Basis Blowout at SoCal Border Shocks Market
A basis blowout of immense proportions has occurred between Rocky Mountain
region supply basins and the Southern California border this month and
it appears to be expanding as we enter August, leading to widespread speculation
and controversy in the industry about its causes.
The heat in the Southwest and the soaring power market in California
over the past few weeks undoubtedly have a lot to do with the extreme natural
gas prices at the border. Gas demand for electric generation in California
has grown in "double digits" this year, said El Paso Natural
Gas President Patricia Shelton, "and I know there is less hydro [available
to the market]. And I know in the east-of-California market there's a lot
of electric generation demand also. But beyond that, I [can't speculate]."
"What we're seeing is that demand has increased by about 300 MMcf/d
over last year," said Shelton. However, SoCal Border prices between
$4.60 and $4.70/MMBtu for today's flow are about $2.30 more than prices
at the same time last year and are by far (40-50 cents) the highest spot
gas prices in the nation, even higher than PG&E citygate prices in
Northern California. Furthermore, the basis spread between the border and
Rocky Mountain and southwestern supply points has ballooned to more than
$1/MMBtu from 33 cents during July 1999. Basis, which is about 46 cents
more than current maximum transportation rates on El Paso Natural Gas,
is much wider than market fundamentals warrant, according to many observers.
After blowing out to an average of 36 cents in 1998, the bidweek price
spread between the San Juan Basin (El Paso Blanco) and the Southern California
border narrowed to an average of 26 cents last year and has averaged 28
cents since the beginning of this year through June bidweek. In June, the
spread widened to 48 cents. During July bidweek it averaged 74 cents, and
since July 1 the daily basis spread has average 94 cents. It went from
an average of 82.3 cents/MMBtu from July 1 through July 12 to average of
1.03/MMBtu since July 13. Meanwhile, El Paso Natural Gas' maximum firm
transportation rates are about 54 cents including the current cost of the
3.88% in-kind fuel charge.
"Someone is trying to artificially set the border high in an attempt
to widen the border-basin basis," said one marketer, echoing the comments
of many others. "There are fundamental factors in the state of California
that are already pushing in a certain direction and that has permitted
them to do that," he said. "Without the fundamentals already
pointing in this direction, would they still be able to push things around?
Another unusual phenomenon that has occurred is the divergence of the
Topock, AZ, border prices from the rest of the border points. There are
four main Southern California border delivery points: Ehrenburg, which
is El Paso Natural Gas' south mainline into SoCalGas only; Needles, which
is Transwestern Pipeline into both SoCalGas and PG&E; Kern River Station,
which is PG&E into SoCalGas; and Topock, which is El Paso's north mainline
into both SoCal and PG&E.
Spot gas at Topock has been trading at a premium this month and for
August delivery compared to the other border points and general border-non-specific
gas, and this is causing problems in the market, said one gas trader. "If
we either trade gas at a border non-specific point or pull gas out of in-state
storage and try to hedge that with a published SoCal Border number, our
hedge gets busted because there is a 10 cent differential in the price.
"That's where this whole thing unravels," he said. "Why
are Ehrenburg, Needles, storage gas and the other points discounted off
of Topock this month during a strong demand period? If the fundamental
reason was because the load out west was so strong, then the other points
would be trading at a premium because gas flows better through those points."
Topock is limited to about 540 MMcf/d, whereas Ehrenburg can handle up
to 1.2 Bcf/d, he noted.
El Paso Natural Gas has come under a lot of fire because of its capacity
allocation methods, particularly at Topock. (See NGI, July
10) The pipeline allows anyone who owns capacity on its system to use
Topock as a primary delivery point, which overloads the location and causes
a significant portion of nominations to be curtailed on a regular basis.
However, that leads one to believe Topock would be a less attractive delivery
point compared to the others because of the likelihood that much of what
is nominated to Topock will be cut.
Some have questioned, however, whether some traders may have developed
a gaming strategy based on not having to deliver contracted volumes. An
end user might favor a Topock over a non-Topock delivery because if and
when his capacity is cut, he may be able to turn around and buy second
cycle gas at 10 to 20 cents less than he originally paid. "We were
forced to unload some gas into Erhenburg at $4.50 that was originally sold
(but later cut) at $4.70 at Topock," a marketer said, adding it is
not unusual for 30% to 40% of nominations at Topock to be cut.
Several other traders hypothesized that Topock might be trading at a
premium because it gets exclusive treatment on EnronOnline, which boasts
up to 2,000 mainly gas and power transactions each day and has done $90
billion in business since Jan. 1. "You always have a Topock buyer
in EnronOnline," one source noted.
"EnronOnline has come out and publicized the price where they will
buy and where they will sell, and no one has really done it like that before,"
he added. "Basically they are saying the market is this..... and they
have backed that up with the willingness to transact."
"Everyone who does business in the West is looking at EOL,"
another marketer said.
"The reason Topock is so high is that the quantity of basis and
financial transactions is heavily weighted toward Topock," said yet
Others speculate that the 1.5 Bcf/d of firm transportation capacity
on El Paso Natural Gas held by El Paso Merchant Energy has something to
do with the basis spread. When Dynegy held that space several years ago,
it frequently was accused of holding capacity off the market in an attempt
to drive up the spread. However, one source claims El Paso Merchant currently
is having difficulty finding a buyer for its capacity.
Harvey Morris, an attorney with the California Public Utility Commission,
said he is very interested in this topic. He believes putting so much firm
transportation capacity into the hands of one market player enables not
only that player, but also many others to manipulate prices to a great
"We have a complaint against El Paso and El Paso Merchant Energy
about the same anticompetitive conduct we were worried that Dynegy had
done," said Morris. "Obviously it is getting worse." (See
NGI, April 10)
The large gas marketers have grown even larger and are much more able
to wield market power, "and that is particularly possible when one
market player, El Paso Merchant, has entered into a giant arrangement and
the others can now take advantage of it. The issue isn't can you get gas
to market; the issue is when one big player withholds capacity or jacks
up the price for that capacity, the fight for the remaining capacity goes
up likewise. When one major player is doing a lot of artificiality in the
marketplace then you cause a snowballing effect among the prices from everyone
else. El Paso Merchant is the artificial player right now."
The current price situation "doesn't make sense," Morris noted,
"because it's not like we're using up all the molecules on all the
interstate pipelines to California, and we're still in a physical excess
pipeline capacity situation."
The CPUC's complaint against the El Paso Natural-El Paso Merchant Energy
contract is pending at FERC. Morris said the Commission recently granted
discovery, which will take place over the next few weeks. The CPUC intends
to make a decision on where it plans to take this case by the end of August.
Its appeal of the El Paso-Dynegy decision also is pending in the U.S. Court
(Note to Price Survey Participants: NGI is investigating the possibility
of changing its coverage of the Southern California border in its price
tables by adding two additional pricing points: Southern California Border/Topock
and Southern California Border/Non-Topock. NGI would continue to publish
a Southern California Border Average. NGI is asking for cooperation in
specifying the border delivery point when reporting transactions. It would
like to make these additions as soon as possible. NGI also welcomes input
on this subject. Please call Dexter Steis at 703-318-8848).