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

In January, Enron will replace Dynegy as El Paso’s largestshipper with its one-year contract. El Paso’s next largest shipperis 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 Enronbecause it expects the value of its west-bound capacity to increasein 2001.

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

The increase in value has been attributed to a number of factorsthat likely will not be going away. They include growing gas demandin California due to unregulated operation of gas-fired generationand simple population and economic growth. Deliverability fromCanada to the Pacific region also has tightened up since NorthernBorder increased Canadian supply access to the Midwest. That willbecome even more pronounced next year with the 1.25 Bcf/d Allianceproject coming on line in November. And lastly, there is the factthat one marketing company has stepped in over the past two yearsand utilized the capacity more wisely than its regulatedpredecesor, Pacific Gas and Electric.

The impact Dynegy had on California border prices and on basisbetween the San Juan Basin and the border is likely to continuewith Enron. The average basis differential between San JuanBasin-Blanco and the border widened from 19 cents in 1997, the yearbefore the Dynegy deal took effect, to 36 cents in 1998 and 27cents 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 Borderbidweek prices averaged $2.52, $2.23 and $2.32, respectively in1997, 1998 and 1999.

Nevertheless, one source last week called it “ridiculous” thatsomeone was willing to pay so much for the space given that on amark-to-market basis the capacity is worth only about $20-25million. El Paso would not reveal who the first winning bidder was,but industry speculation had Duke Energy pegged because of itslarge generation capacity holdings in the state of California.Despite El Paso’s initial problems drumming up enough competitionfor 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 ifrevenues exceed $35 million. Above that level, Enron gets 75% ofthe revenues and El Paso gets 25%. There is not an interruptiblerevenue crediting arrangement as there was in the Dynegy deal.However, a portion of the capacity will remain subject to a recallprovision so that California endusers have access to it undercertain circumstances, as stipulated in FERC’s order on rehearing[RP97-28-019].

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