Gov. Frank Murkowski says he opposes a natural gas pricing mechanism in a contract between Marathon Oil Co. and Enstar Natural Gas Co. that would have Marathon supply the Southcentral gas utility with additional gas from producing fields in the Cook Inlet basin.
State Attorney General David Marquez asked the Regulatory Commission of Alaska to suspend consideration of the Marathon-Enstar deal over concerns about pricing terms that would have Enstar base its price on the Henry Hub gas price index.
"Using the Henry Hub index as an incentive to encourage development may be appropriate in some circumstances," Murkowski said. "However, Enstar's attempt to have the commission accept the use of HHI pricing in this case is unprecedented and unreasonable for a gas supply agreement based on proven reserves."
The Henry Hub index price is based upon the price of gas delivered to the Henry Hub Pipeline crossroad in Louisiana. The index is used in the natural gas industry to establish gas prices for delivery to a number of markets throughout the Lower 48. In this case, however, the gas is produced in Cook Inlet for consumption in Alaska, Marquez said.
The RCA has approved previous contracts for Unocal Corp. to supply Enstar with natural gas with the price for the gas pegged to the Henry Hub index, but those contracts were to underpin exploration programs by Unocal, which are risky, Marquez said. The Marathon contract, in contrast, is to supply Enstar from proven reserves, and the pricing link to Henry Hub may not be appropriate.
Representatives from Marathon were unavailable for comment, but Enstar spokesman Curtis Thayer said that while he hasn't had a chance to read the attorney general's statement, the concern seems in contrast to the state's current negotiating position on North Slope gas. In that case, the state is proposing to base the contract price on the Henry Hub price. North Slope reserves are also proven, Thayer said. "They can't have it both ways," he said.
Gas contracts between gas producers and Alaska utilities have traditionally been linked to crude oil prices because there is no physical connection between Alaska's small gas market and interconnected markets of the Lower 48. Unocal's contract with Enstar was precedent setting as the first to link gas prices in the Southcentral region to an out-state-state index.
It was approved to spur new exploration for gas, which is needed in the region because existing gas fields are being depleted. Unocal's exploration was successful and the company is now supplying gas to Enstar under the contract. Marquez said the situation with Marathon is different because the price link to Henry Hub would, in effect, give the company a windfall.
In approving previous gas supply contracts the RCA has noted that the risks associated with natural gas exploration must be compensated or producers may explore elsewhere.
"The commission approved these contracts noting that the Henry Hub price structure is higher than previously approved contracts but that it is appropriate to balance the goal of ensuring an adequate natural gas supply in the future against a higher costs to the consumer," Marquez said. "A higher price for gas such as the HHI price may be necessary to attract exploration capital."
Tim Bradner can be reached at tim.bradner@alaskajournal.com.
