NGC Posts 40% of its El Paso Capacity For Release But has No Takers
The market for California-bound, southwestern pipeline capacity, and Permian and San Juan Basin natural gas is going to improve dramatically over the next two summers, according to Natural Gas Clearinghouse. So it was a big risk for NGC to post for release earlier this month 40% of its San Juan-to-California capacity on El Paso. Being charged by competitors and state regulators with restraint of trade, antitrust violations, and market manipulation for its purchase of 1.3 Bcf/d of westbound firm capacity on El Paso made that decision a little easier.
Also allaying its worries was the fact that it wasn't using all of the capacity and only was paying for 50% of it this year. In 1999, it's obligated to pay reservation charges on 72% of the 1.3 Bcf/d. Any fears it did have, however, vanished completely when no one showed the slightest interest in purchasing the space.
"I think this clearly demonstrates the market has thumbed its nose at it, and it's really just a price issue," said Flinn, general manager of trading and commercial operations. "Who can say what the value of it is. We won't know until we get down the road and let this dynamic market out West develop."
NGC posted three packages of capacity on El Paso's bulletin board for release this month. It was the first time the marketer had shown a willingness to part with any of the capacity it purchased since its contracts became effective in January. The contracts, which replaced a long-term agreement with PG&E, temporarily solved El Paso's capacity turnback problem.
Since January, numerous critics have cited the increases in prices for gas and transportation capacity to the California border as evidence the NGC-El Paso pact amounts to market manipulation. The California Public Utilities Commission said it was obvious NGC needed only half of the capacity it purchased and bought the excess to tie up the market, depriving its competitors of capacity at discounted rates.
"I wouldn't say NGC has necessarily tied up the market but I would say we have seen an increase in volumes coming west on Transwestern's system," Southern California Gas' Lad Lorenz, said last week. "Because NGC holds [most] of the capacity on El Paso and [has not been] releasing any of the capacity., interruptible on Transwestern has been a viable option."
Transwestern's Steve Harris said despite not having any capacity available from the San Juan basin to the border TW's total contracted capacity more than doubled from January 1997 to January 1998. All of the additions were between Permian and the border. "We were flowing only about 400 MMcf/d in January of 1997. In January of 1998 we were flowing 950 MMcf/d to the border. And basically we were at full capacity in January and February and the later part of March. Here at the beginning of April were flowing about 850 MMcf/d.
"Definitely prices for capacity have increased considerably [since Jan. 1]. Back in December, we had posted IT capacity going to California at about 3 cents/Dth/d and had done numerous deals at that. Then starting in January and February, we saw the market going up, and when we went out to sell through an open season-type period that capacity was sold [as firm] at rates in the 10 cents/Dth. All of a sudden you saw a huge increase in the demand for firm capacity and the value of that go up as well."
He attributes some of the increase in demand to the impact of El Nino on Midwest demand, which normally targets Permian Basin gas, driving up prices. This winter, there has been less interest from the Midwest in Permian gas, making it available to the California market. But NGC's deal certainly played a large role. NGC tied up the previously available capacity on El Paso, and a provision in its contract with the pipeline created a disincentive for El Paso to sell discounted IT.
But NGC is not without supporters. Southern California Gas's Rob Davis noted shippers do not have a "God-given right to discounted capacity.. One hundred percent of the as-billed rate is deemed to be just and reasonable by the FERC, so I'm not sure what you could do that could be anticompetitive in driving prices up to a level that's supposed to be just and reasonable," said Davis. He questioned the motives of some of the protesters but could shed no light on why other capacity holders would be concerned when the value of their capacity - and if they are producers, the value of their gas at the border - has risen.
The oddest thing in this ordeal is no one stepped up to take either of two 593,000 MMBtu/d packages of El Paso capacity NGC put out for release. One was offered through the end of April and the other through December 1999. They comprised 80% of NGC's access to the San Juan Basin under the purchased contracts. NGC's Flinn said market players missed a huge opportunity, one that NGC isn't likely to offer again.
Flinn said besides posting the capacity on El Paso's bulletin board, NGC was "proactive and made several phone calls to our competitors and others as well as the utilities, letting them know what we were doing, making sure that they had full warning so they didn't say 'well, we didn't see it.' And I can tell you that we did not get one single phone call from anybody in the marketplace asking if we would be willing to split it up, or would we consider negotiating a little bit lower prices, different load factor or a different delivery point.
"So from that perspective, I'm not sure there's a whole lot for these folks to argue about." It was a big surprise given the level of criticism of the NGC-El Paso deal. "FERC, I think, is going to continue 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's release that no one would step up and buy the capacity because the packages were too large and the prices were too high. Flinn said NGC posted such large capacity packages only after it made a 20 MMcf/d package available and no one purchased it. After "the market said that appeared to be just a token amount, we said okay if there's that big a demand for the space and people really need a lot of volume, we'll put a large volume out there.... They could have bought it and re-released it as well.
"And there are people out there that have loads in excess of this volume that will be effective May 1." He mentioned AES Corp., which paid $781 million for nearly 4,000 MW of generating capacity auctioned by Southern California Edison in December. "AES has an on-peak load that could be as much as 1 Bcf/d of gas and they don't have any fuel set up for that yet," said Flinn. "There are new market players that have demand in excess of what we put out on the board. It's got PG&E as a primary delivery point but you can nominate to [three] other delivery points [at Topock]."
A number of observers scoffed at the near maximum rates NGC was offering when it is paying only 12 cents/Dth/d, or about one third the max rate, and San Juan-California border basis has averaged a nickel or more below the max rate so far this year. One observer said it shows NGC just wants to use its unrealistic offering as proof it's not withholding capacity. Transwestern's Steve Harris said he expected shippers would sooner sign up for TW capacity at 10 cents/Dth/d, rather than pay 34-35 cents/Dth/d to NGC and risk overbuying. But he conceded TW has no capacity available from the San Juan Basin to the border. Flinn said NGC posted the large block of capacity at close to maximum rates (36 cents/Dth, plus volumetric and fuel charges) because that is what it expects the value of the capacity to average, if not this summer then certainly next summer. Recent strong market prices for gas and capacity clearly show the value of access to the San Juan Basin.
"The market out there is extremely dynamic and it's going to be changing immensely between now and next year. It will be changing rapidly within the next month or two as you have new power plants changing hands, capacity changing hands on some of the other pipes, like PG&E, PGT, different issues on Transwestern. Then as you go into next winter, there is what looks to be like quite a large threat that Canadian gas will not be showing up in California [and will] migrate to the Midwest. The market right now, according to what we're hearing, is saying deliverability out of Canada cannot keep PGT's, Northern Border's and TransCanada's incremental space full. California happens to be the lesser netback for the Canadians, so it looks like there should be a continued need for more gas and capacity out of the Southwest, to be served primarily off Transwestern and El Paso."
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