The market for California-bound, southwestern pipeline capacity,and Permian and San Juan Basin natural gas is going to improvedramatically over the next two summers, according to Natural GasClearinghouse. So it was a big risk for NGC to post for releaseearlier this month 40% of its San Juan-to-California capacity on ElPaso. Being charged by competitors and state regulators withrestraint of trade, antitrust violations, and market manipulationfor its purchase of 1.3 Bcf/d of westbound firm capacity on El Pasomade that decision a little easier.

Also allaying its worries was the fact that it wasn’t using allof the capacity and only was paying for 50% of it this year. In1999, it’s obligated to pay reservation charges on 72% of the 1.3Bcf/d. Any fears it did have, however, vanished completely when noone showed the slightest interest in purchasing the space.

“I think this clearly demonstrates the market has thumbed itsnose at it, and it’s really just a price issue,” said Flinn,general manager of trading and commercial operations. “Who can saywhat the value of it is. We won’t know until we get down the roadand let this dynamic market out West develop.”

NGC posted three packages of capacity on El Paso’s bulletinboard for release this month. It was the first time the marketerhad shown a willingness to part with any of the capacity itpurchased since its contracts became effective in January. Thecontracts, which replaced a long-term agreement with PG&ampE,temporarily solved El Paso’s capacity turnback problem.

Since January, numerous critics have cited the increases inprices for gas and transportation capacity to the California borderas evidence the NGC-El Paso pact amounts to market manipulation.The California Public Utilities Commission said it was obvious NGCneeded only half of the capacity it purchased and bought the excessto tie up the market, depriving its competitors of capacity atdiscounted rates.

“I wouldn’t say NGC has necessarily tied up the market but Iwould say we have seen an increase in volumes coming west onTranswestern’s system,” Southern California Gas’ Lad Lorenz, saidlast week. “Because NGC holds [most] of the capacity on El Paso and[has not been] releasing any of the capacity., interruptible onTranswestern has been a viable option.”

Transwestern’s Steve Harris said despite not having any capacityavailable from the San Juan basin to the border TW’s totalcontracted capacity more than doubled from January 1997 to January1998. All of the additions were between Permian and the border. “Wewere flowing only about 400 MMcf/d in January of 1997. In Januaryof 1998 we were flowing 950 MMcf/d to the border. And basically wewere at full capacity in January and February and the later part ofMarch. Here at the beginning of April were flowing about 850MMcf/d.

“Definitely prices for capacity have increased considerably[since Jan. 1]. Back in December, we had posted IT capacity goingto California at about 3 cents/Dth/d and had done numerous deals atthat. Then starting in January and February, we saw the marketgoing up, and when we went out to sell through an open season-typeperiod that capacity was sold [as firm] at rates in the 10cents/Dth. All of a sudden you saw a huge increase in the demandfor firm capacity and the value of that go up as well.”

He attributes some of the increase in demand to the impact of ElNino on Midwest demand, which normally targets Permian Basin gas,driving up prices. This winter, there has been less interest fromthe Midwest in Permian gas, making it available to the Californiamarket. But NGC’s deal certainly played a large role. NGC tied upthe previously available capacity on El Paso, and a provision inits contract with the pipeline created a disincentive for El Pasoto sell discounted IT.

But NGC is not without supporters. Southern California Gas’s RobDavis noted shippers do not have a “God-given right to discountedcapacity.. One hundred percent of the as-billed rate is deemed tobe just and reasonable by the FERC, so I’m not sure what you coulddo that could be anticompetitive in driving prices up to a levelthat’s supposed to be just and reasonable,” said Davis. Hequestioned the motives of some of the protesters but could shed nolight on why other capacity holders would be concerned when thevalue of their capacity – and if they are producers, the value oftheir gas at the border – has risen.

The oddest thing in this ordeal is no one stepped up to takeeither of two 593,000 MMBtu/d packages of El Paso capacity NGC putout for release. One was offered through the end of April and theother through December 1999. They comprised 80% of NGC’s access tothe San Juan Basin under the purchased contracts. NGC’s Flinn saidmarket players missed a huge opportunity, one that NGC isn’t likelyto offer again.

Flinn said besides posting the capacity on El Paso’s bulletinboard, NGC was “proactive and made several phone calls to ourcompetitors and others as well as the utilities, letting them knowwhat we were doing, making sure that they had full warning so theydidn’t say ‘well, we didn’t see it.’ And I can tell you that we didnot get one single phone call from anybody in the marketplaceasking if we would be willing to split it up, or would we considernegotiating a little bit lower prices, different load factor or adifferent delivery point.

“So from that perspective, I’m not sure there’s a whole lot forthese folks to argue about.” It was a big surprise given the levelof criticism of the NGC-El Paso deal. “FERC, I think, is going tocontinue to lean in the same direction they did in the [March 3]technical conference,” i.e., in NGC’s favor, according to Flinn.

Big Buyers are Out There

Some critics predicted well before the bidding deadline on NGC’srelease that no one would step up and buy the capacity because thepackages were too large and the prices were too high. Flinn saidNGC posted such large capacity packages only after it made a 20MMcf/d package available and no one purchased it. After “the marketsaid that appeared to be just a token amount, we said okay ifthere’s that big a demand for the space and people really need alot of volume, we’ll put a large volume out there…. They couldhave bought it and re-released it as well.

“And there are people out there that have loads in excess ofthis volume that will be effective May 1.” He mentioned AES Corp.,which paid $781 million for nearly 4,000 MW of generating capacityauctioned by Southern California Edison in December. “AES has anon-peak load that could be as much as 1 Bcf/d of gas and they don’thave any fuel set up for that yet,” said Flinn. “There are newmarket players that have demand in excess of what we put out on theboard. It’s got PG&ampE as a primary delivery point but you cannominate to [three] other delivery points [at Topock].”

A number of observers scoffed at the near maximum rates NGC wasoffering when it is paying only 12 cents/Dth/d, or about one thirdthe max rate, and San Juan-California border basis has averaged anickel or more below the max rate so far this year. One observersaid it shows NGC just wants to use its unrealistic offering asproof it’s not withholding capacity. Transwestern’s Steve Harrissaid he expected shippers would sooner sign up for TW capacity at10 cents/Dth/d, rather than pay 34-35 cents/Dth/d to NGC and riskoverbuying. But he conceded TW has no capacity available from theSan Juan Basin to the border. Flinn said NGC posted the large blockof capacity at close to maximum rates (36 cents/Dth, plusvolumetric and fuel charges) because that is what it expects thevalue of the capacity to average, if not this summer then certainlynext summer. Recent strong market prices for gas and capacityclearly show the value of access to the San Juan Basin.

“The market out there is extremely dynamic and it’s going to bechanging immensely between now and next year. It will be changingrapidly within the next month or two as you have new power plantschanging hands, capacity changing hands on some of the other pipes,like PG&ampE, PGT, different issues on Transwestern. Then as you gointo next winter, there is what looks to be like quite a largethreat that Canadian gas will not be showing up in California [andwill] migrate to the Midwest. The market right now, according towhat we’re hearing, is saying deliverability out of Canada cannotkeep PGT’s, Northern Border’s and TransCanada’s incremental spacefull. California happens to be the lesser netback for theCanadians, so it looks like there should be a continued need formore gas and capacity out of the Southwest, to be served primarilyoff Transwestern and El Paso.”

Rocco Canonica

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