El Paso Natural Gas may have gotten the industry’s largest Christmas bonus last week. Its announcement two weeks ago that it recontracted all of its California-bound capacity for $37.5 million was a bit premature and a little understated. As it turned out, Enron North America Corp. upped the ante last week for 1.25 Bcf/d of firm transportation capacity on the pipeline by $8 million following a four-day open season.

In January, Enron will replace Dynegy as El Paso’s largest shipper with its one-year contract. El Paso’s next largest shipper is the nation’s largest gas distributor, Southern California Gas, which holds 1,176 MMcf/d. The SoCalGas contract runs through Aug. 31, 2006. But El Paso said it signed a short-term deal with Enron because it expects the value of its westbound capacity to increase in 2001.

The $38 million contract with Enron for 1.25 Bcf/d when combined with the previously announced $7.5 million deal with Williams Energy Marketing and Trading covering 99,301 Mcf/d marks a 30% increase in revenue when compared with the previous two years under the Dynegy contract, said spokesman Mel Scott. He said the two new contracts together amount to $45.5 million for 2000 compared to an average of $35 million/year for the Dynegy contract.

The increase in value has been attributed to a number of factors that likely will not be going away. They include growing gas demand in California due to unregulated operation of gas-fired generation and simple population and economic growth. Deliverability from Canada to the Pacific region also has tightened up since Northern Border increased Canadian supply access to the Midwest. That will become even more pronounced next year with the 1.25 Bcf/d Alliance project coming on line in November. And lastly, there is the fact that one marketing company has stepped in over the past two years and utilized the capacity more wisely than its regulated predecessor, Pacific Gas and Electric.

The impact Dynegy had on California border prices and on basis between the San Juan Basin and the border is likely to continue with Enron. The average basis differential between San Juan Basin-Blanco and the border widened from 19 cents in 1997, the year before the Dynegy deal took effect, to 36 cents in 1998 and 27 cents in 1999. San Juan Non-Bondad bidweek spot prices averaged $2.33 in 1997, $1.87 in 1998 and $2.05 in 1999, while SoCal Border bidweek prices averaged $2.52, $2.23 and $2.32, respectively in 1997, 1998 and 1999.

Nevertheless one source last week called it “ridiculous” that someone was willing to pay so much for the space, given that on a mark-to-market basis the capacity is worth only about $20-25 million. El Paso would not reveal who the first winning bidder was, but industry speculation had Duke Energy pegged because of its large generation capacity holdings in the state of California. Despite El Paso’s initial problems drumming up enough competition for the space – it held two previous open seasons without result – demand obviously picked up in the last round.

The contract signed by Enron allows for a sharing mechanism if revenues exceed $35 million. Above that level, Enron gets 75% of the revenues and El Paso gets 25%. There is not an interruptible revenue crediting arrangement as there was in the Dynegy deal. However, a portion of the capacity (Block 2) will remain subject to a recall provision so that California endusers have access to it under certain circumstances, as stipulated in FERC’s order on rehearing [RP97-28-019] (see NGI Aug. 2).

Rocco Canonica

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