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El Paso Gets Early Holiday Gift: A 1.2 Bcf/d Deal

El Paso Gets Early Holiday Gift: A 1.2 Bcf/d Deal

The controversial two-year period in which Dynegy Marketing and Trade held a huge chunk of El Paso's firm capacity to the Southern California border is coming to an end, but if western gas traders are looking for a new market regime in the new millennium they may be sorely disappointed. El Paso announced Friday that it has found another buyer willing to hold on to 1.2 Bcf/d of firm space to the California border.

The southwestern pipeline said it recontracted all of its available firm capacity for a minimum of $37.5 million in revenues for 2000. The amount reflects an increase of 7% over the annual average revenues generated from the Dynegy deal over the past two years. Dynegy paid $70 million for 1.3 Bcf/d.

During the open bidding process that occurred during September, Williams Energy Marketing and Trading purchased 99,301 Mcf/d effective Jan. 1. The remaining capacity of 1,225,894 Mcf/d was contracted Friday, for a one-year term commencing Jan. 1, to an undisclosed shipper. Speculation tended to center on Duke Energy, whose subsidiary Duke Energy North America has 3,450 MW of current electric generation capacity in California and another 1,400 MW in development. El Paso said the shipper would be identified after a four-day bidding period. The open season is being held to provide an opportunity for other shippers to better the rates in the contract.

El Paso said the negotiated rate contract provides the company with potentially greater revenues, depending upon basis differentials between receipt and delivery points on the El Paso Natural Gas system over the course of the one-year deal. Details of the contractual terms can be found on El Paso Natural Gas Co.'s electronic bulletin board.

"We are pleased with the results of the recontracting process, which demonstrate the growing value of the capacity," said William A. Wise, president and CEO of El Paso Energy. "We designed the contract around a one-year term because we believe the value will continue to rise during the next year. This contract assures El Paso Natural Gas a reliable revenue stream during the year 2000, with upside potential. The proceeds from this contract are consistent with the projections used to establish the company's financial earnings targets for the coming year."

The transaction came just in the nick of time, too. Two rounds of open bidding failed to produce a deal earlier this fall and the pipeline company had to turn to a negotiated deal less than a month prior to decontracting. In the first round of bidding this fall, slightly less than 100 MMcf/d was awarded to Williams Energy Marketing and Trading. Other bids were rejected because they didn't meet El Paso's "minimum revenue threshold" requirements.

For the same reason and also because of withdrawn bids or unmet credit specifications, no awards were made in a second bidding round even with Dynegy's right-of-first-refusal (ROFR) capability removed. El Paso thought the ROFR might have been a deterrent to potential bidders in the first round.

Following the failure of the second open season, El Paso essentially hoped to repeat what it had done with Dynegy two years earlier: assign the capacity in a negotiated arrangement.

Including the approximately 1.3 Bcf/d of capacity turned back by Pacific Gas & Electric in 1997, Dynegy has a shade less than 1.5 Bcf/d of FT reserved, all of which expires at the end of this year. One source said Dynegy was reluctant to re-up all of its huge El Paso commitment because it was "getting hammered" this year on take-or-pay provisions during the summer months. Under its contract Dynegy was obligated to pay reservation charges on at least 72% of the capacity compared to only 50% in 1998.

"We had discussions with El Paso," said one Dynegy source. "They evidently didn't like our proposal and took Duke's."

The only other single customer that comes near Dynegy in controlling firm El Paso capacity to the border is distributor Southern California Gas with about 1,176 MMcf/d. The SoCal Gas contract runs through Aug. 31, 2006. Pacific Gas & Electric turned back all of its FT holdings on El Paso in 1997.

If the past two years provides any indication of the market impact of one company holding such a large amount of access to the Southern California Border, then a fairly wide San Juan-SoCal basis can be expected in 2000. NGI found that the average basis differential between San Juan Basin-Blanco and the border widened from 19 cents in 1997, the year before the Dynegy deal took effect, to 36 cents in 1998 and 27 cents in 1999. San Juan Non-Bondad bidweek spot prices averaged $2.33 in 1997, $1.87 in 1998 and $2.05 in 1999, while SoCal Border bidweek prices averaged $2.52, $2.23 and $2.32, respectively in 1997, 1998 and 1999.

Several San Juan Basin producers, including Amoco and Burlington Resources, have staunchly opposed the Dynegy contract. They also took shots at El Paso in a September complaint to FERC that the pipeline consistently overbooks firm nominations at the Topock, AZ, delivery point into Southern California Gas. The producers alleged that the Topock allocation method causes them big monetary losses (Amoco estimated $1-2 million a year in its case). They wanted to stop El Paso's first open season for about 1.4 Bcf/d in FT, saying its results could exacerbate the situation.

A marketer agreed with the two producers last week, complaining that El Paso essentially has been selling interruptible capacity as firm. "I am almost never able to get 100% of my FT flows delivered at the border" by El Paso, he said. The marketer estimated that nominated firm deliveries by Transwestern average 95-100%, but said El Paso service can range from 5% to 100%.

Roger Tanner, Rocco Canonica

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