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Natural gas prices are too good to last.

Natural Gas Prices Are Too Good To Last

Aside from a spike caused by the Persian Gulf War, plentiful supply and long-term contracts have kept Southcentral consumers' rates low. Later this decade, though, market forces will drive natural gas prices up.

Although jolted this year by hefty rate increases spurred by high oil prices during the Persian Gulf crisis, residential and commercial consumers from the Matanuska-Susitna Valley to the Kenai Peninsula can expect to pay less for natural gas in 1992. Price prospects will dim within a half-decade, however: Rates are bound to increase by the mid-1990s because of agreements between gas producers and utilities.

With an estimated 3.4 trillion cubic feet of proven natural gas reserves in the Cook Inlet basin, consumers also need not worry about running out of the inexpensive and clean-burning fuel anytime soon. There's at least a 15-year to 20-year supply, and it's believed there's plenty left to be discovered.

Says Richard Barnes, president of Enstar Natural Gas Co., "Let me answer it this way: We probably will put about $10 million in the ground this year for distribution, transmission, facilities; and we'll recover that through depreciation over 33 years. So we expect to be in business for 33 years, at the minimum."

Even if Cook Inlet should run short of gas, Barnes explains, there's always the North Slope, which contains not only North America's largest oil field but the continent's biggest natural gas reserve at Prudhoe Bay.

Whether the bulk of that gas eventually is shipped to the Pacific Rim or to Lower 48 markets, some will have to be made available for local consumption, he adds. "Let's say that it's going to be a dead certainty that if they want permits to cross Alaska lands -- unless they change the law of the land -- the pipeline has to be operated for the benefit of local furnishings of gas as well as for its export," says Barnes.

Chugach Electric Association, which mostly depends on natural gas to fire turbines that produce electricity, also isn't worried about the gas supply. Chugach and Enstar are among the biggest users of natural gas in Southcentral Alaska.

Says David Highers, manager of Chugach, "I suppose it's like anything else; it's not endless. But the different producers have adequate supplies for us and Enstar, at least well into the next century."

Adds Barnes of Enstar, "I believe there is plenty of gas, but I don't want to give you the impression that it doesn't cross my mind, or that I have a sanguine attitude about it to where I don't think it's an issue."

What Enstar and Chugach have from the Cook Inlet producers are contracts guaranteeing them delivery of billions of cubic feet of natural gas over a 10- to 12-year period. Sale prices are adjusted annually or quarterly, depending on the contract, and often they are tied to the price of oil. In fact, it was the sudden jump in oil prices during the Persian Gulf crisis that forced Enstar to increase 1991 residential gas rates by 12.5 percent and commercial rates by 14 percent.

For its 83,000 customers, Enstar this year will receive about 25 billion cubit feet of natural gas from Marathon Oil Co. and about 15 billion cubic feet from three Beluga producers: Arco Alaska, Chevron USA and Shell Oil Co. Enstar's Beluga contract, which is tied to the wholesale price of No. 2 fuel oil sold at the Tesoro refinery in Kenai, was adjusted about the time worldwide oil prices skyrocketed to the $35 to $40 per barrel level.

Because Enstar's gas comes from various fields and is co-mingled and delivered via a pipeline system that encircles the upper Cook Inlet, consumers pay the same price based on a weighted average. Enstar ended up paying about three times more for its Beluga gas than it did for gas under its Marathon contract, which was adjusted in the third quarter of 1990, at the low end of escalating oil prices.

Price Hikes. "Nobody expected that oil prices would spike up to $40 a barrel in a short period of time because of the war in the Middle East," Barnes explains. "It caused Beluga gas prices to go up radically. For all of this year, we're having to pay more for gas ... than we originally expected."

Enstar, which is attempting to negotiate a new agreement with the Beluga producers, is hoping to acquire additional gas commitments for the future. "So a year from now, our gas situation might be changed, but I can tell you it won't be changed for the worse," Barnes says. "I think by next January our rates will be back down in line, and I don't see anything coming along that's going to jeopardize that. I see Kuwait getting its fires out and ultimately they will allow Iraq to produce its own oil and get it to market."

Though the Cook Inlet region enjoys some of the least expensive natural gas in the United States, consumers can expect rates to increase in the future. For one, utilities are still purchasing some gas under old contracts dating back to the 1960s, when natural gas sold for as little as 26 cents per thousand cubic feet compared to today's wholesale rates of $1.70 to $3.70 per thousand cubic feet.

