California Seeks Input on Prepaid Gas Purchase Plan

An ambitious plan to prepay for large volumes of gas under a multi-year contract is under consideration by the California agency responsible for procuring natural gas for state facilities. Staffers of Natural Gas Services, a unit of the state's Department of General Services, would like to hear ideas about implementing such a program from potential suppliers.

As it currently envisions the program, NGS is looking for between 15 Bcf and 50 Bcf of gas delivered at rates of 3-5 Bcf/year (that would cover 20-30% of total annual usage by facilities in the NGS program). The gas would be bought for even or nearly even delivery rates over the next five to 10 years starting in July 1999. Delivery points would be Malin, the PG&ampE citygate and the Southern California border. NGS wants a fixed price from the supplier, with possible limited participation in sharing savings during periods of extremely low gas prices.

NGS would use its own means to finance pre-payment for the gas, so it is not actively seeking proposals that include financing, said Marshall D. Clark, manager of the DGS Natural Gas Services Program. "We can borrow money for the pre-payment at a fairly low rate," Clark said. There have been a number of pre-payment deals lately between government agencies which currently are able to borrow money at exceptionally low interest rates at the same time gas prices are low. (See story below about the Municipal Gas Authority of Mississippi). The agency "will obviously have strong requirements for certainty of delivery for the full term and volume of the deal," he added.

The potential for rising California gas prices -- due to expansions of Northern Border and TransCanada and the Alliance Pipeline project shifting Canadian supplies more toward the Midwest market -- played no part in NGS testing the pre-payment waters, Clark said. "We feel like we've seen most of that [higher California prices] happening already," he said, pointing out that only a few years ago basis at the California border used to be Nymex [Henry Hub futures contract] minus 60-80 cents, "and now we're Nymex-plus."

The state currently buys about half of its gas at fixed prices (25% on an annual basis and 25% under five-year contracts), with the other half tied to the monthly California indexes of NGI's Gas Price Index. Clark sees the pre-payment proposal as another way of trying to diversify the government's supply portfolio. "We've heard of several deals like this being done before, and it looks like it makes good sense for us," he said.

NGS wants to schedule informal presentations from suppliers in Sacramento during the first three weeks of January (Jan. 4-22). After reviewing the proposals, NGS would specify its exact terms and conditions for the program and conduct an open bidding process to choose a provider. Because of a delay while NGS makes supporting contract commitments with public sector facilities customers (non-state government groups such as municipal and county governments and school campuses), bidding is expected to take place in mid to late April.

Those interested in making a presentation or seeking further information should contact Clark at (916) 324-1283 or via e-mail at

Roger Tanner, Houston

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