California Seeks Input on Prepaid Gas Purchase Plan
An ambitious plan to prepay for large volumes of gas under a
multi-year contract is under consideration by the California agency
responsible for procuring natural gas for state facilities.
Staffers of Natural Gas Services, a unit of the state's Department
of General Services, would like to hear ideas about implementing
such a program from potential suppliers.
As it currently envisions the program, NGS is looking for
between 15 Bcf and 50 Bcf of gas delivered at rates of 3-5 Bcf/year
(that would cover 20-30% of total annual usage by facilities in the
NGS program). The gas would be bought for even or nearly even
delivery rates over the next five to 10 years starting in July
1999. Delivery points would be Malin, the PG&E citygate and the
Southern California border. NGS wants a fixed price from the
supplier, with possible limited participation in sharing savings
during periods of extremely low gas prices.
NGS would use its own means to finance pre-payment for the gas,
so it is not actively seeking proposals that include financing,
said Marshall D. Clark, manager of the DGS Natural Gas Services
Program. "We can borrow money for the pre-payment at a fairly low
rate," Clark said. There have been a number of pre-payment deals
lately between government agencies which currently are able to
borrow money at exceptionally low interest rates at the same time
gas prices are low. (See story below about the Municipal Gas
Authority of Mississippi). The agency "will obviously have strong
requirements for certainty of delivery for the full term and volume
of the deal," he added.
The potential for rising California gas prices -- due to
expansions of Northern Border and TransCanada and the Alliance
Pipeline project shifting Canadian supplies more toward the Midwest
market -- played no part in NGS testing the pre-payment waters,
Clark said. "We feel like we've seen most of that [higher
California prices] happening already," he said, pointing out that
only a few years ago basis at the California border used to be
Nymex [Henry Hub futures contract] minus 60-80 cents, "and now
The state currently buys about half of its gas at fixed prices
(25% on an annual basis and 25% under five-year contracts), with
the other half tied to the monthly California indexes of NGI's Gas
Price Index. Clark sees the pre-payment proposal as another way of
trying to diversify the government's supply portfolio. "We've heard
of several deals like this being done before, and it looks like it
makes good sense for us," he said.
NGS wants to schedule informal presentations from suppliers in
Sacramento during the first three weeks of January (Jan. 4-22).
After reviewing the proposals, NGS would specify its exact terms
and conditions for the program and conduct an open bidding process
to choose a provider. Because of a delay while NGS makes supporting
contract commitments with public sector facilities customers
(non-state government groups such as municipal and county
governments and school campuses), bidding is expected to take place
in mid to late April.
Those interested in making a presentation or seeking further
information should contact Clark at (916) 324-1283 or via e-mail at
Roger Tanner, Houston
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