Friday, August 19, 2011

Three in a row; Enstar files new Buccaneer, Aurora & Cook Inlet Energy gas contracts

Alan Bailey
Petroleum News

Southcentral Alaska gas utility Enstar Natural Gas Co. has submitted three new gas supply contracts to the Regulatory Commission of Alaska for approval. One of the contracts, for gas from Buccaneer Energy’s newly discovered Kenai Loop gas field on the Kenai Peninsula, commits firm gas supplies after Cook Inlet Natural Gas Storage Alaska’s new Kenai Peninsula gas storage facility goes into operation in 2012.

The other two contracts, with Aurora Gas and Cook Inlet Energy, will enable those companies to help bolster Enstar’s peak winter gas supplies by participating in the gas bidding system that Enstar pioneered in the winter of 2010-11 — Enstar has insufficient contracted, guaranteed gas supplies to meet projected peak winter demand and has instigated the bidding system to obtain gas to fill shortages on a day-to-day basis.

A provision in the Buccaneer contract will also enable Buccaneer to participate in the bidding process as soon as RCA approves that contract.

Gas for storage
However, the primary purpose of the Buccaneer contract will be to ensure sufficient gas supplies to meet Enstar’s contracted use of the CINGSA storage facility, Enstar spokesman John Sims told Petroleum News Aug. 15. Enstar plans to pull gas from the CINGSA facility during periods of high winter demand, starting in the winter of 2012-13, to ensure that gas can be flowed fast enough to meet gas consumers’ peak needs.

According to Enstar’s tariff filing, the Buccaneer contract for guaranteed gas supplies from 2012 involves pricing indexed to the New York Mercantile Exchange gas futures, but with a minimum gas price of $5.71 per thousand cubic feet between March and November of each year, and a minimum price of $7.06 per thousand cubic feet between December and February. The maximum price at any time of the year would be $10 per thousand cubic feet. These floor and ceiling prices would be adjusted for inflation, starting in 2012. Based on projections of Nymex futures, Enstar anticipates the weighted average cost of gas purchased under the contract to rise from $5.89 per thousand cubic feet in 2012 to $6.16 per thousand cubic feet in 2014.

The pricing terms appear similar to those in earlier Enstar supply contracts with Marathon, approved by RCA in May 2010, and with Anchor Point Energy, approved by RCA in November 2009. Those earlier contracts both had inflation-adjusted price floors and ceilings of $6.85 and $9.70 year round. Anchor Point Energy is selling gas from the Armstrong Cook Inlet-operated North Fork gas field in the southern Kenai Peninsula.

However, Sims said that based on a comparison of the price floors between March and November, the Buccaneer contract pricing should work out a bit lower than that for the Anchor Point Energy contract.

Up to 31.5 bcf
The Buccaneer contract requires the delivery of a total of 12 billion cubic feet of gas to Enstar, with an option to increase that total volume to 31.5 bcf, with these volumes likely taking until 2018 to deliver, Enstar says. The contract requires Buccaneer to complete the drilling of two new wells at Kenai Loop, one well by Nov. 1 this year and the other well by Nov. 1, 2013.

According to a Buccaneer press release, Buccaneer will initially deliver gas from Kenai Loop at the rate of 5 million cubic feet per day in 2012, with an option to increase that rate to 15 million cubic feet per day after six months, depending on progress with the drilling of new wells.

Although the Buccaneer contract for firm gas supplies will help fill a looming gap in Enstar’s annual gas supply needs, Enstar’s customers will still likely face supply shortfalls, starting at 5.9 bcf in 2013 and growing to 18.9 bcf in 2018, in the absence of further gas supply contracts, Enstar says. On the other hand, the storage of Buccaneer’s gas in the CINGSA facility should stave off any shortfall in the rate of delivery of winter gas until 2018.

And Enstar presumably hopes that the recent startup of new Cook Inlet gas exploration will further bolster its supplies. The new contracts and recent enthusiasm by small independent gas explorers operating in the Cook Inlet basin appear to reflect the impact of incentives for gas exploration that the Alaska Legislature has enacted, Sims said.

Bidding system
Meantime, with insufficient gas under firm contract to meet potential delivery needs in the winter of 2011-12, before CINGSA comes online, Enstar will be operating its day-to-day bidding system, to try to fill any supply shortfalls as necessary.

None of the contractual arrangements for gas supplies through the bidding process guarantee to make gas available but do allow qualified gas producers to bid to deliver to Enstar any gas that they have available for immediate sale. Enstar’s three new contracts add Buccaneer, Aurora Gas and Cook Inlet Energy to the list of qualified producers, thus increasing the likelihood of finding any necessary short-term supplies — Enstar already has contracted arrangements for the potential purchase of “non-firm” gas from Unocal, Marathon, ConocoPhillips and Anchor Point Energy.

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Republished with the permission of the Petroleum News