Enstar, Unocal gas contract up before RCA

Marathon, Phillips, Chevron, Aurora object to agreement

Kristen Nelson

PNA Editor-in-Chief

A gas supply contract that Enstar Natural Gas Co. subsidiary Alaska Pipeline Co. signed with Unocal last year is being protested by other Cook Inlet gas suppliers.

After receiving objections, and at the recommendation of its own staff, the Regulatory Commission of Alaska suspended the agreement Jan. 18 pending a hearing to allow Enstar to show that provisions of the proposed contract are in the public interest, that a reasonably competitive procurement process was undertaken and to explain the impacts on long-term regional gas supplies.

The RCA’s Public Advocacy Section will be a party to the hearing and a hearing examiner, Paul Olson, has been named.

Enstar told the RCA in a Dec. 12 letter that the contract provides that Unocal will supply Enstar’s gas requirements beyond existing contract levels for 2004 and 2005 (beginning perhaps as early as 2003) and said Unocal has committed to spend at least $10 million exploring for new gas over the next two years.

Enstar said it has been discussing gas supply needs with Cook Inlet producers for several years and while it has had offers to accelerate delivery of gas already committed to it, the company said it “believes that it is better to meet its requirements with additional gas dedicated to it.”

Enstar told the RCA it believes the contract provides the necessary financial incentive for gas exploration in Cook Inlet. The contract price for new gas would be based on Henry Hub prices, with a floor of $2.75 a thousand cubic feet. 2000 gas contracts, based on 1999 oil prices, were about $1.60 an Mcf; the 2001 price has risen to $2.36 an Mcf.

Other suppliers object

Marathon objected to the contract on a number of grounds: that it contains no firm requirement for Unocal to sell any gas to Enstar; that it could drive up the cost of gas to ratepayers if Unocal chooses to deliver gas; that it threatens the spot market and Enstar’s competition in the retail market; that it would destroy the exploration and production programs of other producers; and that it would prevent Alaska Pipeline Co. from pursuing alternative gas supplies.

Phillips Alaska Inc. said it supports Enstar’s attempts to spur additional exploration for natural gas reserves, but objects to the Unocal contract because it “has no definitive term, volume, nor even a definite geographical limitation for Unocal’s supply” and would place Unocal in “a gas broker position” making Unocal “the sole supplier for all of Enstar’s future unmet requirements.”

Uncommitted reserves available

Chevron U.S.A. Inc. told the commission it appreciated Enstar’s effort to stimulate oil and gas exploration, but said the contract would essentially lock out all other competitors from future demand in the primary market for Cook Inlet gas, thus reducing competition and limiting exploration activities. Without access to markets, Chevron said, other companies would hesitate to invest in exploration.

The contract could even result in less competition at future Cook Inlet state and federal oil and gas lease sales.

Aurora Power Resources Inc. said it “is strongly opposed to Enstar’s entering into yet another ‘requirements’ contract. If this contract is approved, the largest potential market for natural gas will be completely closed to any other would-be sellers for a minimum period of time extending through year 2005, and possibly longer.”

Aurora said it has not been successful to date in convincing Enstar “that small producers and small fields should be part of Enstar’s long term supply strategy” and said Aurora has modest uncommitted reserves which it would be willing to sell at much less than the price contemplated in the Unocal agreement.