Homer Alaska - Business

Story last updated at 11:26 AM on Wednesday, August 17, 2011

Enstar, Buccaneer strike a deal

Utility to buy gas from Kenai well for storage facility

By Molly Dischner
Morris News Service - Alaska

A Sunday announcement suggests progress for natural gas development on the central Kenai Peninsula.

Buccaneer Energy announced Sunday — Monday in Australia, where the company is headquartered — that Buccaneer Alaska will sell gas from its Kenai Loop well to Enstar.

Enstar will be storing some of that gas at the Cook Inlet Natural Gas Storage facility, a project of those two entities' parent company, Semco Energy. This is the first supplier announced for the storage project. Among the future customers of the storage project is Alaska Electric and Energy Cooperative, a subsidiary of Homer Electric Association.

Enstar supplies natural gas to residential and commercial customers throughout the Kenai Peninsula and the rest of Southcentral Alaska.

Recent projections have shown a shortfall in the coming winters, with more demand for natural gas than area producers can supply.

Buccaneer spokesman Dean Gallegos said in the statement that this contract would help alleviate that shortfall.

"This gas contract represents the first such contract executed by Enstar to supply their reserve capacity in the new CINGSA facility," Gallegos said.

"Importantly, it provides Buccaneer with cash flow certainty in the near term, which will under pin the development of the Kenai Loop field."

Kenai Loop is near WalMart, and is adjacent to Marathon's Cannery Loop development site.

The location means its relatively easy to bring gas to market, Buccaneer Alaska representative Mark Landt said last week.

"We're close to infrastructure," Landt said.

The gas sales agreement is dependent on approval from the Regulatory Commission of Alaska. According to that body's website, a decision is due by Sept. 26.

Sales can begin once the commission approves the contract, but Buccaneer said they will likely start in December, once additional work at the Kenai Loop site is completed.

According to Enstar's filing with the regulatory commission, that construction includes a pipeline extension to connect the Kenai Loop site to Enstar's transmission and distribution system.

Initial sales will be done on a day-to-day basis, Buccaneer said in the announcement. That means the company will sell what is available in a daily auction to help meet peaking demand for gas. Last winter, Enstar purchased about five million cubic feet every day, at an average price of $9 per thousand cubic feet.

Come April, Buccaneer expects to sell its gas for about $5.96 per thousand cubic feet. That's when Enstar's parent company, Semco Energy, expects the new natural gas storage facility to come online. The storage facility is under construction near Kenai. CINGSA will help meet fluctuating demand by storing gas in a mostly-depeleted field in the summer so that gas can be extracted all winter.

The gas price will vary seasonally. From December through March, the gas will sell for about a quarter more, at $6.24 per thousand cubic feet.

Regardless of the season, the contract specifies that Enstar is responsible for transportation costs once the gas is at an agreed upon point, and will cover the cost of the pipeline tariff.

During the first six months of the firm contract, the contract says that Buccaneer will deliver between 5 and 15 million cubic feet per day. The first 5 million cubic feet is guaranteed; beyond that, Buccaneer can sell up to 10 million cubic feet per day of test gas. After six months, Buccaneer has the option to increase to a guaranteed 15 million cubic feet per day. The firm contract begins when the CINGSA facility comes online, which is expected to happen in April.

Buccaneer said in its statement that the step-up delivery lowers the risk for Buccaneer, and allows the company to continue its exploration plans.

Landt said last week Buccaneer plans to spud an additional well in the Kenai Loop this month, with more to follow in the next six to twelve months. The contract calls for the second well this November, and a third by Nov. 2013.

In the longer-term, Buccaneer is also working on both oil and gas prospects in Cook Inlet, which could supply even more natural gas to the local market.

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