“California’s energy crisis was voluntary. They didn’t have to do it. It didn’t have to be this way,” according to veteran energy analyst and consultant Ben Schlesinger, who told NGI this week that the state bet on the weather and the spot market, but failed to hedge its bets.

The planners who restructured the state’s power market committed the cardinal sin of failing to hedge or back up the hydro power component, which normally accounts for a third of California’s power supply, Schlesinger said. The state built no new power plants; it prohibited long-term contracts; and it threw away the conservation cap by not allowing wholesale costs to be passed through to consumers.

Schlesinger, president of Benjamin Schlesinger & Associates in Bethesda, MD, in a wide-ranging interview with NGI, also said natural gas prices have stabilized and he expects some of the supplemental projects for LNG to fall by the wayside if prices stay around $3.00. He commented on the prospects for a pipeline in the far north and natural gas supplies coming from Venezuela.

The veteran natural gas and power analyst said the California Public Utilities Commission (CPUC) first took the short-term view with natural gas 10 years ago, when it effectively pushed the state’s utilities into abandoning long-term contracting for natural gas. “And they got away with it because there was a surplus.” Then in the mid-90s, “they did the same thing with electricity,” going with the theorists who advised banning bilateral contracts and throwing everyone into the day-ahead market.

The potential crisis had been set up, and the state bore the brunt of the loss when the Pacific Northwest failed to build a sizeable snowpack two winters in a row, and hydro power went into a serious slump. Much of what was left of the hydro power stayed home under long-term contracts with local generators. California, by design, relying totally on the spot market, was caught short and paid the price.

A prime lesson for those who would avoid a California-type energy meltdown is to back up any hydro-power supply with conventionally-fired generation, “even if the plants sit idle most of the time,” he said.

For now, “the California energy crisis is over,” Schlesinger said, noting the drop in natural gas prices and the current excess of generation capacity in the state. “What we have left is a financial and political crisis,” involving the very high fixed-price, long-term contracts signed in the heat of the crisis, plus the precarious position of the state’s utilities. Apart from the tangential impact of the California crisis on neighboring western states, he does not see California’s problems affecting other energy markets.

Schlesinger predicted that by the end of this year the United States will be seeing increased natural gas supplies as a result of the drilling boom which started late last year. At the same time, there will be some long-lasting conservation impacts on the gas market brought on by the high prices that will offset some of the growth in power generation demand.

“This past winter we were working with people who are doing three things to cut back on their gas demand. The demand from those who switched to oil or stopped operations temporarily will come back. But those who were prompted to spend money on the shop floor, building or buying more efficient equipment, that demand won’t come back. It’s gone. At three to four dollars an MMBtu, they spent money they wouldn’t have spent if gas were two dollars.”

Schlesinger also predicted “after six months of these $3 prices, a lot of these supplemental (gas supply) projects are going to slow down. You’ll see a thinning of the ranks.” There is a market for LNG coming into the existing terminals, but enthusiasm for accelerated development of new ones will moderate if prices stay down.

The energy analyst likes the odds on the long-term potential for Venezuelan LNG, however, which doesn’t have a long way to travel to U.S. markets. “They have U.S. style reserves down there–140 Tcf of proved reserves, and potentially another 500 Tcf— and there’s nothing being done with them. There’s no market.” The gas is associated and so far Venezuela has concentrated on its large oil reserves. Measuring off distances roughly on a map, Schlesinger pointed out that the closest markets for Venezuelan LNG are U.S. ports, which are a little over 2,000 miles away.

It’s unlikely Venezuelan gas would be shipped south to other South American countries, many of which have their own reserves. Putting a pipeline through the Amazon is a non-starter, and an overseas route to Buenos Aires would be on the order of 5,000 miles. Likewise Europe, which is closer to Middle East resources, is about 4,000 miles from Venezuela. “The only place they can go with their gas is the East Coast of North America. Of course, the ideal place for a receiving terminal is at the end of the line, not the beginning: for instance, one in California, maybe Long Beach, and one in Florida.

“Everyone says you can’t build an LNG terminal in California, because it’s earthquake-prone. Look at Japan, they’re earthquake prone and they’ve got 13 of them. You build them to withstand earthquakes.” Right now, however, Schlesinger sees the real interest in LNG terminals on the East and Gulf coasts.

Going north for supplemental supply, Schlesinger offered that the Mackenzie Delta pipeline is more likely to be built to tap arctic gas ahead of the longer and more expensive Alaska line. “The money is so different that I think it will dictate the Mackenzie project.” By rough measure the Mackenzie route would be about 1,250 miles versus about 1,800 for the Alaska route, which he said is through a much more difficult terrain. The Alaska route could be built later, or North Slope reserves could follow a long dormant plan for a pipeline to Valdez, AK, and liquefaction for shipping, “possibly to Long Beach, CA.”

Power generation demand will continue to increase. Already it is changing the natural gas market. “Some of the new generation demand started showing up on the demand charts for the first time last year. There used to be clean seasonality in gas prices. They were higher in the winter and lower the rest of the year. With the power generation demand, there’s no clean seasonality. The only people who seem to still believe in seasonality any more are futures traders,” Schlesinger said, pointing to a graph of NYMEX prices. “Basis is really the variable, that’s where the seasonality is now, in basis.”

Schlesinger believes there is still a future, long-term for nuclear power. “You can’t fool all of the people all the time. There’s nothing wrong with nuclear power. There is no China syndrome. We’ve had two meltdowns, Browns Ferry and Three Mile Island. It goes three and a half feet and stops. The earth stops it.” As for the waste problem, “by the time radioactive waste starts to leak out of Yucca Mountain (waste storage) 10,000 years from now, if we followed the alternative (more fossil fuels, global warming, melting icecaps) we’d all be underwater.”

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