Explains Chugach's Highers, "There's no doubt gas is going up. It's probably the single biggest escalator in our contracts. We're using old gas with new gas under two different pricing formulas. As we use up the old gas, the escalation curve goes up. We have a very good contract, but nevertheless, it's much higher than we had before. The producers were really anxious to get those (old) contracts off their books. They were almost embarrassing."

Adds Bill Van Dyke, petroleum manager for the state Division of Oil and Gas, "Gas rates are going up and they will continue to go up because of the way the contracts are written. Five years from now rates are going to be a fair amount higher. Ten years from now they are going to be quite a bit higher because these old contracts will have run out by then. But the new contracts are still very favorable to Alaska consumers relative to somebody living in Chicago or New York City."

From Chugach's viewpoint, natural gas used to fire its system represents a big savings in capital costs, as well as in fuel costs, for delivering electricity to its 62,000 residential and commercial customers. Chugach also sells electricity directly to Anchorage Municipal Light and Power, Matanuska Electric Association, Homer Electric Association, the city of Seward and Golden Valley Electric Association in Fairbanks.

"One thing it does for us, in particular, is that we have clean plants," Highers says. "Where we can go on line with a gas turbine relatively quickly and pass a lot of environmental impacts relatively easily, coal cannot."

About 200 billion cubic feet of natural gas is produced in Cook Inlet each year, a level that's been fairly constant since the early 1980s. While a significant portion is used by the major utilities, Chugach and Enstar, more than half the gas is converted to liquefied natural gas by Marathon-Phillips and exported to Japan or used in Unocal's ammonia-urea plant in Nikiski.

Prospecting. Though natural gas supplies are abundant, however, there are signs that producers are positioning themselves to replenish reserves as some fields, particularly the Kenai Gas Field, approach their depletion points. Arco Alaska and other oil companies that operate in Cook Inlet basin are actively exploring for oil and gas. In a recent state oil and gas lease sale, which offered both onshore and offshore tracts, Marathon and its bidding partners won 20 of 31 parcels they bid on.

"Marathon has been exploring for Cook Inlet oil and gas reserves since the mid-1960s," says Dana Corlett, Marathon's production manager. He adds that the firm is interested in drilling for either oil or gas.

Van Dyke of the state oil and gas division says oil companies that use a lot of natural gas, particularly Marathon and Unocal, have been out buying up reserves during the past few years. "It's really evident with Unocal on the west side of Cook Inlet," Van Dyke says. "They started production out of Pretty Creek, Stump Lake, Ivan River and Lewis River in the Beluga area. Cannery Loop (in Kenai) started up three years ago."

Still, there appears to be a lack of market demand for natural gas, which over the years has served to keep gas prices relatively low. Says Enstar's Barnes, "There has not been a big incentive for explorationists to drill holes because there has been a shut-in supply of 15 years to 20 years. They have in mind that they drill today and next year they are producing it. There's no market for gas and, if someone does buy it from you, it's because you're going to sell it to them cheaper."

But Barnes says there may be an increase in gas exploration during the next five years. He explains, "Unocal is a net purchaser of gas in the inlet, and they have a very large appetite for gas with that ammonia plant. As long as that plant keeps going, they are going to be a willing buyer."

Both the gas producers and the utilities are continuously improving their distribution network and back-up systems. For example, Marathon recently completed its 16.2-mile Granite-Point-to-Beluga pipeline, which will provide a second source of gas to the Chugach Beluga Power Plant and which also ties into Enstar's 20-inch mainline for delivery to Anchorage. Under an agreement between Marathon and Unocal, gas earmarked for the liquefied natural gas and ammonia plants will be diverted to Enstar's system should the utility run short of gas during peak demand in the winter.

"So if one of our producers gets into trouble, we will have plenty of gas," Barnes says. "Under the Marathon contract, we've got what is known as unlimited delivery. Whatever peak demands we make on Marathon, they have to supply it."

Meanwhile, natural gas remains the choice of fuel for just about anyone who can get it. There's really no comparison when it comes to heating a home with gas or electricity. In the Anchorage area, for example, the typical home will spend $120.43 a month for gas compared to $309.94 a month for electricity. A gas clothes dryer costs about 7 cents a load compared to about 27 cents a load for an electrical dryer.

"Electricity just can't compete, and we don't even try to compete," concedes Joe Griffith, Chugach's manager of financing and planning. "But there's enough market out there that we don't have to worry about giving up, or taking gas head-on."

PHOTO : Enstar's Richard Barnes: Southcentral Alaska enjoys an ample supply of natural gas in the Cook Inlet basin.
COPYRIGHT 1991 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:prices of natural gas in Alaska
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Jul 1, 1991
Words:1819
Previous Article:Fort Knox findings.
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