NGI The Weekly Gas Market Report
A basis blowout of immense proportions has occurred betweenRocky Mountain region supply basins and the Southern Californiaborder this month and it appears to expanding as we enter August,leading to widespread speculation and controversy in the industryabout its causes.
The heat in the Southwest and the soaring power market inCalifornia over the past few weeks undoubtedly has a lot to do withthe extreme natural gas prices at the border. Gas demand forelectric generation in California has grown in “double digits” thisyear, said El Paso Natural Gas President Patricia Shelton, “and Iknow there is less hydro [available to the market]. And I know inthe east-of-California market there’s a lot of electric generationdemand also. But beyond that I [can’t speculate].”
“What we’re seeing is that demand has increased by about 300MMcf/d over last year,” said Shelton. However, SoCal Border pricesbetween $4.60 and $4.70/MMBtu for today’s flow are about $2.30 morethan prices at the same time last year and are by far (40-50 cents)the highest spot gas prices in the nation, even higher thanPG&E citygate prices in Northern California. Furthermore, thebasis spread between the border and Rocky Mountain and southwesternsupply points has ballooned to more than $1/MMBtu from 33 centsduring July 1999. Basis, which is about 46 cents more than currentmaximum transportation rates on El Paso Natural Gas, is much widerthan market fundamentals warrant, according to many observers.
After blowing out to an average of 36 cents in 1998, the bidweekprice spread between the San Juan Basin (El Paso Blanco) and theSouthern California border narrowed to an average of 26 cents lastyear and has averaged 28 cents since the beginning of this yearthrough June bidweek. In June, the spread widened to 48 cents.During July bidweek it averaged 74 cents, and since July 1 thedaily basis spread has average 94 cents. It went from an average of82.3 cents/MMBtu from July 1 through July 12 to average of1.03/MMBtu since July 13. Meanwhile, El Paso Natural Gas’ maximumfirm transportation rates are only about 54 cents including thecost of the 3.88% in-kind fuel charge.
“Someone is trying to artificially set the border high in anattempt to widen the border-basin basis,” said one marketer,echoing the comments of many others. “There are fundamental factorsin the state of California that are already pushing in a certaindirection and that has permitted them to do that,” he said.”Without the fundamentals already pointing in this direction, wouldthey still be able to push things around? Probably not.”
Another unusual phenomenon that has occurred is the divergenceof the Topock, AZ, border prices from the rest of the borderpoints. There are four main Southern California border deliverypoints: Ehrenburg, which is El Paso Natural Gas’ south mainlineinto SoCalGas only; Needles, which is Transwestern Pipeline intoboth SoCalGas and PG&E; Kern River Station, which is PG&Einto SoCalGas; and Topock, which is El Paso’s north mainline intoboth SoCal and PG&E.
Spot gas at Topock has been trading at a premium this month andfor August delivery compared to the other border points and generalborder-non-specific gas, and this is causing problems in themarket, said one gas trader. “If we either trade gas at a bordernon-specific point or pull gas out of in-state storage and try tohedge that with a published SoCal Border number, our hedge getsbusted because there is a 10 cent differential in the price.
“That’s where this whole thing unravels,” he said. “Why areEhrenburg, Needles, storage gas and the other points discounted offof Topock this month during a strong demand period? If thefundamental reason was because the load out west was so strong,then the other points would be trading at a premium because gasflows better through those points.” Topock receipts are limited toabout 540 MMcf/d, whereas Ehrenburg can receive up to 1.2 Bcf/d, henoted.
El Paso Natural Gas has come under a lot of fire because of itscapacity allocation methods, particularly at Topock. The pipelineallows anyone who owns capacity on its system to deliver theirentire load to Topock as a primary delivery point, which overloadsthe location and causes a significant portion of nominations to becurtailed on a regular basis. However, that leads one to believeTopock would be a less attractive delivery point compared to theothers because of the likelihood that much of what is nominated toTopock will be cut.
Several other traders hypothesized that Topock might be tradingat a premium because it gets exclusive treatment on EnronOnline,which boasts up to 2,000 mainly gas and power transactions each dayand has done $90 billion in business since Jan. 1. “You always havea Topock buyer in EnronOnline,” one source noted.
“EnronOnline has come out and publicized the price where theywill buy and where they will sell, and no one has really done itlike that before,” he added. “Basically they are saying the marketis this… and they have backed that up with the willingness totransact.”
“Everyone who does business in the West is looking at EOL,”another marketer said.
“The reason Topock is so high is that the quantity of basis andfinancial transactions is heavily weighted toward Topock,” said yetanother observer.
Others speculate that the 1.5 Bcf/d of firm transportationcapacity on El Paso Natural Gas held by El Paso Merchant Energy hassomething to do with the basis spread. When Dynegy held that spaceseveral years ago, it frequently was accused of holding capacityoff the market in an attempt to drive up the spread. However, onesource claims El Paso Merchant currently is having difficultyfinding a buyer for its capacity.
(Note to Price Survey Participants: NGI is investigating thepossibility of changing its coverage of the Southern Californiaborder in NGI’s Daily Gas Price Index by adding two additionalpricing points: Southern California Border/Topock and SouthernCalifornia Border/Non-Topock. NGI would continue to publish aSouthern California Border Average. NGI is asking for cooperationin specifying the border delivery point when reportingtransactions. It would like to make these additions as soon aspossible. NGI also welcomes input on this subject. Please callDexter Steis at 703-318-8848).
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