This is the first time that utility Enstar Natural Gas Co. is entering a new year without firm contracts for all of the natural gas supply it expects to need to serve customers in Southcentral Alaska. Because all of its gas comes from a handful of producers in the Cook Inlet, the utility has come up with a new bidding mechanism to secure its peak day requirements.

"For the first time we're attempting to sort of create a spot market up here," Enstar spokesman John Sims told NGI. "We're off the grid, so to speak, from other pipelines. All of our gas comes from Cook Inlet. So what we have established is a sort of spot market where we will send a request out to the producers in the Inlet and the producers will blindly respond with the quantity and the price."

The bidding system entails a website where producers can respond to an Enstar request for supplies. "They'll respond, and that will be our option for purchasing gas on a daily basis," Sims explained. The system goes into operation Jan. 1. Enstar will be able to purchase supplies from Marathon, ConocoPhillips, Chevron and Anchor Point Energy under existing contracts, Sims said.

He said the utility is finding itself short of supply because there hasn't been enough drilling going on in the Inlet. He blamed the rejection of several proposed supply contracts by the Regulatory Commission of Alaska during the middle part of this decade for the situation.

"...[T]hey thought [the producers] had too much market power, so they denied [the contracts] based on price," Sims said. "What they've done is they've actually made it worse because they've decreased the investment that's gone on in the Inlet."

For instance, Enstar submitted a contract for approval that would have taken care of the utility's supply and deliverability needs out to 2016. "That was rejected by the commission, and now here we are in 2011 and we don't have all of our gas under firm commitments."

Sims cited a study that said it would take 13-14 new wells in the Inlet every year to meet Southcentral's supply needs. This year eight wells were drilled. "Each year the problem compounds," Sims said. "Next year as opposed to 13 we're going to need 20." Other studies have shown that there is plenty of gas in Cook Inlet to meet the region's needs, he noted.

Neither a bullet pipeline from the North Slope nor a larger-diameter line to ultimately serve Lower 48 markets will be online to serve Southcentral's needs in time, Sims said.

"It's all a matter of timing," he said. "When you look at Enstar's needs, we have significant needs starting in 2013, and any sort of pipeline that comes down from the North Slope -- whether it's the straight bullet line that serves Alaska or it's the large-diameter line that goes into Canada -- those projects aren't expected for another 10 years. We've got sort of a midterm issues in two to three years and beyond until a pipeline comes. Our gas either has to come from Cook Inlet or it has to come from outside sources. And the investment isn't being made in Alaska to meet the needs of the consumer, whether it's an electric utility for power generation or for natural gas for space heating."

One interim option, if sufficient development doesn't occur in Cook Inlet, is importation of liquefied natural gas (LNG), Sims said. The state currently exports LNG from a facility on the Kenai Peninsula. The most economic option for LNG imports would likely be via vessels that allow for onboard regasification.

"There's also some discussion about converting the existing LNG export plant, but that has its own challenges as well," Sims said.

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