Cook Inlet oil and gas producer Hilcorp Energy agreed to terms of a consent decree to cap the price of gas sold to utilities and industrial customers for five years and not allow gas to be sold into LNG export markets until local utility needs are met, a state attorney said Thursday.
The consent decree, if agreed to by an Alaska Superior Court, will clear the way for Hilcorp to complete its acquisition of Marathon’s Alaska assets, most likely in early January.
Assistant State Attorney Ed Sniffen said the decree applies only to Hilcorp and not to Marathon. Even though the decree is not yet in effect, Hilcorp agreed Wednesday to abide by its terms between now and the time it is approved, Sniffen said.
The U.S. Federal Trade Commission meanwhile agreed to drop its own investigation of the Marathon-Hilcorp sale and has deferred to the state of Alaska and the pending consent decree, the FTC said in an announcement Wednesday.
The parallel federal and state investigations have been under way for most of 2012. Sniffen said the state of Alaska is concerned because Marathon and Hilcorp currently produce about 70 percent of Cook Inlet gas sold to regional utilities, and having that much production controlled by one company could put utilities at a disadvantage in negotiations.
Terms of the proposed decree will be made public when notices are published, probably early next week. The court will take comments from the public and interested parties for 60 days. Following that, a state Superior Court hearing will be hosted and a decision made on the consent decree, he said.
Final resolution of the matter will likely come in January, clearing the way for the Marathon asset sale, Hilcorp spokeswoman Lori Nelson said. Marathon disclosed last month to investors that the Cook Inlet assets were sold to Hilcorp for $375 million.
Sniffen said the deal freeze gas prices sold by Hilcorp to utility and industrial customers at prices existing when the decree is official, likely in January, but those prices are expected to be similar to the average price of Cook Inlet gas today, about $6.52 per mcf, Sniffen said.
The deal has an escalator allowing an annual 4-percent increase, he said, and this would likely result in an allowable price of about $7.72 per mcf at the end of five-year period in 2017, he said.
“This was a very difficult balancing act for us because we want to protect the local consumers and at the same time give Hilcorp enough of a price incentive to explore for gas,” Sniffen said.
The provision prohibiting Hilcorp from selling gas for export as LNG until local utility needs are met also applies to sales to companies “who intend to resell the gas for LNG export,” Sniffen said.
That issue may be moot if ConocoPhillips, which owns the Kenai LNG plant, fails to renew its LNG export license for the plant due to expire next March.
ConocoPhillips has not informed the state, Sniffen said, of any plans to apply for a renewal, but if an application is made it would likely come in January, he said.
There is increasing sensitivity to the Cook Inlet gas supply situation because existing fields are declining in production and local utility demand is expected to exceed annual production by the 2014-15 winter, requiring gas to be imported as LNG or compressed natural gas, utility officials told the state regulatory commission in a recent briefing.
Several companies are exploring for oil and gas in Cook Inlet, but no major discoveries have yet been made. Even if they are it is unlikely they can be put into production in time to meet the projected shortfall.
Tim Bradner can be reached at email@example.com.