Risk from gas prices remains obstacle for pipeline

Posted: Tuesday, June 08, 2004

Finding a way to spread the risk among parties is one of the key unresolved issues in getting North Slope producers to commit to the financial gamble of a multibillion-dollar Alaska natural gas pipeline.

Although long-term, take-or-pay contracts could protect gas producers and pipeline investors from the financial fear of low market prices, they also could put utilities in the position of paying above-market prices for Alaska gas in the future. That's something that utility regulators and consumers don't like.

An Alaska gas line moving 4.5 billion cubic feet per day would carry almost $5.8 billion worth of gas a year, at $3.50 per thousand cubic feet. With the projected pipeline tariff possibly eating up two-thirds of the revenue if construction cost estimates come true, the producers worry about who will help share the risk during periods of low gas prices.

"You're probably not going to see LDCs (local distribution companies) take a big share of the risk," said Bill Garner, a managing director of energy investment bank Petrie Parkman & Co., in Houston. "Naturally, LDCs are a little gun-shy about signing these long-term contracts."

Utilities aren't necessarily required to obtain regulatory approval of their gas supply contracts but they do need approval of their rates, and consumers can protest if they believe the utilities are overcharging for gas.

"We know of a number of utilities that are discouraged (by state regulators) from signing long-term contracts," said Michael Zenker, senior director for Cambridge Energy Research Associates' North American Natural Gas Service.

Some public utility commissions have expressed interest in perhaps moving away from their opposition to long-term gas supply contracts, though it's still early in the evolution, Zenker said.

Utilities have a responsibility to ensure that their customers have adequate supplies of gas, but it's impossible to know how much gas might cost in the future and how much utilities should promise to pay for that supply.

Contracts for long-term pipeline shipping capacity are different from contracts to buy gas at a set price, said John Cita, chief economist for the Kansas Corporation Commission, which regulates utilities in the state.

Signing a long-term deal for pipeline tariffs, or even for gas at prices tied to a floating market index, isn't a problem compared to a long-term supply contract at fixed prices, he said.

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