HEA secures lower price on gas deal with Furie

The price of Cook Inlet natural gas continues to trend downward as utilities and producers agree to contracts beyond 2018.

Homer Electric Association has signed a gas purchase agreement with Furie Operating Alaska LLC to purchase natural gas beginning April 1, 2016, for $6.50 per thousand cubic feet, or mcf.

The deal was submitted to the Regulatory Commission of Alaska Sept. 14.

That initial base load gas price is 12 percent cheaper than the $7.42 per mcf price that Hilcorp Alaska and the Department of Law agreed to in the 2012 Consent Decree, a condition of Hilcorp’s purchase of Chevron Corp. and Marathon Oil Co. assets in the basin. The Consent Decree expires in early 2018 at price of $8.03 per mcf.

At that time, Homer Electric could be purchasing natural gas from Furie for $7 per mcf, according to the utility’s filing with the RCA.

The gas supply agreement is tentative pending the approval of the RCA.

The initial $6.50 per mcf price extends through 2016. In 2017, the price increases 25 cents per mcf to $6.75. It continues to escalate 25 cents per mcf each year through 2020, the end of the agreement, when the price would be $7.50 per mcf.

Homer Electric’s current supply contract with Hilcorp ends March 31, 2016, and the two were not able to reach an extension, according to the RCA filing.

The utility estimates the contract will save it approximately $3 million in the first year versus the Consent Decree price. Those savings dwindling to about $350,000 per year in the out years, when compared to the agreement Hilcorp reached with Chugach Electric Association earlier this year.

“This contract will provide one of the Cook Inlet independent producers with a market for its gas, allowing them to move forward with significant investment in Cook Inlet offshore gas infrastructure,” Homer Electric General Manager Brad Janorschke said in a release. “The contract brings to fruition the State of Alaska’s goal to incentivize offshore exploration and development in the Cook Inlet.”

Janorschke also said that excess capacity from current gas development could further price competition in the market.

Chugach’s agreement with Hilcorp extends through March 2023 at a base load price of $7.96 per mcf.

The last two years of the Homer-Furie supply contract, 2019 and 2020, are separate optional terms that can be picked up at the discretion of Alaska Electric and Energy Cooperative Inc., the wholesale gas supplier of which Homer Electric is the sole member.

Base gas load under the deal is for between 4 billion cubic feet, or bcf, per year to 6.2 bcf per year.

Homer Electric projects its demand to grow by about 4 percent over the length of the contract to just more than 4.4 bcf in 2020.

If daily demand exceeds the base load and reaches 12.4 million cubic feet per day, the “swing load” gas price increases to $7.48 per mcf in 2016. Overall, the swing load prices are 10-20 percent less than comparative prices under the Consent Decree and Hilcorp’s agreement with Chugach.

Peak load prices at demand greater than 15.4 million cubic feet per day start at $10.73 per mcf in 2016 and escalate to $12.37 in 2020.

Furie Vice President Bruce Webb said in the Homer Electric release that the agreement is a step toward Furie’s long-term success in Cook Inlet.

“When we began drilling in 2011, the Cook Inlet was in the midst of a potential energy crisis. We are proud to be one of the companies to provide energy security to the residents of Southcentral Alaska,” Webb said.

In a previous interview with the Journal, Webb said Furie expects to begin production from the Kitchen Lights Unit in the central Inlet sometime in November.

Initial production of up to 20 million cubic feet per day will likely increase as more customers are secured, he said.

By the end of the year, Furie will have invested about $500 million in the Kitchen Lights development, according to Webb.

 

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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