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Enstar rates rise as new gas contract kicks in Unocal contract covers 24 percent of natural gas transmission firm’s supply, cost a 36-month Nymex average Kristen Nelson Petroleum News Editor-in-Chief
Enstar Natural Gas Co., the natural gas distributor in Anchorage and surrounding areas of Southcentral Alaska, has been grappling with Cook Inlet natural gas supply issues for a number of years. A recent average 13 percent rate increase came partly because the company’s newest gas supply contract, with Unocal, is not indexed to the price of crude oil, as are Enstar’s other contracts, but to a 36-month average price of natural gas on the New York Mercantile Exchange.
Enstar’s Chief Executive Officer Tony Izzo told the Anchorage Chamber of Commerce March 1 that in 2000 Enstar did not have enough natural gas under contract to meet the needs of its customers in 2003, and the new type of contract with Unocal was needed to provide enough return to Unocal for the company to discover and develop new natural gas resources.
Companies searching for oil in the 1950s and 1960s discovered so much natural gas in Cook Inlet that industries were established on the Kenai Peninsula south of Anchorage to use the gas: Unocal’s ammonia and urea plant — now owned by Agrium — and the Phillips Petroleum (now ConocoPhillips) and Marathon Oil liquefied natural gas plant.
Enstar, which started distributing natural gas from the Kenai Peninsula in Anchorage in 1961, found in 2000 that the game had changed and that new supplies were needed. And it also found, Izzo said, that the old contract basis, indexing the price it paid for natural gas to oil prices, wasn’t attractive enough to get companies to explore for new gas supplies.
Enstar “learned very early on … that producers are competing for capital on a global market. Their projects here have to match up and compare and get tested against, projects all over the world,” Izzo said, and the test is the return capital earns.
Contracts based on an index to oil prices were not competitive for investment dollars against worldwide opportunities. The new contract needed to be based on natural gas prices. Nymex 36-month average U.S. natural gas prices have been volatile, and Izzo said Enstar negotiated its new supply contract with Unocal based on a 36-month New York Mercantile Exchange average to avoid steep price swings. Even with the increase, it’s a good deal for Enstar customers, Izzo said, citing a recent survey of natural gas distribution companies by the American Gas Association. For the same quantity of natural gas, Enstar customers pay $87, while in New England that quantity costs more than $200, Izzo said, more than $250 in Pittsburgh, Penn., and more than $150 in Seattle, Wash.
In 2004, Enstar has four gas suppliers: Aurora Gas from the Moquawkie field 7 percent; Unocal from the new contract 24 percent; 7 percent from the Beluga field on the west side of Cook Inlet; 62 percent from Marathon. The cliff in the future That Cook Inlet natural gas supply that was so plentiful in the 1960s drops off dramatically in about 10 years. Izzo said when he looks at a chart prepared by the Alaska Division of Oil and Gas of historic and projected gas supply in Cook Inlet he sees a cliff, a steep drop in available natural gas looming in the next decade.
Enstar’s contract with Unocal “has resulted in significant investment and new discoveries,” he said, some 300 to 400 billion cubic feet discovered in exploration by Marathon and Unocal. “We continue to work with producers to ensure the future energy needs are met,” Izzo said. “I don’t think a month goes by that we’re not discussing some type of arrangement, future arrangement, with a producer to supply unmet requirements.”
The federal government is also concerned.
Izzo said he met with U.S. Sen. Ted Stevens of Alaska in late 2002, “and I talked to him about what I characterized as this cliff, this shortfall, and my concern about an economic impact on this community. The last thing we want to see is a situation where we’re managing an economic decline.”
Stevens secured an appropriation of some $500,000 to the Department of Energy’s Arctic Engineering Office at the University of Alaska Fairbanks, and a study was begun in August 2003 “to determine future demand and supply in Cook Inlet and evaluate options.” This isn’t just an Enstar effort, Izzo said. The power utilities, Chugach Electric Association and Municipal Light and Power, also natural gas users, are also involved in the study. DOE study expected out May 1 The Department of Energy study is due out May 1, but based on work to date, 2013 will be a critical year. That is when the natural gas supplies known now in Cook Inlet will have declined to the point where there is only enough natural gas for home heating and utilities, with none to spare for the fertilizer or LNG plants on the Kenai Peninsula.
Izzo said he is not implying that either the fertilizer or LNG plants would be shut down. “I want to see the industrial plants thrive,” he said. “They are the economic engine on the Kenai Peninsula.”
But, he said, if you look at known natural gas supplies, 2013 is “the intersection of home heating and power generation and the amount of gas that’s in the inlet.”
He emphasized that the decline graph does not include either the potential for new discoveries or for expansion of existing reserves, but at Enstar, Izzo said, “these are the kinds of things that we are looking at so that 10 years from now we don’t find ourselves in a situation where we’re surprised.” Need to be proactive now Izzo said that in his opinion, “we are at a critical point regarding energy in Alaska. If we are not proactive now, we will find ourselves facing an economic decline, or managing one, in the near future.”
By Lower 48 standards, Cook Inlet has a good gas supply. The amount of reserve here isn’t typical in the Lower 48, he said, and the reason is economic: “they just go out and spend the money and find it when it’s needed.”
In the short term, he said, preliminary results from the DOE study “show that as early as 2013 declining reserves in Cook Inlet may not be enough to support home heating and power generation, even assuming closure of the plants.”
Izzo said he believes North Slope gas will be needed in Cook Inlet “at some point, but I also think that we have not done everything that can be done in Cook Inlet” to look for more potential gas supplies here: “the best option for us has been and will be Cook Inlet gas,” he said.
Evaluating options is the key, Izzo said: “We don’t have the answers yet, but we want to make sure that we identify what the potential is.” Options include gas storage Options include storage: should “the industry, collectively, look at some type of storage facility so that we can store gas for those cold winter days for peaking purposes?”
And what about non-conventional sources of gas? “What is the real potential for coalbed methane or alternate sources of energy?”
And then there is North Slope gas, Izzo said: “What would we want in terms of access to a North Slope pipeline, if and when — I believe it will be when — that comes through.”
When North Slope gas is available, Izzo said, Enstar would do what it does for Cook Inlet supply, “negotiate for space in the line, contract for a supply.”
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