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Alaska's Enstar, Producers Ordered to Cap Gas Price

November 10, 2008
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Officials at Alaska's Enstar Natural Gas Co. must go back to the negotiating table with producers ConocoPhillips and Marathon Oil to hammer out gas pricing terms more favorable to consumers in the state's Southcentral region, state regulators ruled.

The Regulatory Commission of Alaska said last week it is not satisfied with the terms of Enstar's gas supply agreements with the producers and wants to cap the price that Enstar pays them for gas. Such a cap would be indexed to price movements in Canada and the Lower 48 states. The commission's order involves only about 5% of the total amount of gas Enstar purchases for its customers. The two deals with the producers are for deliveries beginning in 2009 and continuing through 2013. Combined the deals represent supply of 37.8 Bcf.

The commission said it believes the Cook Inlet producers have too much power over the price of the gas; state and federal officials should have better protected area gas ratepayers in the deal; and Cook Inlet gas consumers need to be protected from the market power it believes the producers have over Enstar.

Earlier this year the U.S. Department of Energy approved the extension of a liquefied natural gas (LNG) export license for the producers, which export LNG from a terminal on the Kenai peninsula (see NGI, June 9). In exchange for the extension, the producers agreed to produce more gas in the Cook Inlet area for local consumption by the customers of Enstar and others (see NGI, Jan. 7).

"We find that the producers of natural gas in Cook Inlet have the ability to exercise market power and were able to do so in their negotiations with local buyers of natural gas," the commission said in its order approving the gas sales agreements with amendments. "Market power arises from the particular circumstances of supply and demand in Cook Inlet. Producers own the liquefied natural gas plant and are themselves the alternative buyers of the gas. Relatively inelastic consumer demand for natural gas, particularly when combined with tightening supply, allows producers to more easily force prices higher. Absent the unequivocal need on the part of Enstar consumers for natural gas in the wintertime, producers would not have market power and there would be much less need for regulatory intervention."

Enstar spokesman Curtis Thayer would not comment on the order but said the company's lawyers are evaluating it and are at the beginning of the process under which they will negotiate the commission-mandated pricing agreements with the producers.

Enstar, which delivers gas to about 327,000 customers, had previously warned that it may have to begin importing LNG to meet demand because of declining gas output from the Cook Inlet Fields. The supply agreements between Enstar and the producers filled the supply shortfall.

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