility or a pipeline common carrier, Aurora will wish to be a customer-shipper on that line,” the company said in a Nov. 10 filing.

Aurora notes that Marathon has told the commission it would not be opposed to operating CIGGS as a common carrier if several conditions were met, including the capital costs for converting CIGGS. “Aurora agrees that CIGGS’ owners should be permitted to recover their capital costs, but they have yet to produce documents establishing what those costs would be,” the company said.

Aurora said its Nicolai Creek unit is connected to the Cook Inlet Gas Gathering System with a gathering line, and it delivers gas produced at Nicolai Creek “into CIGGS under a limited number of agreements with CIGGS’ owners Marathon and Unocal.”

But, Aurora said, it does not have “free and open access to CIGGS,” and without that “Nicolai Creek gas is effectively stranded at the whim of Marathon or Unocal, contrary to Marathon’s assertion … that ‘there is no stranded gas on the west side of the Cook Inlet.’”

In October, Aurora said, its deliveries to Northern Eclipse were curtailed, and while “the utility had an ample inventory of LNG on hand and the supply disruption was of short duration,” the impact on Fairbanks Natural Gas — which obtains LNG from Northern Eclipse — “could have been devastating.”

Aurora said Marathon does not “allow Aurora free and open access” to CIGGS, which “inhibits both urgently needed exploration and development of natural gas in Cook Inlet and free competition for the purchase and sale of natural gas in the Cook Inlet area.” Lacking “free and open access” to CIGGS, “Aurora has been unable to sell its Nicolai Creek gas at current market prices,” the company said.

“Aurora also has an existing gathering line physically connected to a short ‘jumper line’ which connects CIGGS to Beluga Pipe Line and delivers gas produced from its Kaloa and Moquawkie Gas Fields,” Aurora said, and wants to deliver gas from Kaloa and Moquawkie into CIGGS, but Marathon has denied Aurora access, “requiring Aurora instead to deliver all of this production through the Beluga Pipe Line” to Aurora’s financial detriment. Aurora noted that, in a separate proceeding, it is protesting the rates charged on the Beluga Pipe Line.

In pressing its desire to intervene, Aurora told the commission: “Insofar as CIGGS’ capacity is or may become limited, Agrium (and every other would-be shipper including Enstar) is potentially adverse to Aurora because all shippers have an obligation to their shareholders to maximize their access to limited throughput capacity at the expense of every other shipper.”