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ENSTAR, Suppliers Racing the Clock for Contract Approval

South-central Alaska gas distribution utility ENSTAR Natural Gas Co. is seeking expedited state regulatory approval of two contracts that would allow it to avoid a gas supply shortfall as early as Jan. 1.

The deals with ConocoPhillips Alaska Inc. and Marathon Oil Co. are conditioned upon a two-year extension of the federal export license for the liquefied natural gas (LNG) plant on the Kenai Peninsula (see Daily GPI, Jan. 4), which has been sought by the producers and requires U.S. Department of Energy Approval. A provision in the supply contracts would allow the LNG facility to act as a supply backstop to ENSTAR as it requires curtailment of LNG operations if necessary for the producers to meet supply commitments to ENSTAR.

Previously ENSTAR had designated one of its gas suppliers as an "unmet requirements" provider, meaning that supplier would step in to make up any supply shortfall experienced by the utility. As gas deliverability has declined in the Cook Inlet region ENSTAR has been unable to find anyone willing to fulfill the backstop role. "Despite ENSTAR'S best efforts, no supplier would agree to be an unmet requirements provider for any year after 2008," the utility told the Regulatory Commission of Alaska in a filing Friday that seeks approval of the supply contracts.

A previous supply contract with Marathon (APL-5), for which ENSTAR requested commission approval in 2005, was turned down over cost, severance tax and transportation reimbursement provisions. "In the aftermath of APL-5, the process of attracting new suppliers and negotiating new agreements was slow and difficult," the utility said. "ENSTAR moved as quickly as it could to secure new supplies to fill the impending shortfall in 2009 and beyond. These two contracts [with ConocoPhillips and Marathon] are the product of that successful effort. They fill all of ENSTAR's unmet requirements through 2010, but not all of those requirements through 2013."

ENSTAR has been looking at ways to get additional gas supplies into Cook Inlet, spokesman Curtis Thayer told NGI last year (see Daily GPI, Sept. 28, 2007). One longer-term option would be to encourage more development of local reserves. A second would be a spur pipeline off of a larger Lower 48-bound pipeline from Fairbanks to Cook Inlet. And the third option would be a bullet line to bring gas from Alaska's North Slope to Cook Inlet. Alaska lawmakers could receive for consideration a North Slope gasline proposal from TransCanada on May 19 (see Daily GPI, April 10). Also proposed is a joint gasline proposal from BP and ConocoPhillips (see Daily GPI, April 9).

The contracts need to be approved by the commission by Oct. 31 or else they will be terminated. If approved, neither contracting company will be an unmet requirements provider. Rather, ENSTAR's gas demand will be aggregated among all of its suppliers.

"With some minor exceptions, ENSTAR will attempt to purchase gas from all its suppliers on a pro rata basis, reflecting each supplier's and each contract's proportional share of ENSTAR's total projected gas requirements for the year," the company said. "ENSTAR's intent is that variations from forecasted weather and load growth will, generally speaking, be absorbed proportionally by all of the contracts."

Another provision of the contracts up for approval is that they anticipate the utility will develop its own gas storage by 2011 to meet seasonal swings in its demand. "To that end, the contracts have 'tiered' pricing, which reflects the higher value of gas consumed during peak periods," the utility said. "Under this approach, ENSTAR expects to be able in the future to substitute lower-priced gas, drawn from storage, for gas in the higher-priced seasonal and needle peak price tiers..."

For pricing each contract uses its own basket of indexes, which don't include the Henry Hub. "Basket pricing will help protect ratepayers from price volatility, responding to commission concerns...that Alaska ratepayers should not be subjected to market fluctuations caused by natural disasters or other market disruptions that can occur when the contract price is tied to a single geographic point."

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