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CA Natural Gas Outlook: Supplies, Reliability OK; Prices, Competition High

With the advent of the traditional winter heating season coming next month, California's two major energy agencies held three separate sessions this past week examining in fine detail the outlook for natural gas supplies and prices this winter. Since reliability and supplies are said to be assured, state lawmakers and energy officials spent a lot of time looking at ways to help mitigate the expected 30% to 50% jump in gas utility bills for customers who qualify for low-income assistance.

With the heads of the two state legislative committees overseeing private sector utilities and four of the five members at the California Public Utilities Commission gathered Thursday at a half-day hearing in Los Angeles, executives from the major gas utilities in the state outlined various proposals for mitigating the impact of the bills, but no one offered much hope that prices would begin to go down any time through winter and into spring.

A presentation by the CPUC's energy division director Sean Gallagher reiterated the inevitability of higher prices, noting that the latest futures prices for January-February supplies are more than $14/MMBtu.

Earlier in the week, and again last Friday, leaders of the California Energy Commission (CEC) weighed in on the wholesale gas price issue -- first CEC Chairman Joe Desmond called a press briefing Tuesday in Sacramento to proclaim the state's supplies and infrastructure were adequate for the coming winter, while warning that prices will continue at their current historic high levels through the winter.

Desmond stressed that competition for natural gas will continue to become more intense on a national level, and that was further affirmed as part of a natural gas examination in the CEC's final public meeting before finalizing its 2005 update to the state's Integrated Energy Policy Report.

With California being geographically located at the western end of the nation's natural gas pipeline grid system and 87% of its gas supplies having to be imported, Desmond said the state is increasingly sensitive to the growing "liquid, national market" for gas. And the state is unwilling to accelerate the regulatory process for siting a liquefied natural gas (LNG) terminal because it might compromise the thoroughness of the ongoing environmental and safety reviews of three current off- and on-shore sites being proposed, he added.

Nevertheless, in all three forums policymakers reiterated the fact that eventually the state and the greater West need an infusion of LNG supplies. The big questions are where and when, in addition to Sempra Energy's North Baja, Mexico receiving terminal that is under construction and on track to begin operations in two years.

Mainly the Southwestern states are the principal competition to California for new domestic gas supplies because "they have also relied upon gas-fired power generation in the last several years, and this is impacting the interstate price for gas at Topock [on the Arizona-California border] as we're looking at this," Desmond said. "So states like Nevada and Arizona that have relied on natural gas-fired generation much like California has [9,908 MW of new generating capacity in the last 10 years -- all natural gas-fired] are actively seeking new supplies.

"You're seeing much the same thing in the other Southwest states, and that is, in fact, what is driving up the gas price. Gas also is flowing in both directions along the California-Mexico border, so we have to think about competing to get gas to flow north into California."

Desmond's bottom line was that this winter there will be "sufficient supplies of natural gas, but they are just going to cost more." Storage levels overall for the state are at the 234 Bcf level, or 90% of where they were at this point last year, running ahead of the five-year average for storage levels, he said.

In a number of visuals used to chart supplies and prices estimated for the future, Desmond showed the projections for price this winter are in the $12 to $14/MMBtu range, with Califiornia being at the lower end of the range, and the nation overall on average being quite a bit higher than California. The CEC estimates for translating wholesale natural gas prices into costs for the consumer use the $5/MMBtu gas price as resulting in $11 billion in annual costs; when the price doubles to $10/MMBtu (close to current average wholesale prices), the annual cost to state consumers doubles to $22 billion.

California's record annual gas bill was set in the crisis year of 2001 when gas costs collectively topped $16 billion, and the CEC estimates that prices this year will result in a similar total greater than $16 billion after three years in which the costs were below that level for three straight years.

In response to a question, Desmond indicated that the state would not try to "speed up" the review process on three proposed LNG terminal sites -- one in the Portland of Long Beach, and the other two offshore Oxnard, CA. "You don't want to do anything that would compromise the thorough review of the environmental and safety concerns. That has been laid out in existing regulations. There is no need for us to do anything to suggest the need to accelerate and suddenly short-circuit or circumventing an important environmental review."

Desmond reiterated that his agency took the lead two weeks ago in filing with the Federal Energy Regulatory Commission, outlining a number of safety and security concerns that were voiced collectively and individually by various California agencies.

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