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IGU approves Hilcorp gas contract, providing up to 11 years of supply
Alan Bailey for Petroleum News
During its Jan. 19 meeting the board of the Interior Gas Utility approved a new gas supply contract with Hilcorp Alaska. Hilcorp produces gas from multiple fields around the Cook Inlet. IGU’s current supply contract, also with Hilcorp, expires on March 31. Although the initial term of the new contract is five years, there are options to extend the contract by two further three-year terms, thus making it possible to have the contract run for up to 11 years.
Before deciding on the Hilcorp contract, IGU and its gas supply consultant, Mary Ann Pease, had made contact with every gas supplier in the Cook Inlet region, evaluating among other things supply redundancy, achieved through the operation of multiple fields and wells, through backup sources of supply, and through records of service to other utilities, Dan Britton, IGU general manager, told the board.
Gas pricing Gas pricing in the first year of the Hilcorp contract begins at $7.60 per mcf, a price slightly below that of IGU’s current Hilcorp contract, but a little above Hilcorp’s pricing levels for utilities in the Cook Inlet region. The price increases to $7.91 in year five of the contract.
Britton told the board that the contract’s pricing levels reflect IGU’s relatively small size compared with other utilities, and the fact that Hilcorp is accepting a seasonal swing in IGU’s gas demand. Other Hilcorp contracts include peaking services involving additional fees, Britton said. Hilcorp has agreed to start the new gas pricing on Jan. 1, 2021, if the IGU board approves the new contract.
There was a lengthy board discussion regarding the contract, the suitability of its terms and the appropriateness of the gas pricing. The discussion included a defeated motion to hold a separate work session to discuss the contract in detail - apparently the terms of the contract had previously been discussed in executive session. Ultimately a motion to approve the contract was passed on a five to two vote.
Gas supply chain SIGU obtains its gas through its Titan LNG plant on Cook Inlet near Point MacKenzie. Hilcorp supplies gas to the plant through Enstar Natural Gas Co.’s gas pipeline network. The LNG is transported to Fairbanks by road trailer for storage in IGU’s LNG storage tanks. At the end of last year the utility completed a new 5.25 million gallon tank in central Fairbanks, and the utility is nearing completion of the installation of storage tanks at North Pole.
The Hilcorp contract involves the availability of gas from multiple gas fields through five separate delivery points into Enstar’s system, for shipment to the Titan plant, Britton said. Britton also commented that part of the process for establishing continuing gas supplies involved investigating possible sources of LNG, other than the Titan plant.
Expanding gas usage A key IGU objective is to expand the utility’s customer base in the Fairbanks region, in part to help address severe winter air pollution in the region - the intent is to persuade people to convert to the use of natural gas rather than fuel oil or wood stoves for heating buildings.
The utility has been planning to expand the Titan plant, to support an increasing number of customers. However, a decision on this expansion has been placed on hold, because of uncertainty over future gas demand as a consequence of the impact of the COVID-19 pandemic on the price of fuel oil. However, IGU does plan to increase its customer base through its ability to store more LNG, using its expanded Fairbanks storage tank capacity.
And, so, the utility needs a gas feedstock supply arrangement that, on the one hand, ensures reliable supplies for customers while, on the other hand, enables some level of supply flexibility to meet uncertain future demand expansion.
Price predictability Britton emphasized to the board the ability of the new contract to meet these IGU needs by providing predictable pricing well into the future, coupled with flexible supply levels.
“We know what the cost of gas will be for the next 11 years,” Britton said. “The need for this contract fits well within our mission. We have in excess of 1,400 customers today and we have a commitment to provide them with a secure firm gas supply contract.”
By comparison, the cost of heating oil is highly unpredictable, even just weeks into the future, Britton commented.
Supply flexibility In terms of supply flexibility, the new contract only requires Hilcorp to commit to a minimum purchase of 833 million cubic feet per year of gas for the initial five-year term of the contract. That volume corresponds to the level of IGU’s current gas sales. The maximum committed by Hilcorp for potential supply amounts to 5 million cubic feet per day, or 1,825 million cubic feet for the year, the maximum production capacity of the existing Titan plant. In addition, should IGU decide to move ahead with the Titan expansion, the utility can give Hilcorp 18 months’ notice to increase the daily supply maximum to up to 15 million cubic feet.
The resulting level of certainty over the availability of expanded gas supplies will be become particularly important if IGU seeks bonding for the financing of the Titan expansion, Britton pointed out.
On the other hand, for a fee of $145,775 per year, IGU can opt to reduce the minimum contracted supply volumes by up to 30%, should some other cheaper gas supply become available, Britton said. And, as with other utility gas supply contracts in the Cook Inlet region, IGU would receive a pro rata share of Hilcorp gas, should there be some unanticipated constraint on gas supplies.
“I’m pleased with the contract and the flexibility it provides us, and the opportunity to continue to look for additional supplies, and the potential opportunities for savings in the future,” Britton said. “It provides the utility with a substantial security of supply … and predictability for the next 11 years.”
- ALAN BAILEY
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