Enstar Natural Gas Co., in a Nov. 14 letter to the Regulatory Commission of Alaska, has requested a second amendment to its natural gas sales agreement dated Feb. 26, 2016, with beleaguered Cook Inlet producer Furie Operating Alaska LLC.
Furie produces gas from a platform in the inlet offshore the town of Nikiski.
“The second amendment reflects the parties’ agreement that Furie does not have sufficient quantities of firm gas produced at Kitchen Lights unit to meet existing commitments,” Enstar said.
To accommodate Furie’s reduced production capacity, the second amendment reduces the firm annual contract quantity, ACQ, during contract years two and three and provides a contemplated annual contact quantity, ACQ, for the extended term.
The GSA, by and between Alaska Pipeline Co. and Furie, was initially approved by the commission Apr. 25, 2016. On Oct. 31, 2017, the commission approved an amendment to the agreement. Historically, the commission has regulated Enstar and Alaska Pipeline Co. as a single entity.
Due to production challenges, Furie asserted a Force Majeure event on Jan. 23, 2019, during which it has been unable to meet certain contractual requirements, the parties said in the amendment, adding that Enstar is investigating the validity of the Force Majeure event.
Both parties acknowledge “terminating the GSA could negatively affect the competitiveness of an already illiquid Cook Inlet market.”
Furie will not have quantities of firm gas available until Jan. 1, 2020, but wishes to deliver interruptible discretionary gas starting on the second amendment effective date.
In the event regulatory approval is not obtained, “the Parties agree that this failure shall constitute a termination event to which no cure period shall apply and no further actions are required to terminate the agreement.”
Firm annual contract quantity slashedIn year two of the GSA, beginning April 1, 2019, the second amendment slashes the firm annual contract quantity of gas from 6.194 billion cubic feet to 1.138 bcf. In year three, the ACQ will drop from an original 6.194 bcf to an amended 3.650 bcf.
In contract years four and five, the ACQ would be 3.103 bcf, and 2.373 bcf, respectively.
The amendment also eliminates seasonal adjustments of gas deliveries as outlined in the original GSA, in favor of a flat, firm daily contract quantity.
With the second amendment, Furie and Enstar added an option to purchase additional gas on an interruptible basis, referred to as discretionary gas. The amendment establishes ceiling prices for discretionary gas at not to exceed $9.47 per thousand cubic feet in year two, stepping up to a maximum of $10.05 per mcf in year five.
The firm gas volume price is set at $6.30 per mcf in year one, stepping up to $6.85 per mcf in contract year five, which begins April 1, 2022.
The second amendment also modifies the date by which Enstar is required to exercise its option to extend the GSA - from April 1, 2018, to April 1, 2020.
Comments on the filing are due at the commission's office in Anchorage on Dec. 18.
Force Majeure event under scrutinyIn January 2019, Furie experienced freezing issues that caused blockages in its pipelines, Enstar said in its letter to the RCA.
Furie stopped deliveries of gas under the GSA on Jan. 24.
“In a letter dated January 23, 2019, Enstar received notice from Furie purporting to declare a ‘Force Majeure event’ under Section 11.1(b) of the GSA,” Enstar said. “Furie has been unable to meet certain contractual requirements due to production challenges as asserted in their declared Force Majeure event.”
On Feb 11, Enstar issued a formal default notice to Furie under the terms of the GSA.
“Enstar continues to investigate the validity of the Force Majeure event and will continue to notify the RCA of any new material developments,” Enstar said.
On April 25, Furie notified Enstar that its Force Majeure event had concluded.
“During the alleged Force Majeure event, Enstar met customers’ needs through additional withdrawals of gas from its storage inventory in Cook Inlet Natural Gas Storage Alaska, LLC (‘CINGSA’) and short-term gas purchases,” Enstar said. “While Enstar contemplated terminating the agreement, both Enstar and Furie recognized that terminating the GSA could negatively affect competitiveness in the Cook Inlet gas market.”
The GSA was amended to postpone the deadline for Furie to deliver the reserves report, engineers opinion letter, and “Statement of Seller’s Available Gas Reserves for Contract Year beginning April 1, 2019 to October 31, 2019,” Enstar said. “Due to the purported Force Majeure event, Furie has alleged that it was not able to prepare the required documents by the original deadline of April 1, 2019.”
Furie bankruptcyOn Aug. 9, 2019, Furie voluntarily petitioned for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.
Enstar said it is closely following the bankruptcy proceedings.
On Nov. 1, the debtors (Furie, Corsair LLC and Cornucopia Oil and Gas LLC) designated the GSA and subsequent amendments as an executory contract that the debtors “will potentially assume and assign in connection with a Sale on the Amended Notice of Assumption and Assignment of Executory Contracts or Unexpired Leases and Cure Amount,” Enstar said. “The designation of the GSA as an executory contract gives Enstar a level of assurance that the volumes contemplated under the Second Amendment will be delivered.”
The bankruptcy court issued an order regarding bid procedures on Sept. 26, 2019. On Nov. 1, the debtors filed an Amended Notice of Sale, under which the deadline to object to any sale was extended from Nov. 15 to Dec. 10.
Enstar said that since entering into the second amendment, it has sought an appropriate time to file it with the commission.
“Enstar has been aware of the possibility of bankruptcy proceedings for some time, and hoped to file the amendment after the bankruptcy proceedings were complete and after the ultimate ownership of Furie Operating Alaska, LLC had been settled,” Enstar said. “However, Enstar is filing it now to allow the Commission time to review the Second Amendment prior to the January 1, 2020 date for firm deliveries to resume. Enstar will advise the commission if the Furie GSA is assigned to a different entity as a result of the bankruptcy.”