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Enstar gas delivery case against Hilcorp dismissed by judge
Alan Bailey for Petroleum News
Judge Herman Walker of the Alaska Superior Court has dismissed without prejudice a lawsuit in which Anchorage-based gas utility Enstar Natural Gas Co. claimed that Hilcorp Alaska had broken the terms of their gas supply agreement.
Enstar has claimed that Hilcorp violated the agreement by refusing to supply some gas to Enstar because of the timing with which Enstar was injecting gas into the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula. As previously reported by Petroleum News 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 on the Kenai Peninsula since March, following the termination of AEEC's firm gas supply contract with Hilcorp. AEEC generates power for Homer Electric Association.
Coordination of gas deliveries with CINGSA withdrawals In the contract amendment Enstar and Hilcorp agreed on a protocol for coordinating Enstar's purchase of what is referred to as 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. Enstar uses gas stored in CINGSA to ensure adequate gas deliverability during high levels of gas demand during cold winter weather.
The dispute arose because Hilcorp claimed that Enstar was going to use the requested daily call gas for injection into CINGSA, in contradiction with the terms of the gas supply contract amendment. Enstar claims that it would not have contravened the contract and that it needs adequate amounts of gas stored in CINGSA to ensure that it will be able to withdraw gas from storage at adequate rates at times when gas demand is especially high. Also, Hilcorp alleged that Enstar had already reinjected some daily call gas back into CINGSA.
Essentially the companies disagree on their interpretations of the terms of the contract.
Judge rules dispute resolution protocol must be followed Judge Walker dismissed Enstar's lawsuit Feb. 6 on the grounds that the utility had failed to follow through on a contractually required procedure for resolving disputes. The contract stipulates that there is a three-stage dispute resolution process: the parties must first negotiate; if negotiation fails they must mediate; and if mediation fails the parties must go to binding arbitration. At the same time, under state law, if arbitration is required contractually to resolve a commercial dispute, the court must compel arbitration, the judge wrote.
In this case the parties have both confirmed that there had been negotiations over the dispute. Then, after the negotiations failed, Enstar asked the court for a mandatory preliminary injunction without going through the mediation and arbitration steps required in the contract, the judge wrote. Enstar told the court that the court could issue an injunction because Hilcorp had sold gas to Marathon Petroleum and Cook Inlet Energy Oil that would otherwise have been sold to Enstar, in sales that contravened the terms of Hilcorp's contract with Enstar.
However, the judge ruled that Enstar had not established that Hilcorp had willfully diverted gas that was intended for its delivery to Enstar.
Urgency of dispute resolution? The judge also dismissed an argument by Enstar revolving around the urgency of the case, given the potential shortage of gas to meet Alaskans energy needs and the length of time that may be required to conduct arbitration of the dispute. The judge commented that Hilcorp had made a delivery of gas to Enstar a few days prior to oral arguments in the lawsuit and that through mediation and, if necessary, arbitration, the dispute can be resolved in less than 90 days.
Thus, the court is going to dismiss the case without prejudice, the judge said.
"The court did not address the contract dispute with Hilcorp but the decision highlights the need for the parties to resolve this matter as quickly as possible," Lindsay Hobson, Enstar director of legal and administration, has told Petroleum News. "We are rapidly proceeding with mediation and will continue to work with Hilcorp to reach a resolution."
"We are pleased Judge Walker heard our concerns and dismissed this frivolous lawsuit as it merely served as a distraction from the fundamental issue ---- the need for more long-term gas supply in the Southcentral market," Hilcorp spokesperson Matthew Shuckerow told Petroleum News. "Hilcorp remains committed to supporting the utilities, businesses and residents of Southcentral Alaska that rely on Cook Inlet natural gas. We remain diligent in these efforts and anticipate spending hundreds of millions of dollars drilling new wells, recompleting existing wells, and maintaining and enhancing infrastructure in the Cook Inlet this year. That is our priority."
Shuckerow said that when Enstar filed the lawsuit Hilcorp had urged the utility to come back to the table and work with Hilcorp to develop a reasonable resolution that takes into account the needs of all Alaskans that depend on Cook Inlet natural gas.
--ALAN BAILEY
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