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Securing Gas Supplies Vexing Alaska Utilities

Alaska's ENSTAR Natural Gas Co. is resorting to a previously unused tariff provision to secure gas supplies to cover what would be a 2.1 Bcf shortfall this year and a potential 9 Bcf shortfall in 2010. Meanwhile, contract talks between Anchorage-based Chugach Electric Association, the state's largest electric utility, and a trio of Cook Inlet gas producers are at a stalemate over how supplies should be priced.

ENSTAR is about to make its fourth try at a long-term contract with area producers -- Marathon Oil, ConocoPhillips and Chevron -- after previous deals were rejected by regulators as too costly (see NGI, Nov. 10, 2008). For now, ENSTAR is buying gas based on its weighted average cost of gas, something it can do for now as it has multiple contracts. But come 2011, the only contract remaining will be with Chevron, ENSTAR spokesman Curtis Thayer told NGI. "It's the first time we've ever used that provision, and we anticipate we can use that provision in 2010," Thayer said. "During that time we're going to go back with the producers to negotiate a contract that the regulatory commission will accept."

Chugach, which is facing a greater supply shortfall than ENSTAR, has further to go to get to a supply deal.

"Chugach has four gas supply contracts that have been in place for the last 20 years, and those prices are based on volume, so when we use up the volume they'll be expired, and we expect that to happen in mid-2010 for the supplier who supplies 50% and in the first quarter of 2011 for the other three suppliers. We'll be with no gas at all at that point," the utility's director of energy resources, Suzanne Gibson, told NGI. "We've been negotiating with the the three producers in the Cook Inlet since the end of 2004...We don't have any contracts and we don't have any hope of a contract at this point."

Gibson noted that the U.S. Geological Survey believes that there is 17 Tcf of gas in Cook Inlet waiting to be produced. She said the gas Chugach buys should be indexed to production-area prices in the Lower 48 states, not market-area or citygate prices.

"For 40 years we've been exporting natural gas from Cook Inlet [via the nation's only LNG export terminal] and we continue to do so at this time. And as long as we do that we should be paying production basin pricing," Gibson said. "We're happy to put together some sort of a basket of indices based off Lower 48 production areas and pay that price. We'd even be willing to pay a premium for swing gas. We think that's reasonable, fair and equitable in a market that has no market."

In the case of ENSTAR, regulators first rejected a contract based on a 12-month trailing average of Henry Hub prices, "which ironically would be our lowest-priced gas in any of our portfolio today," Thayer said. The utility and its would-be suppliers went back to regulators with two contracts based on composites of three and five Lower 48 indexes. "That was actually recommended by the state attorney general," Thayer said. However, it was rejected. Regulators called for a contract indexed to producing basin prices. That idea was rejected by the producers, Thayer said.

In the short term, ENSTAR is working to strike a long-term contract with its suppliers. Longer term, the utility is a proponent of a bullet pipeline from the southern part of Alaska's North Slope down to Anchorage via Fairbanks. Preliminary spending on the project should reach about $15 million this year, Thayer said. Updated estimates for the entire project should be available in March. Currently the project is pegged at about $3.3 billion by ENSTAR. "We have not found any show-stoppers," Thayer said of the bullet line proposal, which now is merely known as the ENSTAR line.

Gibson, however, called it a "pipe dream" and said it doesn't makes sense to spend billions on a pipeline that would connect two producing basins -- the North Slope and Cook Inlet. Rather than shipping North Slope gas to Cook Inlet, Gibson said Cook Inlet producers should produce and sell their gas locally at prices reflective of other producing areas. Gas exports via the Kenai Peninsula LNG terminal are fine, she said, as long as local needs are met. Chugach is appealing in Ninth Circuit Court the recent extension of the LNG facility's export license to that end.

In September Sen. Ron Wyden (D-OR) sought revocation of the export license extension, saying the U.S. Department of Energy failed to meet the public interest test required by the Natural Gas Act and rejected requests by Chugach that DOE "condition the export of Alaskan gas on assurances that Alaska's own need for natural gas was met" (see NGI, Sept. 15, 2008).

"We're in a difficult situation because Alaska is not connected to any other resource basin, so what we have here is what we have," Gibson said. "The needs of Alaskans should be given consideration, particularly in light of the fact that we're home to the only export facility in the nation. And there's a reason why you have to have a license [to export]. It's not to make sure that it's economical or profitable. It's to make sure that you're not sending off a resource that the population depends upon and then being held hostage to a group of producers who know that you depend on them. That's what's going on up here. There's no market. There's only three. There's only three."

ConocoPhillips said it could not comment on its negotiations with Chugach except to say that they are ongoing. Marathon did not provide a response by press time.

The export license for the Kenai LNG terminal was recently extended by two years (see NGI, June 9, 2008). With the extension, which lasts from April 1, 2009 until March 31, 2011, ConocoPhillips and Marathon may export up to 98 Bcf. The terminal owners filed for the extension in January 2007 (see NGI, Jan. 22, 2007). The companies struck an agreement with the state a year later to secure its support of a license extension (see NGI, Jan. 7, 2008). The extension allows for exports to Japan and other countries on either side of the Pacific Rim.

In support of the license extension, Alaska Gov. Sarah Palin said the agreement with the producers ensured that there would be adequate supplies of gas for local utilities. It also requires the owners to develop additional gas reserves in Cook Inlet and allows third parties the opportunity to monetize gas production through the LNG plant. Marathon and ConocoPhillips also agreed to sell Cook Inlet seismic and well data to third parties. "This extension will secure a future for the LNG operation and is another step toward ensuring energy supplies and energy security for Alaska," Palin said.

The presence of gas in Alaska is not in dispute, but it will take contracts to secure supplies for ENSTAR and Chugach. Contracts also will be needed to support a gasline to the Lower 48, a project Palin has made the No. 1 goal of her administration.

TransCanada Alaska LLC has the state concession to build the gasline, along with millions in seed money and federal loan guarantees (see NGI, Dec. 22, 2008). Producers ConocoPhillips and BP are backing a competing project known as Denali (see NGI, Aug. 11, 2008). Gibson said that like most Alaskans, she hopes the two projects will "marry up" and a Lower 48 pipeline will actually get built.

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