Enstar secures enough gas for 2009, future supplies still short
It was nip and tuck, but Enstar Natural Gas Co. secured enough gas to cover a projected 2.1 billion cubic feet supply shortfall in 2009 after state regulators approved one-year contracts for the utility with Cook Inlet producers, Enstar spokesman Curtis Thayer said.
The agreement is only a band-aid though, and more serious gas supply issues loom for Enstar over the next three years. In 2011 and 2012, the utility will be short about a third of its annual need for gas.
Meanwhile, a lengthy cold snap is driving natural gas consumption to record levels in Southcentral Alaska, to the point that gas-producing wells can’;t keep up with demand. Gas is being diverted from a liquefied natural gas plant near Kenai to Enstar, according to Natalie Loman, spokeswoman for ConocoPhillips Alaska Inc., which operates the LNG plant. Loman would not say how much gas is being diverted.
Enstar shipped a record 234 million cubic feet through its system on Jan. 3, exceeding a previous record for gas use of 227 million cubic feet set on Jan. 9, 2007.
The price of Enstar’;s gas is taking a 22 percent jump in 2009, also. Enstar adjusts its gas prices annually based on what the utility is charged by gas producers under existing purchase contracts. Much of the gas now being sold by Enstar is priced on a formula linked to past crude oil prices, which soared to record heights last summer.
As for the longer-term gas supply issue, in its Dec. 22 decision the Regulatory Commission of Alaska did not deal with a contentious issue in Enstar’;s efforts to get supply contracts, which is the pricing mechanism for the gas, Thayer said.
Enstar and Cook Inlet producers have been attempting to get the commission to approve long-term contracts with the price based on an average of gas sales prices posted at U.S. gas trading hubs. The RCA rejected the proposals, the latest on Oct. 31, for gas deliveries for 2009 that would begin Jan. 1.
That left Enstar within two months of not having sufficient gas under contract to cover its needs, and at a time in mid-winter when demand for gas peaks, Thayer said. The utility and the producing companies had to scramble to come up with an alternative deal, and to get the RCA’;s approval.
The one-year contracts with ConocoPhillips and Marathon Oil Corp. sidestep the pricing controversy by allowing Enstar to buy gas for 5 cents under its weighted average cost for gas provided under all supply contracts, including some where the gas price is indexed to past crude oil prices.
Agreement on a long-term pricing mechanism is needed to give producers sufficient incentive to do new drilling and well work to ensure sufficient reserves but also to ensure deliverability of gas during cold winter weather, Thayer said.
The contracts with ConocoPhillips and Marathon that were rejected Oct. 31 would have based the price of Cook Inlet gas sold to Enstar on a formula linked to several gas trading hubs in the Lower 48.
Enstar actually now has one supply contract, with Chevron Corp., where the price is linked to the Henry Hub index in Louisiana. That was approved by the RCA several years ago. Two years ago, the commission rejected a contract Enstar negotiated with Marathon Oil using a similar link to Henry Hub, as well as the recent contracts with Marathon and ConocoPhillips that were tied to several trading hubs.
In its Oct. 31 decision, RCA put forth its own suggested solution, linking the price to Lower 48 gas producing regions rather than trading hubs. This would have resulted in about a 15 percent reduction in prices for the producers compared to what would have been paid in the contracts linked to the trading hubs.
ConocoPhillips and Marathon rejected that approach, however, arguing that it did not provide sufficient revenue to justify investments needed to ensure the gas can be produced and delivered to Enstar.
Enstar needs about 32 billion cubic feet per year for its customers in Southcentral Alaska. Under the one-year agreements, Enstar will purchase 1.1 billion cubic feet from ConocoPhillips Alaska and 1 billion cubic feet from Marathon, giving it enough gas to cover the 2.1 billion cubic feet shortfall for 2009.
The supply shortfall will grow though over the next few years. In 2010, Enstar will be short 8.6 billion cubic feet for its needs. In 2011 the shortfall is estimated at 10 billion cubic feet, and in 2012 it is estimated at 11 billion cubic feet.
Enstar and the producing companies will be taking new long-term contracts to the regulatory commission to cover those needs, Thayer said, with hopes of getting agreement on a pricing mechanism.