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California Gas Future: Mixed, Manageable, Report Says

California has hedged itself reasonably well against the continuing uncertainty of natural gas prices and supplies, but the state needs to foster development of more regional western transmission pipeline and storage infrastructure while also determining the long-term potential for more shale gas, given the adverse environmental impacts it can carry. This is the essence of the natural gas portion of the state's latest Integrated Energy Policy Report (IEPR), which is predominantly focused on the electricity sector.

The California Energy Commission (CEC) in mid-December unanimously approved its 2009 IEPR, recommending a fresh mix of strategies for lowering the state's greenhouse gas (GHG) emissions along with maintaining reliable, efficient and affordable energy supplies. The focus continued to be on reliability and renewable resources in this latest annual update of the report that goes to the governor and legislature.

The 272-page IEPR recognized that California is experiencing reduced demand for electricity, natural gas and transportation fuels as a result of the economic recession. It assumes that this will turn around, however, and energy demand will start to grow again as the economy improves.

In any scenario dependence on natural gas for electricity generation, heating and various industrial processes requires California to seek ever-more reliability and cost-effectiveness in its gas supplies, according to the IEPR. In making its annual revisions to the report, the CEC focused on three natural gas issue areas: price volatility, supply and infrastructure needs.

The report sees a growing diversity of supply sources as a strength of the state's ongoing gas policy, which can include increased shale gas dependence and increased liquefied natural gas (LNG), although over the last two years the state's predictions have gone from expecting some significant LNG imports to not counting on them in the near term.

"The recent development of natural gas shale formations has contributed to increased domestic production of natural gas, and LNG does not seem to be a priority fuel for California at this time," the CEC report said. However, the IEPR recognizes that "if private investors are willing to invest in LNG facilities without committing taxpayer or ratepayer funds, LNG should then be considered a viable option."

Authors of the annual report said they do not oppose LNG development in the state as long as that development is "consistent with the state's interests in balancing environmental protection, public safety and local community concerns to protect the state's population and coastal environment."

Noting that there have been four severe wholesale natural gas price spikes since 2000, the most recent coming in 2008, the IEPR assumes past difficulty in making meaningful wholesale gas price forecasts will continue. And it concludes that the move to more carbon-constrained energy policies will make it even more difficult to accurately predict what will happened with future gas prices.

Thus the two main gas recommendations in the CEC report give highest priority to:

While the CEC report concludes that the state has improved its level of vulnerability to interstate gas supply and price crises, the state's large dependence on gas for power generation (45%) and for out-of-state supplies (87%) still "leaves it vulnerable to supply disruptions and price volatility." More than ever, the state is part of what the IEPR called "an international natural gas market," including Canada and Mexico.

"A disruption in one area [of the West] ripples through the rest of the market. California is not immune to the ripples, but the ripples are much smaller now when they reach the state. Prices of natural gas at California's border are among the lowest in the nation, with current prices considerably less than the Henry Hub price," according to the IEPR.

Several problematic areas continue, the report noted, citing the "environmental concerns related to groundwater impacts and carbon footprint expansions" from drilling of shale gas, a new sense that the "United States may not need to rely on LNG to make up previously projected supply deficits," and a state law (AB 4037) that inhibits widespread mixing of farm waste-based and landfill gases in conventional natural gas pipelines.

The report noted that for the future there are several sources of potential new gas supplies for California, including LNG. Those sources are the existing Sempra Energy import terminal along the Pacific Coast of North Baja California in Mexico at its Costa Azul terminal, and three separate new interstate pipeline proposal from the Rockies west -- Ruby, a 1.2 Bcf/d pipeline from Opal, Wyoming to Malin, OR; Sunstone, 1.2 Bcf/d from Opal to Stanfield, OR; and Kern River Pipeline's latest expansion project to carry an additional 200 MMcf/d from Wyoming to Southern California.

Natural gas also is increasingly used in transportation, the report said, noting that the number of gas-fueled light-duty vehicles running on natural gas has increased from 3,082 vehicles in 2000 to 24,810 at the end of last year.

"While these numbers are small compared to the total vehicle population, increasing alternative transportation fuels to help meet the state's greenhouse gas emissions goals will require careful evaluation of the impact on the natural gas supply system," the IEPR said.

"California's energy policy future requires a clear, well defined foundation that understands the energy issues and provides a strategy for energy programs," said CEC Commissioner Jeffrey Byron, the presiding member for the two-member committee overseeing the development of the 2009 revision of the IEPR. "This report is the compass that will help make certain that the governor's energy vision can be implemented."

The CEC's latest statewide report contains 22 policy recommendations spread over a wide variety of areas, keeping in mind the significant climate change mitigation measures on the drawing board for 2012 and beyond. "The state's electricity, natural gas and transportation sectors must continuously respond to changes in supply and demand, new policies and technologies and their associated challenges, and increasing environmental regulation," the IEPR said.

The report update notes that at the end of 2008, more than one-third of the state's electric generation came from carbon-free sources -- nuclear (14.4%), large hydroelectric (11%) and renewables (10.6%). Nearly half came from natural gas-fired generation (45.7%). Coal -- almost all coming from out of state -- provided the rest of the mix (18.2%).

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