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RCA conditionally approves Unocal-Enstar gas sales agreement
Kristen Nelson PNA Editor-in-Chief
The Regulatory Commission of Alaska has conditionally approved a natural gas sales agreement between Unocal and Enstar Natural Gas Co. — an agreement which pegs the price of Cook Inlet natural gas to Henry Hub futures prices.
The RCA said that Enstar and Unocal characterize the gas sales agreement as an “exploration contract” because focus is on exploration for new gas sources to meet Enstar's needs. While Unocal is confident new gas will be discovered, the commission said, “the fields are likely to be small and the cost of production and transporting the gas to market will be high.”
In an Oct. 25 decision the RCA said it was conditioning its approval by limiting the term of the agreement to delivery of 450 billion cubic feet, limiting Unocal's ability to sell third party gas to 15 percent of the annual gas volume sole and providing Enstar with a first right of refusal to purchase non-economic gas before Unocal may sell non-economic gas to other parties.
Parties opposing the gas sales agreement told the RCA that it shifts the risk for future Cook Inlet gas exploration to Enstar ratepayers. The RCA said that, while it understands the concern, it finds “that Enstar has identified its future requirements and developed a credible compendium of gas supply contracts to meet those requirements.”
The RCA said it was satisfied that negotiations were at arms-length, and that, with the modifications included in the order, the agreement is in the public interest.
Price based on Henry Hub futures The price in the gas sales contract will be determined annually by using a 36-month daily average of the Henry Hub natural gas futures and a floor price of $2.75 per thousand cubic feet adjusted for one-half of the inflation rate after 2002.
“Exploration is needed in order to ensure an adequate supply of gas for Enstar ratepayers,” the RCA said. “The risk associated with exploration must be compensated or exploration will go elsewhere.”
The commission said it weighed “the risk that Enstar will not have an adequate natural gas supply in the future against a higher exploration price” and is persuaded that Enstar must pay a competitive price to attract capital and encourage exploration in Cook Inlet.
Peaking fee part of contract On any day when Unocal supplies more than its pro rata share of maximum deliverability, Enstar must pay Unocal a peaking rate of $1 per thousand cubic feet in addition to the price for the excess. Unocal and Enstar have told the RCA that they estimate peaking fees will not exceed $10,000 a year.
Peaking gas covers times when Enstar's suppliers do not supply all the gas that Enstar customers need on a particular day and allows Enstar to get that gas from Unocal, at a premium because of additional costs Unocal bears to produce and deliver it. RCA said that when a particular shipper does not supply its committed gas to Enstar, the peaking fee will be passed back to that shipper.
Peaking gas also covers times when the demand for gas is greater than normal due to extremely cold temperatures. Enstar can then get additional gas from Unocal and that peaking fee would be passed on to the ratepayer through Enstar's gas cost adjustment.
Other charges Enstar will reimburse Unocal for RCA-approved tariff charges up to $1 per thousand cubic feet on pipelines constructed after the effective date of the contract. The parties must agree to any reimbursement in excess of $1 per Mcf.
The commission said that its Public Advocacy Section argued that such capital expenditures should be paid for by Enstar stockholders, not Enstar ratepayers. But the commission found no reason to interfere with this portion of the agreement.
It said that if new gas is discovered, new pipelines may need to be built. The cost of construction and operation of pipelines are covered in tariffed rates and new pipeline transportation costs are capped at $1 per Mcf.
Since the commission must approve the tariff before these costs may be passed through to ratepayers, it has an opportunity to determine if the rates are just and reasonable.
Changes to agreement On the issue of the length of the gas sales agreement, the commission said that while having the agreement open ended might encourage exploration, it also bound Enstar and Enstar ratepayers indefinitely. Unocal testified that a volume of 450 billion cubic feet created sufficient incentive to explore, so the commission limited the agreement to delivery of 450 bcf — preserving the exploration incentive and also providing the commission the opportunity to review whether continuation of the agreement is in the public interest.
The Public Advocacy Section also argued that the agreement would allow Unocal to purchase gas from other sources and sell it to Enstar at the higher Henry Hub futures contract price. Unocal argued that this possibility is unlikely because the Cook Inlet basin is old, fields are producing on a flat or declining basis and do not have the swing capabilities to meet Enstar's needs.
But, Unocal told the commission, “it should not be prevented from buying third party gas to meet Enstar's unmet requirements.” Unocal said it envisioned a situation where it would take gas from flat or declining fields or from a one-well producer, inject it into storage and then produce it at a rate that would match Enstar's needs. Unocal would be increasing the value of the gas through storage and it could then be used to meet Enstar's needs.
“Although Unocal believes a prohibition against purchasing third-party gas would strand a lot of gas that could be used by consumers,” the commission said, “limiting its ability to sell gas to 15 percent of the total annual gas volume sold would not affect its ability to insure certain supply.”
The third change the commission made in the agreement was to give Enstar the first right of refusal of non-economic gas. If Unocal and an independent engineer agree that gas production will not be economic, Unocal's obligation to produce, deliver and sell gas will be suspended as long as production is not expected to be economic.
The commission said it understands that exploration and production of new gas at the contract price may not be economic, and does not find the uneconomic clause to be unreasonable, but ordered that “before Unocal sells gas to third parties under this provision, Enstar should have a right of first refusal to purchase the gas at a flatter swing rate.”
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