CA Gas Supplies Seen as Adequate; Prices/Transmission Cause Concern

Continuing to be driven by the thirst of more natural gas-fired electric generating plants, California natural gas supplies should remain sufficient, although prices will stay higher than they have been in the past in the $4-$6/MMBtu range, according to an updated forecast released Wednesday by the state energy commission.

The report, which is part of the development of the state's "Integrated Energy Policy Report" due to the state legislature Nov. 1, raises a red flag concerning the adequacy of interstate pipeline capacity coming into Southern California and transmission in the northern half of the state.

"To accommodate growing demand in California and surrounding states, interstate natural gas pipeline infrastructure in the Southwest, Rocky Mountains, and Canada should be expanded to increase the amount of natural gas that can be transported to California," said the California Energy Commission's latest report, which is an update of a December 2002 gas report. In an unrelated development, the commission on Wednesday also held a workshop in Sacramento for in-state stakeholders to examine "any impediments to continuing or increasing natural gas supplies here in California," according to a commission staff analyst.

While citing Southern California Gas Co. as having "adequate" intrastate pipeline capacity, the energy commission staff expressed "concern" with interstate capacity serving Southern California, and what it called "the regulatory conditions affecting its usage," along with increasing gas demand in Arizona and New Mexico absorbing "a significant amount of the natural gas flowing west from the San Juan and Permian basins." To alleviate what it considered a "potential bottleneck" to California's future supplies, the report said the interstate infrastructure serving east-of-California markets needs to be expanded.

Overall gas demand in California should average 1%/year growth over the next ten years, according to the report, with demand for electric generation gas supplies rising about 1.5%/year over that same period. Industrial demand, on the other hand, is expected to be flat.

On the supply side, "supplies are not as plentiful as expected earlier," said the energy commission report, noting that liquefied natural gas (LNG) is expected to fill in the slack of production from the U.S. Lower 48 and Canada. But even with the expected LNG imports starting in 2007, the report said the "Southwest will remain the state's major natural gas resource region.

"New gas-fired power plants in the western U.S. are increasing gas demand and, in turn, triggering the need for new investments in interstate pipeline projects. The gas flow patterns in the base case indicate that additional pipeline capacity will be needed to meet growing electricity generator demand in southern Nevada, Arizona, and New Mexico. The San Juan and Rocky Mountain basins will be the primary supply basins of choice."

As part of the latest update, the energy commission staff looked at 11 different scenarios: (a) base case, (b) low hydro, (c) high economic growth, (d) low economic growth, (e) high demand-side management (DSM), (f) low DSM, (g) transportation sector, (h) low natural gas supply, (i) LNG, (j) low gas prices, and (k) high gas prices.

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