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RCA OKs Beluga field purchase
The Regulatory Commission of Alaska has approved the purchase by electricity utilities Municipal Light & Power and Chugach Electric Association of ConocoPhillips’ one-third share of the Beluga River gas field on the west side of Cook Inlet.
ML&P, a utility owned by the Municipality of Anchorage, is purchasing 70 percent of ConocoPhillips’ interests in the field, while Chugach Electric is purchasing 30 percent of the interests. ML&P already owns one-third of the field. Hilcorp Alaska, the company that owns the remaining third of the field, will replace ConocoPhillips as field operator.
Following the acquisition, the current producing section of the field, consisting of reservoir rocks down to a depth of 7,000 feet, will be owned 56.67 percent by ML&P, 10 percent by Chugach Electric and 33.33 percent by Hilcorp. The non-producing section of the field, below 7,000 feet, referred to as the deep oil and gas resources leases, will be 80 percent owned by ML&P and 20 percent owned by Chugach Electric.
The utilities want to reduce the cost of the fuel gas they use in their power generation plants by obtaining their own gas at cost from Beluga, rather than buying the gas at market prices. The utilities had asked the commission for expedited consideration of their request for approval of the purchase.
Benefits outweigh costs In an April 21 order agreeing to the purchase, the RCA commissioners said projections of the remaining useful life of the gas field, as analyzed by the two utilities, indicate that the benefits to the utilities’ customers are reasonably likely to outweigh the costs of acquisition of the interests in the field.
“In addition to the gas cost savings that will flow through to ML&P and Chugach’s customers, we are persuaded that the acquisition will provide the utilities and their customers with an increased gas cost stability and enhanced gas supply security, which will qualitatively benefit ML&P and Chugach customers throughout the remaining life of the BRU (Beluga River unit),” the commissioners wrote.
“I want to thank the RCA for their swift consideration and action. I also want to thank Chugach for working with ML&P and the Municipality to generate long-term savings for families and business in the Anchorage bowl,” stated Anchorage Mayor Ethan Berkowitz in response to the commission's approval of the purchase.
“ML&P’s initial investment in the Beluga River gas field has saved our ratepayers over $239 million since 1996,” said ML&P General Manager Mark Johnston on April 21. “Today’s ruling ensures long-term financial benefits to Anchorage businesses and families.”
“Chugach is grateful to the RCA commissioners and staff for the time and attention they have given this matter, and the quick turnaround of the final decision,” said Brad Evans, Chugach CEO. “This partnership will allow us to secure low-cost and reliable supplies of natural gas for the benefit of ratepayers. This is an important ruling that will have benefits for all of our customers.”
Cost $152 million The commission’s order says that the total purchase price for the Beluga field assets is $152 million, with ML&P paying $106.4 million and Chugach Electric paying $45.6 million. However, the commissioners have allowed the utilities to maintain the confidentiality of the complete purchase and sales agreement with ConocoPhillips. The utilities had argued that some of the content of the full agreement could compromise ConocoPhillips’ current and future ability to negotiate oil and gas asset transactions.
ML&P has said that it is going to fund its share of the purchase with funds accumulated from the utility’s past Beluga gas sales and some other fund sources. Chugach Electric plans to use commercial paper for initial funding, before entering into a long-term debt financing arrangement.
Due diligence As part of their due diligence for the purchase, the utilities commissioned Petrotechnical Resources of Alaska and Ryder Scott to conduct reserves estimates for the fields, with PRA preparing future production forecasts. PRA reported likely total future gas production from the acquired gas field interests, based on proven reserves, to be 90 billion cubic feet through to 2033.
Consultancy firm National Economic Research Associates prepared an economic evaluation of the purchase, finding that a base case for the deal would likely result in revenue savings through 2033 of $108 million for ML&P customers and $31 million for Chugach Electric customers. Those savings translate to a net present value savings of $57 million for ML&P and rate reductions of 3.5 percent to 4 percent for ML&P’s customers. Chugach Electric would see a net present value savings of $26 million, a figure that would increase to $33 million if Chugach Electric qualifies for state small producer tax credits. In a filing with the commission, Chugach Electric has said that it needs to complete the Beluga purchase, with commission approval, before May 1, in order to be able to qualify for the tax credits.
Supply stability In addition to gas cost savings and corresponding reductions in electricity rates for their customers, the utilities have argued that the Beluga gas field deal will improve their gas cost stability and help assure their security of gas supply - for at least some portion of the utilities’ gas needs it will no longer be necessary to periodically negotiate new gas supply agreements and then seek commission approval for those agreements. The utilities say that they will also benefit from seats at the table in future investment and management decisions for the Beluga gas field.
The commissioners have approved an agreement between the utilities and certain federal agencies with offices within the service area of the two power utilities. The agreement requires ML&P to make certain filings in connection with incorporating its Beluga gas supplies into its rate structure, and states that commission approval of the Beluga deal will not set a precedent for future ratemaking or the use of gas sales funds.
Gas market impacts One of the more curious aspects of the Beluga gas field deal arises from the fact that ConocoPhillips has a gas supply agreement with Southcentral gas utility Enstar Natural Gas Co. With the transfer of ConocoPhillips’ interests, two power utilities will end up supplying Enstar with some of its gas. Enstar has told the commission that it is comfortable with the new gas supply arrangements but that it is concerned about the impact of the Beluga field deal on the Cook Inlet gas market - some gas producers struggle to find markets for their gas. ML&P and Chugach Electric have argued that, from a gas supply and demand perspective, their Beluga field acquisition can be viewed in the same light as a regular gas supply agreement and that the utilities still have significant unmet gas needs.
The state attorney general questioned the risks and benefits of field ownership versus contracted gas supplies, and also questioned the financial arrangement for the dismantlement of the field infrastructure when the field reaches the end of its useful life. ML&P commented that the commission would have the authority to monitor the utilities’ provisions for field dismantlement and restoration.
A disagreement In a partially dissenting opinion, Commissioner Stephen McAlpine issued a statement saying that, while he concurs with the approval of the purchase of the Beluga field assets, he takes issue with some aspects of the manner in which the utilities sought that approval. McAlpine questioned why the utilities waited until March 11 before filing their approval request and then requested expedited processing of the request.
“I would hope that the parties did not withhold the filing until March in order to minimize the opportunity that this commission and others might develop evidence of a contrary nature,” McAlpine wrote.
McAlpine also took issue with keeping the details of the purchase and sales agreement confidential, saying that he had seen nothing in the agreement that warranted confidentiality. He also questioned the concept of a utility taking advantage of state oil and gas credits for a reason that appeared different from the intended purpose of the credits.
- ALAN BAILEY
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