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EOG, Calpine Tie Gas To Electric Prices

EOG, Calpine Tie Gas To Electric Prices

Calling it a first of its kind, producer EOG Resources of Houston and independent power producer Calpine Corp., of San Jose, CA, announced Monday they have completed a multi-million-dollar deal for a one-year supply of natural gas from offshore Texas tied to the price of electricity. Starting Jan. 2001 through Dec. 31, 2001, the contract calls for 10 MMcf/d of gas.

With increasing market indicators this year of the link between gas and electricity prices, EOG and Calpine officials said the one-year supply deal is a "mutually beneficial transaction" helping both companies improve their understanding of "the broader energy markets in the U. S." The deal allows an independent gas producer to sell directly to an independent power producer, eliminating the middlemen." This is the first gas producer to take a risk based on future electricity prices," a San Jose-based Calpine spokesperson said.

"So if they think the price of electricity is going up, this is an excellent contract for them (EOG)," said Rick Barraza, Calpine's investor relations director. "If we think we might be in a market where the prices will stay stable or go down, this is a great deal for Calpine."

Barraza said Calpine is regularly analyzing whether rising gas prices hurt the company, and has found that they do not typically. This contract is another attempt to further insulate itself and put that risk on the gas producers.

"If electricity is $50/MWh; gas is $5 for example," Barraza said. "If electricity goes to $60, gas goes to $5.70, so we're paying more for gas, but we're getting more electricity revenue in the marketplace. Also the price of gas is linked to a pre-negotiate heat-rate for the plant(s), but that is kept confidential."

The EOG supplies are mostly offshore Texas and can help supplement some of Calpine's fuel needs for its Houston Ship Channel power plant projects --- a 750-MW Pasadena, TX, plant now operating and two under construction that total another 1,200 MW. Eventually, there are 14 separate pipelines in Texas through which the supplies could flow, the Calpine spokesperson said.

"We will be able to get the gas to many different places whether or not we physically use it at the Pasadena plant or just trade around it out of Houston," Barraza said.

Richard Nemec

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