On Friday, the Regulatory Commission of Alaska ruled that Cook Inlet Natural Gas Storage Alaska can sell 2 billion cubic feet of gas unexpectedly discovered in its underground storage facility, and that the profit will be divided between CINGSA and the four utility companies that use it for storage.

The ruling resolves a dispute that began in January 2015 between CINGSA and its storage clients — Homer Electric Association, Chugach Electric Company, ENSTAR and Anchorage’s Municipal Light and Power — who claimed a stake in the newly discovered gas because their 20-year storage contracts provided the investment for CINGSA to begin operating in 2011.

The Regulatory Commission of Alaska, RCA, — the state agency that regulates utility companies expected to act in the public interest — ruled that the profits will be shared according to the percentage of the gas that each company owns in the underground sandstone wells that make up the CINGSA facility. CINGSA will keep 38.9 percent of profits, while 61.1 percent will be shared by its four contracted storage clients.

Shares of the profits will be distributed to the clients according to their shares of gas. Of the four, ENSTAR — which shares a parent company, AltaGas, and a president, Jared Green, with CINGSA — owns 46 percent of the 18 billion cubic feet of gas in the CINGSA reservoir, while Chugach owns 10.5 percent, ML&P 8.3 percent, and HEA .694 percent.

In addition to the 11 billion cubic feet of gas pumped into the reservoir for storage by the 4 companies, CINGSA itself owns 7 billion cubic feet of gas — 38.8 percent — which it keeps as “base gas” necessary to maintain the pressure needed to make the stored gas easily extractable when needed.

The RCA ruled for this sharing scheme after considering and rejecting in February a previous agreement between CINGSA and three storage clients to split the profits 50-50. This agreement was arranged between CINGSA, HEA, Chugach and ENSTAR before the RCA case began, and submitted at its beginning for the RCA’s approval. 

The fourth client, ML&P, did not agree to the arrangement. The RCA rejected the arrangement because it also allowed future sales of the discovered gas beyond the 2 billion cubic feet which the RCA decided could be sold without damaging the public interest.

HEA and ML&P have stated that they will incorporate their share of profit into their cost of power adjustment, lowering rates. Chugach also said the profits would reduce its rates, while ENSTAR stated that “its customers should benefit from the sale of the 2 billion cubic feet of gas,” according to the ruling RCA issued Friday.

CINGSA bought a lease on the Sterling C pool, the underground sandstone formation in which it stores its gas, from Marathon in 2011. At the time the groups believed the formation contained 3.6 billion cubic feet of gas, an amount not economically recoverable. While drilling in 2012 to add storage space to its reservoir, CINGSA broke into a previously unknown sealed well from which 14.6 billion cubic feet leaked into the existing reservoir.

It took CINGSA’s team until late 2014 to estimate the volume of the new gas, determine that it came from within its boundary and what effects it would have the performance of its existing facility. Once this work was done, CINGSA determined that some of the gas was saleable and began negotiating with its clients and the RCA to create a deal.

According to the ruling, CINGSA and ENSTAR President Green argued CINGSA’s clients have no stake in discovered gas because contracts confer no ownership in CINGSA and the rates CINGSA charges for storage contain no costs related to the discovered gas.

The clients counter-argued that CINGSA had been built with their money, given in the form of the 20 storage contracts they had signed before the facility was built — as Chugach Regulatory Affairs Director Arthur Miller testified, according to the ruling, “it was the financial commitments from the (storage) customers that enabled CINGSA to develop the storage facility that lead to the discovery of the found native gas.”

Energy consultant Kurt Strunk testified on behalf of Chugach “that because the (storage) customers bear increases in CINGSA’s cost of service, fairness requires any reduction in the cost of service should be reflected in their rates as well.”

Members of the RCA commission agreed. The body stated in the ruling that “CINGSA required the (storage) customers to enter into the 20-year agreements as a condition to CINGSA developing the storage facility. The CINGSA facility would not have been built without the commitments of the (storage) customers.”

Removing gas from the storage well lowers the pressure inside, decreasing the speed at which gas can be withdrawn from the well when desired — an important element of CINGSA’s performance. Clients said that the possibility of this withdrawal speed decreasing constituted a risk justifying a share in the reward of new gas profits. The RCA board ultimately agreed when it awarded them profit percentages based on the amount of gas each had stored.

Maintaining the pressure required for constant deliverability is also the reason CINGSA plans to sell 2 billion cubic feet of the 14.5 it discovered. CINGSA determined that 2 billion cubic feet could be sold without decreasing the desired well pressure of 1,700 pounds per square inch.

With this in mind, CINGSA engineer Richard Gentges “testified that CINGSA has concluded with a high degree of certainty that at least 2 billion cubic feet of found native gas is not necessary to provide service to its customers under its existing contractual obligations,” according to the RCA ruling.

Clients also said the gas sale, and the potential resultant loss of pressure and deliverability, constituted a risk to them not only in the present, but in the future. Should CINGSA expand, it would need additional gas to maintain the present pressure, raising future cost if that gas is sold and removed now.

The RCA board agreed with CINGSA that 2 billion cubic feet is a safely saleable amount under anticipated future circumstances as well as under present circumstances. The RCA ruling stated that according to CINGSA engineer Richard Gentges “the 2 billion cubic feet of found native gas is not necessary for any conceivable expansion scenario.” 

RCA ruled that CINGSA had adequately evaluated the future effects of the sale, although according to the ruling’s summary of Gentges’ testimony, “CINGSA did not do a specific study (of future expansion possibilities) because there are too many potential expansion scenarios each with its own separate set of engineering circumstances, therefore any specific study would be too speculative.”

According to the ruling, CINGSA is currently applying for production permits for the new discovery from the Alaska Department of Natural Resources and the Alaska Oil and Gas Conservation Commission. CINGSA expects the storage facility to have an operational life of 30 years. At the end of that period, the remaining 12.5 billion cubic feet of the gas discovery will be an unexpended asset that could be more easily sold then.

The 2 billion cubic feet of gas CINGSA will sell could be worth about $15 million if sold to Southcentral Alaska utilities, wrote Kenai Peninsula Borough Special Assistant for Oil and Gas Larry Persily in an email.

Persily wrote that the gas CINGSA is selling would be sold to a utility and not directly to residential customers or industries.

“It could always be less depending on time of year and supply and demand factors,” Persily wrote.