Australia's Buccaneer Energy Ltd. has struck a deal with Alaska utility Enstar Natural Gas Co. to supply it with gas from the state's Cook Inlet. The gas will serve customers in gas-hungry Southcentral Alaska, where Enstar supplies the vast majority of residential and commercial customers.
The Buccaneer agreement is with Alaska Pipeline Co. (APC) and Enstar, both subsidiaries of Semco Energy Inc. The contract is awaiting approval of the Regulatory Commission of Alaska. With approval, pipeline and facilities construction will begin and is expected to be completed in December with gas sales to follow.
Enstar's commitment to acquire gas at contract rates begins when the Cook Inlet Natural Gas Storage facility (CINGSA) is completed, which is expected on April 1, 2012 (see NGI, Sept. 6, 2010). Prior to contract sales, Buccaneer said it expects to sell gas on a nonfirm basis in a daily auction for peaking demand requirements in the December 2011-March 2012 period.
"This gas contract represents the first such contract executed by Enstar to supply their reserve capacity in the new CINGSA facility. Importantly, it provides Buccaneer with cash flow certainty in the near term, which will underpin the development of the Kenai Loop field," said Buccaneer Director Dean Gallegos.
A study two years ago found that although Cook Inlet reserves were winding down, there was still about 20% of the original capacity left. The most accessible gas has been produced, according to the study, and the remaining gas may carry an increased cost (see NGI, Jan. 4, 2010). However, a more recent report released earlier this year from the U.S. Geological Survey (USGS) said the amount of undiscovered, technically recoverable gas in the Cook Inlet region is "significantly more" than what was thought 16 years ago (see NGI, July 4).
To make up for current shortfalls in production from the Cook Inlet, a group of utilities is proposing to import liquefied natural gas (LNG). Additionally, plans to truck LNG from the state's North Slope also are under way (see NGI, Aug. 15), and an in-state gasline also is being pursued (see NGI, Aug. 8).
Enstar spokesman John Sims said the Buccaneer contract is a sign that things are looking up in the Cook Inlet, thanks in part to drilling incentives passed by Alaska lawmakers during their last session. However, Enstar is still in talks with several parties for an LNG supply solution and still supports a pipeline from the North Slope.
"It [the Buccaneer contract] shows that there's still interest in Cook Inlet, which is a big thing. We've seen a slowdown in activity..." Sims told NGI.
Buccaneer CEO Curtis Burton noted the recent USGS findings and told NGI that "as the political environment has evolved, finding and producing that natural gas becomes ultimately possible. Under the right set of circumstances, the Cook Inlet could provide enough gas to handle the local market and could potentially become a major exporter."
While Burton is bullish on supplies from the Cook Inlet, he's far less optimistic about plans for a pipeline from the North Slope to serve Southcentral Alaska.
"The simple facts are the pipeline costs are prohibitive, resulting in expensive gas for southern Alaska," he said. "Some estimates place the cost as high as $15/MMcf. More troubling: Alaska agencies have been saying that severe shortages of gas will develop by 2012 without new supplies, so the Alaskan consumer cannot wait for the pipeline, even if it was commercially viable."
The Buccaneer-Enstar contract calls for 12 Bcf of supply in total for Enstar, but it could grow to as much as 31 Bcf depending upon Buccaneer's success in the play. Sims said Enstar expects that the volume-based deal will run for about seven years. Even with the Buccaneer supply Enstar will still be needing about 5 Bcf per year beginning in 2013, and that need grows in the years beyond, he said.
"We may have a little more breathing room" because of the Buccaneer contract, Sims said. "At this point I think there is a lot of positive activity going on in Cook Inlet, and we'll just have to see how those wells are behaving."
The annual weighted-average price under the contract is $6.03/Mcf. Enstar will be responsible for transportation costs after the receipt point and absorb the current 21 cents/Mcf pipeline tariff, thus giving Buccaneer a gross floor price of $6.24/Mcf. Under the seasonal contract, the summer (March-November) is priced at a floor of $5.96/Mcf, including the pipeline tariff. Winter (December-February) is priced at a floor of $7.06/Mcf including the pipeline tariff. A price ceiling of $10.00/Mcf applies to both seasons. Price changes between the floor and ceiling are based on Nymex gas futures. Floors and ceilings are to be adjusted quarterly for inflation starting in 2012.
Buccaneer has committed to delivery of a minimum of 5 MMcf/d and maximum of 15 MMcf/d commencing when CINGSA has been completed. Six months later, Buccaneer has the option to increase deliveries to 15 MMcf/d as more wells are drilled at Kenai Loop and reservoir performance is monitored.
Buccaneer is focused on developing its 100% owned oil and gas assets in Alaska. Activities in Alaska include developing the Kenai Loop onshore project, which is believed to have 4.8 MMboe of proven and probable reserves, and acquiring and operating an offshore jackup rig for use by third parties. Mobilization of the jackup rig into Cook Inlet is expected in the fourth quarter.
The producer has drilled the onshore Kenai Loop No. 1 well, which was tested to have a flow rate of 6-8 MMcf/d. It is expected to be in production in the fourth quarter. The company plans to drill Kenai Loop No. 2 during the third quarter. Full development of the onshore Kenai Loop field could exceed 10 producing wells, Buccaneer said.
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