An ambitious plan to prepay for large volumes of gas under amulti-year contract is under consideration by the California agencyresponsible for procuring natural gas for state facilities.Staffers of Natural Gas Services, a unit of the state’s Departmentof General Services, would like to hear ideas about implementingsuch a program from potential suppliers.

As it currently envisions the program, NGS is looking forbetween 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 theNGS program). The gas would be bought for even or nearly evendelivery rates over the next five to 10 years starting in July1999. Delivery points would be Malin, the PG&ampE citygate and theSouthern California border. NGS wants a fixed price from thesupplier, with possible limited participation in sharing savingsduring 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 ServicesProgram. “We can borrow money for the pre-payment at a fairly lowrate,” Clark said. There have been a number of pre-payment dealslately between government agencies which currently are able toborrow money at exceptionally low interest rates at the same timegas prices are low. (See story below about the Municipal GasAuthority of Mississippi). The agency “will obviously have strongrequirements for certainty of delivery for the full term and volumeof the deal,” he added.

The potential for rising California gas prices — due toexpansions of Northern Border and TransCanada and the AlliancePipeline project shifting Canadian supplies more toward the Midwestmarket — played no part in NGS testing the pre-payment waters,Clark said. “We feel like we’ve seen most of that [higherCalifornia prices] happening already,” he said, pointing out thatonly a few years ago basis at the California border used to beNymex [Henry Hub futures contract] minus 60-80 cents, “and nowwe’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), withthe other half tied to the monthly California indexes of NGI’s GasPrice Index. Clark sees the pre-payment proposal as another way oftrying to diversify the government’s supply portfolio. “We’ve heardof several deals like this being done before, and it looks like itmakes good sense for us,” he said.

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

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

Roger Tanner, Houston

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