Natural gas for Southcentral storage facility may be Japan-bound

A contract dispute has impaired gas supplies for the new $180 million gas storage facility being developed on the Kenai Peninsula, the operator of the facility, Cook Inlet Natural Gas Storage Alaska, or CINGSA, said Aug. 20.

“We are seeking to buy 2 billion cubic feet of gas,” to bring the “pad gas” needed to pressurize the storage reservoir to 7 billion cubic feet by this fall, CINGSA spokesman John Sims said.

CINGSA had contracted with a Cook Inlet producer to supply gas in March 2011 but the producer may instead have opted to sell the gas to Japan as LNG for higher prices, CINGSA said in an August 13 letter the company wrote to the Regulatory Commission of Alaska.

The producer was not identified in the letter.

Marathon Oil acknowledged in an Aug. 18 email that it is the producer that entered into the sales agreement with CINGSA in 2011, but said it did not contract with the storage company on an exclusive basis and is not required to supply all of CINGSA’s base gas requirement.

“We have complied fully with the terms of the agreement and will continue to do so,” Marathon spokeswoman Lee Warren said in the email.

In its letter to the regulatory commission CINGSA said the contract was to supply 3.24 billion cubic feet and that the supplier “now asserts that the contract is only an option and that it has no obligations to actually supply the gas. CINGSA disagrees with this contention,” CINGSA’s director of regulatory affairs Dan Dieckgraeff said in the letter.

Alaska utilities that have contracted for gas storage and who will need the gas this winter are concerned. Gas deliverability from producing gas fields in Southcentral Alaska has declined to levels below what utilities need, and the gas storage facility, set to go into operation this winter, would have provided assured supplies at peak demand periods.

Brad Evans, CEO of Chugach Electric Association, said his association, the state’s largest electric utility, is an anchor customer for the storage facility. Having sufficient pad gas to pressurize the storage reservoir is critical for Chugach and other utility customers being able to withdraw gas at rates they will need during cold weather, Evans said in an interview with the Journal.  

Seven billion cubic feet of pad gas is needed to provide enough pressure for withdrawals of stored gas to be done efficiently, Evans said. The facility can operate with less pad gas but its performance will not be optimal.

Lee Thibert, Chugach vice president for planning, said the utility will need to withdraw about 30 million cubic feet per day this winter to meet its needs for gas-fired power generation. The storage facility, located near the city of Kenai, is designed to hold a maximum of 11 billion cubic feet. The facility has five wells for both injection and production of gas. It is located within the Cannery Loop gas field, which is operated by Marathon Oil.

Besides Chugach Electric, Anchorage's city-owned Municipal Light and

Power, Chugach Electric and Enstar Natural Gas, the regional gas utility, are CINGSA customers.

CINGSA is owned by Enstar's parent, Michigan-based Semco Energy, and Mid American Energy Holdings.

Sims said that besides the 2 billion cubic feet needed for pad gas for CINGSA, Enstar itself has not yet secured all the gas it needs for 2013. Most space heating for homes and buildings in Southcentral Alaska is done with natural gas.

CINGSA is a regulated storage facility and must report any changes that

will affect its operation to the state regulatory commission, which prompted the Aug. 13 letter.

Marathon said it cannot export LNG itself.

“Marathon sold its interest in the LNG plant in 2011, and we no longer have an export license. We honor our contractual obligations and during peak demand have helped meet the energy needs of customers in Southcentral Alaska. The terms of our contracts are confidential,” Warren said.

ConocoPhillips Alaska, which operates the LNG export plant at Kenai, said it cannot comment on the matter. ConocoPhillips is reported to occasionally purchase gas for LNG from other producers, and holds a federal license for export shipments of LNG from Alaska.

The dispute has prompted a strong reaction from Alaska government leaders. “While this is a contractual dispute that will have to be worked out in the courts, I am disappointed that a company would let Alaskans down at the time when their energy security is most in question,” said state Rep. Mike Hawker, an Anchorage Republican who sponsored legislation leading to creation of the storage facility, in a statement issued late Friday.

“I support free market principles that allow those with a commodity to sell it at the highest price they can. However, there has long been an informal understanding between Cook Inlet producers, utilities and the state that local needs must be met. I am deeply disappointed that a producer would disregard what I see as a responsible corporate citizen’s obligation to the people of Alaska.”

11/11/2016 - 10:20am