Enstar to save $14M in first year of new gas deal with Hilcorp
The eventual return to a free Cook Inlet natural gas market is looking good for consumers as the latest round of gas supply contracts are signed by utilities.
Enstar Natural Gas Co. has reached a deal with Hilcorp Energy to fuel the lone Southcentral gas utility through March 2023 at prices more favorable than those outlined under the Consent Decree that regulates Inlet gas contracts through 2017.
Filed with the Regulatory Commission of Alaska Feb. 29, the gas sale and purchase agreement between Enstar and Hilcorp would kick in April 1, 2018, at an average price of $7.56 per thousand cubic feet, or mcf, for firm gas deliveries. That would amount to a 9.2 percent price decrease compared to contracts under Consent Decree terms that will expire at the end of March 2018 — an overall $14 million savings in the first year.
Enstar Vice President and General Counsel Moira Smith said that savings will be passed on directly to utility’s customers.
“It’s a nice discount off of Consent Decree prices,” Smith said in an interview. “We thought it was a big win for our customers.”
The firm gas price at then end of the deal in 2023 is $8.19.
The tentative agreement, which is subject to RCA approval, also calls for an annual 2 percent price increase, versus the 4 percent yearly escalation allowable under the Consent Decree.
The Consent Decree is the deal reached by the Attorney General’s office and Hilcorp in late 2012 that set price caps for Inlet gas contracts from 2013 through 2017, thus allowing Hilcorp to purchase gas and oil interests from Marathon and Chevron and become the majority gas supplier in the basin.
At more than 22 billion cubic feet, or bcf, per year, Hilcorp would supply about 70 percent of Enstar’s projected demand under the contract — a demand forecast that is flat at 33 bcf for the foreseeable future.
Smith said Enstar’s customer base grows a little more than 1 percent a year, but increasingly energy efficient homes using less natural gas offsets new customer demand. Regional electric utilities that use natural gas as primary fuel source have made similar comments regarding their own demand forecasts.
Last year Chugach Electric Association and Homer Electric Association signed gas supply contracts extending beyond 2017 at prices less than Consent Decree prices as well.
Enstar was able to combine firm, base delivery and peak volume demand prices in the deal, which will cover for contacts of each type the utility had with Hilcorp that are expiring in 2018, according to Smith.
Higher prices for peak demand purchases add about 15 cents to the average yearly gas price paid by Enstar under the agreement.
Utilities typically hunt hard for the longest-term contracts they can to provide customers with security of fuel supply, but there were other factors that led to the five-year term.
“Our goal was to get some stability and five years gives us some stability while simultaneously allowing other producers time to get on their feed and get some real production up and going and also allow room for a (pipe)line from the North Slope that we could purchase from,” Smith said. “It was not Hilcorp saying they did not want to negotiate for more than five years.”
If seen to fruition on its current schedule, the Alaska LNG natural gas export project would begin shipping North Slope gas to Southcentral in late 2024 or 2025, but the state and its partners have announced they won’t have key agreements in place for approval by the Legislature this year, likely delaying the effort.
As to the large share of the contract — filling upwards of 70 percent of Enstar’s total gas demand through one producer — Smith said frankly, “It’s because nobody else could do it.”
While there is little doubt gas reserves in the basin could supply Southcentral for at least several decades, limited local demand continues to hinder the market for Inlet gas. Producers could develop the resource, but they would have no one to sell it to.
Thus, the market has narrowed to one with a single, dominant producer in Hilcorp, despite having some of the highest wholesale natural gas prices the world currently.
Hilcorp’s near exclusive control of Cook Inlet natural gas supply spurred the Consent Decree — a way for the state to limit the monopoly power over a critical commodity.
Smith said the Consent Decree did its job in that it ended exorbitant high bidding for peak demand gas sales and added a “degree of functionality” to the market.
For its part, Hilcorp has been a reliable partner and provided good service to its utility customers, she said.
“Without engaging in hyperbole, (Hilcorp has) acted as very good stewards of the state resource to ensure stability for utilities,” Smith said.
She added that Enstar would still like to see more players, on either side, in the market.
Since Agrium Inc. shut down its Nikiski fertilizer plant in 2007, Enstar has become the major buyer, accounting for a third to half of all gas demand from the Inlet.
Just three years ago Enstar resisted the idea of new Cook Inlet customers because the market was strained on the supply side, Smith said.
Hilcorp’s work to improve supply from existing fields has flipped the market challenge.
Now, the utility would prefer to be “noise” in a much larger gas market, Smith said, under the premise that a larger market would spur more production leading to better security of supply and price competition.
Sporadic sales from ConocoPhillips’ Nikiski LNG export facility have increased gas demand slightly over the last couple years, but depressed worldwide LNG prices have put the immediate viability of future exports in question.
Furie Operating Alaska LLC is finishing early development of its Kitchen Lights Unit and has one small contract in place with Homer Electric, under which gas sales are set to start in April. The base load gas price in that deal is $7.42 per mcf, according to RCA filings.
Elwood Brehmer can be reached at firstname.lastname@example.org.