The state of Alaska is seeking pricing protections for natural gas consumers in the Southcentral region through a consent decree filed to “resolve competitive concerns” with Hilcorp Alaska LLC’s acquisition of Cook Inlet assets from Marathon Oil Co.

The key feature of the proposed consent decree is a cap on the price of gas sold to local utilities and industrial users for the next five years. The decree also would prevent Hilcorp from selling gas for liquefied natural gas (LNG) export until all local needs are met.

Alaska Attorney General Michael C. Geraghty said the consent decree, filed in Alaska Superior Court, would provide price protections over a five-year period while encouraging investment in exploration and development of Cook Inlet natural gas resources.

“Hilcorp is well known in the oil and gas industry as an active developer in mature oil and gas basins such as Cook Inlet,” Geraghty said. “It plans to spend approximately $300 million over the next two years on new Cook Inlet development in addition to the more than $200 million Hilcorp spent in 2012 alone. This settlement allows Hilcorp to keep investing in Cook Inlet while still protecting consumers.”

Alaska’s Southcentral region has faced gas supply worries in recent years as Cook Inlet production has declined while the state has struggled to commercialize its North Slope gas reserves. The most recent concept to commercialize North Slope gas, LNG export to Asian markets, includes delivering gas to Southcentral (see Daily GPI, Oct. 5).

“Without increased exploration and production of Cook Inlet natural gas, there is a risk that existing supplies of natural gas might be insufficient to meet projected demand for Cook inlet natural gas in the future; increased exploration and production of Cook Inlet natural gas is the most time[ly] and cost-efficient option for addressing this issue…” the state said in the consent decree.

Price caps would not affect existing contracts. Assuming closing of the Hilcorp-Marathon deal, all available uncommitted gas sold during the five-year term after Jan. 1 would be subject to escalating price caps. The base gas price cap in 2013 would be $6.60/Mcf, and it would climb to $7.72/Mcf in 2017. The consent decree also provides for a swing gas cap that would be 125% of the effective base gas cap, and an emergency gas cap that would be 150% of the effective base gas cap.

In April Marathon Oil agreed to sell nearly all of its natural gas properties in the state for an undisclosed sum to a unit of Hilcorp (see Daily GPI, April 11). The sale included an estimated 17 million boe net of proved reserves in 10 fields in which Marathon holds interests in the Cook Inlet. Gas operations include the McArthur River, Ninilchik, Cannery Loop and Kenai Gas units, as well as Beaver Creek, which is an oil and gas development within the Kenai National Wildlife Refuge. The sales package also includes natural gas storage and gas pipeline transmission systems.

Last month, when the Regulatory Commission of Alaska held a meeting to review gas supplies available to Cook Inlet area utilities, several said supply negotiations with Hilcorp had been complicated by a Federal Trade Commission review of the Hilcorp-Marathon deal, according to press reports. If the deal goes through, Hilcorp would be the area’s largest gas supplier. ConocoPhillips is the other dominant gas producer in the Cook Inlet.

Comments on the proposed settlement can be submitted to the Alaska Superior Court for 60 days following the filing of the consent decree. Following the comment period, the Superior Court will hold a hearing to determine whether to approve or reject the consent decree.

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