Hilcorp signs contracts to supply natural gas to utilities

New gas contracts are being signed with Southcentral electric utilities, alleviating concerns that there could be near-term gas shortages.

Hilcorp Energy has concluded new gas contracts with two Southcentral Alaska utilities and negotiations are continuing with a third, Hilcorp and the utilities confirmed July 24.

Meanwhile, independent companies exploring and developing new gas discoveries in the region have expressed concern that Hilcorp is locking up the regional utility market, and with operations suspended at ConcoPhillips’ liquefied natural gas export plant on the Kenai Peninsula, at least for now, explorers in the region may be stuck without markets for new gas.

Curtis Burton, CEO of Buccaneer Energy, a small regional gas producer that is now testing an offshore gas discovery, says he is concerned about any one supplier having a monopoly in the region.

The state’s regulatory commission must approve the new contracts Hilcorp has negotiated.

One new Hilcorp supply contract is with Matanuska Electric Association, an electric utility serving the Matanuska-Susitna Borough north of Anchorage. It begins in 2015 and would supply up to 7 billion cubic feet of gas per year, MEA general manager Joe Griffith said.

The price has been set at $7.13 per thousand cubic feet, or mcf, for the first year and would escalate at 4 percent per year through the end of the contract in March 2018, with a price of $8.03 per mcf in 2018, according to Tony Izzo, MEA’s gas supply manager.

The gas would supply a new, 170-megawatt power plant MEA now has under construction that is to begin operation in January 2015. Until now the utility had not secured a supply of gas for the plant, although it is duel-fuel and can also operate on oil.

“Securing this contract represents the ability to keep the lights on at the lowest cost to our members, which is our goal for everything we do,” Griffith said.

Meanwhile, Hilcorp spokeswoman Lori Nelson said a second contract has been concluded with Chugach Electric Association, the state’s largest electric utility, to supply 2.5 billion cubic feet to 8.5 billion cubic feet per year. The Chugach contract begins in 2014 and also terminates in March 2018, for a total volume of 17.6 billion cubic feet, utility spokeswoman Sarah Wiggers said. The price terms are the same that Hilcorp has agreed to with MEA.

Meanwhile, negotiations are underway on a contract with Enstar Natural Gas Co., the regional gas utility, Nelson said.

The Southcentral Alaska gas market has seesawed from surplus to shortages from the 1960s through 2012 and now may be headed back to surpluses with new discoveries being made by independents like Buccaneer.

In the 1960s and 1970s large gas fields were discovered as companies drilled for oil, allowing the development of a regional gas distribution system to make gas available for space heating and power generation.

A local gas-based manufacturing industry was created when Unocal Corp. developed a urea and ammonia plant and Phillips Petroleum and Marathon Oil Co. constructed the LNG plant now owned by ConocoPhillips.

Gas prices remained low and over 40 years gas supplies in producing fields were depleted. The fertilizer and ammonia plant, since purchased by Agrium Corp., closed in 2007 due to shortages of gas.

ConocoPhillips mothballed its LNG plant in 2012, and electric utilities and Enstar forecast shortfalls of gas by 2015 that might require them to import LNG.

Responding to warnings of gas shortages, the state Legislature enacted oil and gas subsidies that pay up to two-thirds of the cost of new exploration and development.

Independents like Buccaneer, Apache Corp., Hilcorp and another small independent, Furie Operating Alaska, initiated new exploration.

Hilcorp purchased former Chevron and Marathon producing assets and is developing new gas from older fields, while Buccaneer and Furie are exploring, with both having made new discoveries.

Apache has initiated a long-term exploration program for Cook Inlet with a primary focus on oil, and has drilled one onshore exploration well.

Gas-based manufacturing may return. Agrium is considering the possible reopening of the plant near Kenai and has a technical team at the site this summer assessing the condition of plant facilities.

Tim Bradner is a reporter for the Alaska Journal of Commerce.

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