Agrium won't seek royalty gas

Using state reserves not included in search for ways to keep Nikiski plant open

Posted: Sunday, April 24, 2005

Agrium is not willing to petition the state of Alaska to purchase state-owned natural gas to keep its North Kenai fertilizer plant open, said Agrium spokesperson Lisa Parker at Friday's task force meeting.

Agrium plans to close the plant Oct. 31 unless the company can secure additional gas to keep the plant operating. A task force appointed by Gov. Frank Murkowski has been meeting for two months to look at ways to keep the plant open, assist employees losing their jobs and spur resource development in the region. The group is moving toward gathering information and making a recommendation to the governor regarding these topics.

Right now Agrium is in negotiations with Cook Inlet gas producers to purchase additional gas for the plant. Parker said the company wants to focus on its negotiations with the producers and does not want to get involved in trying to purchase gas directly from the state.

"That would only confuse matters," Parker said.

At a March 29 meeting, task force co-chair Bob Favretto suggested the group look at ways to possibly sell state-owned gas, called royalty gas, to help the plant stay open. No formal recommendations have yet been adopted by the task force.

Currently, the state receives cash, called royalty in value, for its royalty share of Cook Inlet gas, allowing producers to sell the gas to their customers, such as Enstar.

If the state held a royalty gas sale it would become a seller of gas. Alaska Department of Natural Resources officials said there are about 15 billion cubic feet of gas available that could be sold. Agrium has said it needs 24 billion cubic feet of gas per year for at least two years.

Although Agrium will not try to purchase royalty gas from the state, the task force is still going to look at the issue. At the next meeting, tentatively scheduled for May 5, the DNR is slated to make a presentation about issues involving royalty gas.

The meeting in March was not the first time the sale of royalty gas has come up in Alaska.

Alaska's oil and gas leases give the state ownership of one-eighth of the oil and gas produced in kind, or in physical natural gas or crude oil. The state has sold crude oil royalty in kind from its producing leases in Cook Inlet and the North Slope, selling the state royalty oil to refineries including the Tesoro Alaska Petroleum Co. plant at Nikiski.

The state has never taken royalty gas in kind. This is partly because of a desire not to divert gas from utilities which purchase gas from producers in Southcentral Alaska. If the state's one-eighth share of royalty gas is taken and sold to a third party, such as Agrium, the producers supplying utilities like Enstar Natural Gas Co. and Chugach Electric would be minus one eighth of their production. They might be able to make up the supply to meet contract commitments, or they might not.

Last year the commissioner of DNR asked for written feedback about a royalty in-kind gas sale from parties that are interested and affected by a sale. Responses were received from a variety of organizations, such as Agrium, Unocal Corp. and the Kenai Peninsula Borough.

Agrium responded with a proposal expressing interest in purchasing royalty gas.

A royalty gas sale received mixed reviews from other interested parties.

Unocal opposed the sale and said it could complicate an already unworkable delivery system in Cook Inlet, adding that the gas market in the region is already fragile.

Marathon Oil Company also opposed the sale. In written comments, the company said much of the state's royalty gas is sold under contracts between producers and customers that serve the needs of Alaska consumers.

In the end, the sale never happened.

If the state held a royalty sale of gas, Enstar spokesperson Curtis Thayer said it is uncertain whether Enstar's contract with Unocal would require Unocal to make up the lost royalty gas.

Unocal spokesperson Diane Dunham said her company would make up any royalty gas taken in kind.

Thayer said that other producers supplying Enstar would not be required to make up the shortfall, however.

"We would strongly oppose the state taking its royalty gas and selling it to Agrium because of the adverse consequences for consumers from Anchorage up through the Mat-Su borough," Thayer said. Enstar has calculated that if Enstar lost one-eighth of all of its gas supply, the average cost to residential consumers in Southcentral Alaska would be about $100 per year, about a 15 percent increase on the average residential bill, he said.

"If the state sells royalty gas to Agrium the state will be responsible for raising people's gas bill," Thayer said.

If a royalty gas deal for Agrium is pursued in the future, it is uncertain how the state gas would be priced. State law requires royalty oil and gas to be sold for at least the prevailing market value.

State Department of Natural Resources officials would have to determine the prevailing market value for gas in Cook Inlet. It could be an average of the price for all gas being sold in the inlet, or it could be the highest price that gas is sold for. If it is the latter, the state would use the Enstar contract price with Unocal under its most recent contract as a basis for the sale. That is now $4.56 per thousand cubic feet, Thayer said, which is above the $3 per thousand cubic feet Agrium hopes to buy gas for.

Tim Bradner, a reporter for the Alaska Journal of Commerce, contributed to this story.

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