Chugach, Hilcorp agree on gas supply contract

Chugach Electric Association has extended its natural gas supply deal with Hilcorp Alaska for five years at prices less than those prescribed at the end of the current contract.

The third amendment to the Gas Sale and Purchase Agreement between the Southcentral utility and the Cook Inlet producer kicks in April 1, 2018, at a base load price of $7.35 per thousand cubic feet, or mcf, of natural gas.

That is 8.5 percent lower than the March 31, 2018, price.

In the first quarter of 2018, Hilcorp will sell base load gas to Chugach for $8.03 per mcf. That marks the end of the Consent Decree Hilcorp signed with the State of Alaska when it became the dominant producer in the basin after purchasing Cook Inlet assets from Chevron Corp. and Marathon Oil Co. in 2012 and 2013, respectively.

In the out years, the gas price increases 2 percent per year until reaching $7.96 per base load mcf of gas in March 2023.

Chugach’s base load price from Hilcorp is $7.13 per mcf for all of 2015 and $7.42 for all of next year.

The contract amendment was submitted to the Regulatory Commission of Alaska July 23 for approval.

Mark Fouts, Chugach director of planning analysis, said the pricing is likely a combination of new competition from small producers entering Cook Inlet and Hilcorp having a better confidence in its reserves and the ability to produce them efficiently.

“When (Hilcorp) signed that first five-year deal with everybody under the Consent Decree they had just bought the Chevron and Marathon assets, but they had not really had time to go through and check everything out,” Fouts said.

Hilcorp spokeswoman Lori Nelson wrote in a formal statement that the company has indicated to each of its customers that it is ready to enter contracts beyond the Consent Decree in order to provide lead time to execute the requisite projects to meet the needs of its customers.

“In order to ensure Hilcorp has long-term success in the Inlet and on the Slope we remain focused on increasing production, lowering costs and growing reserves,” Nelson wrote. “Each of these factors play a key role in extending the life of the fields and supporting competitive supply contracts with local utilities.”

The eight-year commitment, with a price drop roughly halfway through, is a stark contrast to the market conditions when Hilcorp came to Alaska via its purchases in 2012. At that time, there were open discussions about the prospect of importing LNG to Southcentral and a cold 2012-13 winter strained the immediately available gas supply.

The current proven plus probable natural gas reserves in Cook Inlet are estimated at 800 billion cubic feet to 1.3 trillion cubic feet by the state Division of Oil and Gas.

Demand from the basin totaled about 120 billion cubic feet, or bcf, last year.

Hilcorp’s commitment to supplying Chugach’s base load drops from nearly 8 bcf of gas per year in 2017 to 5.5 bcf from 2019 through the end of the contract. That leaves roughly 2.5 bcf per year in swing load as an optional purchase, at prices between $9.19 and $9.95 per mcf in the last five years of the agreement.

Emergency load is covered in the $11 per mcf range in the out years. It is listed at $12.04 per mcf in early 2018.

Chugach projects its gas demand to remain virtually flat in the 8 bcf per year range through early 2023.

Fouts said the flat demand projection accounts for uncertainty in the market, but also includes the expectation that the Railbelt utilities will eventually work more efficiently together as economic dispatch is emphasized.

The RCA issued a recommendation to the Railbelt electric utilities earlier this summer that urges them to increase cooperation as a way to maximize the use of low-cost power. The RCA stated it would use its authority and seek legislative action to mandate cooperation if the utilities don’t work more closely together voluntarily.

“A lot of (demand) is hard to predict, but through the Hilcorp contract we have the optionality to move up and down and cover the uncertainties, which adds a lot of value to us in the Hilcorp contract,” Fouts said.

Chugach spokesman Phil Steyer added that the optional load is the utility’s way of balancing assurance of a fuel supply with the prospect of more competitive prices from other producers to fill that gap in the future.

Other factors that play into the flat demand projection are increased efficiency from the new gas-fired Southcentral Power Plant, which Chugach operates in partnership with Anchorage’s Municipal Light and Power, and less individual electric consumption from residential customers, Steyer said.

Average residential consumption has decreased more than 10 percent per customer over the past 20 years, Steyer said, due to energy efficiency improvements among other things.

Elwood Brehmer can be reached at [email protected].

11/20/2016 - 11:55am