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A gas supply lawsuit
Enstar challenges Hilcorp refusal to deliver some gas during storage injection
Alan Bailey for Petroleum News
Anchorage based gas utility Enstar Natural Gas Co. has filed a lawsuit in Alaska Superior Court against Hilcorp Alaska over a refusal by Hilcorp to supply some gas to Enstar because of the timing with which Enstar is injecting gas into the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula.
The dispute relates to an amendment made last year to Hilcorp's supply contract with Enstar as part of an arrangement whereby Enstar has been supplying gas to Alaska Electric and Energy Cooperative since March, following the termination of AEEC's firm gas supply contract with Hilcorp. AEEC uses gas to generate electricity for Homer Electric Association, the primary electric utility for the Kenai Peninsula.
Firm gas supplies under contract Under Hilcorp's contract with Enstar for firm gas supplies Hilcorp must sell to Enstar 25 billion cubic feet of gas per year, with a slightly higher volume in leap years. Enstar can increase or decrease its firm gas purchases somewhat, provided that it gives Hilcorp at least 24 months notice of the change. In addition, Enstar can optionally purchase up to an additional 4 billion cubic feet each year, as required. This additional gas is referred to as "daily call option gas" and is used to help Enstar meet gas demand in cold weather and, as necessary, to replenish Enstar's stock of gas in the CINGSA facility. CINGSA plays a vital role in ensuring adequate gas deliverability during cold winter conditions, when gas demand is especially high.
There is also a "needle peak call option," under which Enstar can call for an additional 20 million cubic feet per day for up to 25 days between November and February.
The contract amendment In January 2024 Enstar and Hilcorp agreed on the contract amendment relating to the AEEC gas supplies, with the amendment also being approved by the Regulatory Commission of Alaska. Under the amendment the two companies agreed on a protocol for coordinating Enstar's purchase of daily call option gas with gas withdrawals from CINGSA. The coordination requires monthly tranches of mandatory gas withdrawals from CINGSA by Enstar prior to the utility's ability to take monthly tranches of call option gas. There can be remaining storage withdrawal capacity and remaining call gas availability beyond these tranches.
The contract amendment also requires Hilcorp to supply to Enstar an additional 3.515 billion cubic feet during non-winter months in support of Enstar's agreement to supply gas to AEEC.
December suspension of daily call gas supply In early December Hilcorp told Enstar that it would have to suspend the delivery of daily call option gas during December, with a commitment to develop a mutually acceptable gas delivery schedule in January. Meanwhile the amount of gas that Enstar was storing in CINGSA was falling below Enstar's target level for ensuring reliable gas delivery to the utility's customers during the winter. And at the end of December Enstar advised Hilcorp that it would resume purchasing daily call option gas, using the gas to replenish its CINGSA inventory.
Dispute over CINGSA gas injection However, Hilcorp claimed that, under the terms of the amended gas supply agreement, Enstar must withdraw gas from CINGSA according to the agreed monthly tranche and not re-inject gas into the facility before the utility could nominate the receipt of further daily call option gas. And on Jan. 7 Hilcorp notified Enstar that it would cease delivery of daily call option gas because the gas supply request "does not align with the daily call protocols." In the court filing Enstar claims that it had appropriately instructed the withdrawal of gas from storage prior to requesting the call option gas.
On Jan. 7 Hilcorp responded to Enstar by claiming that the gas utility was circumventing provisions of the gas supply contract amendment, arguing that under the amendment Enstar cannot inject daily call option gas into storage. Enstar does not agree with this interpretation of the supply contract amendment and, in the absence of a resolution to the problem, has taken Hilcorp to court.
Winter gas deliverability depends on stored volumes Enstar told the court that the maximum rate at which the utility can withdraw gas from CINGSA to meet high winter demand depends on the amount of gas that the utility has in the storage facility. Hence the need to maintain stored volume, including call option gas, at an appropriate level. The utility has asked the court to issue an injunction, requiring Hilcorp to deliver all contractually required daily call option and needle peak gas to Enstar for injection into CINGSA by March 31. Enstar also wants the court to require Hilcorp to prepare a plan for the delivery of gas that Enstar did not purchase in December.
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