With the ink barely dry on the contract accord, El Paso Natural Gas stunned everyone last week when it announced that it and Enron North America Corp. were parting ways. El Paso said the companies had reached a “mutual agreement” to annul their $38 million negotiated arrangement under which the marketer had agreed to acquire 1.2 Bcf/d of westbound firm capacity on the pipeline. (See NGI, Jan. 31).

El Paso blamed the collapse of the deal on FERC, having reducedthe commercial value of much of the contracted-for capacity bycurbing its primary delivery access. The negotiated arrangementcovered three separate capacity agreements.

The decision to release Enron from the three capacity agreementswas somewhat puzzling, given that Enron earlier had asked to bedischarged from only one contract — the famed Block II agreementfor 614 MMcf/d — due to the restraints the Commission had placedon the delivery rights of that capacity. In a terse Jan. 27 letter,Enron notified El Paso of its intent to exit the Block II contract,but it didn’t indicate it planned to terminate the Blocks I and IIIcontracts as well. The two one-year agreements represented acombined total of 650 MMcf/d.

“They asked for it [to be released] and we agreed to it. It wasa mutual agreement,” said El Paso spokesman Mel Scott. The threecapacity agreements, which went into effect Jan. 1, were terminatedeffective Jan. 31. El Paso said it will hold an open season for theentire 1.2 Bcf/d of capacity to run from Feb. 7 to Feb. 14. Biddersfor the capacity will have to meet minimum revenue requirements setby El Paso.

“It is unfortunate that the recent FERC order modified thecapacity rights in a way that will not allow the capacity to servethe purpose that Enron North America originally intended when theyoutbid the prearranged transaction. In the interest of fairness andgood customer relations, we have agreed to release them from thecontracts,” said John W. Somerhalder II, president of El PasoEnergy’s Pipeline Group.

When asked point blank if Enron wanted out of all threeagreements, senior El Paso spokeswoman Norma Dunn said “we justdecided in the spirit of good customer relations to void thatcontract and start over. It’s possible it just didn’t make sensefor them anymore. I just think that it’s the best course totake…”

But Enron’s letter told something of a different story. ThereEnron said it sought to exit only its Block II service agreementbecause it didn’t believe the contract conditions “[had] beensatisfactorily completed.” As a result of the restraints imposed onthe Block II delivery rights, the marketer asserted that “nocontractual obligations under the Block II service agreement exist”anymore. Neither the Block I nor Block III capacity agreements,which were unscathed by FERC’s mid-January order, were evermentioned in Enron’s letter abrogating its Block II contract. Enrondeclined to further comment last week.

Some believe El Paso could have a difficult time re-marketingthe Block II capacity in light of the restrictions placed on itsdelivery rights, but Somerhalder doesn’t think so. “El Pasobelieves the value of this capacity continues to increase with theongoing clockwise shift in North American gas deliveries and thatthe re-subscription revenues will not differ materially from theexpected revenues under the Enron North America contract.”

El Paso’s Dunn agreed. The pipeline is “very confident…we’regoing to be able to re-contract, and you’re going to see the valueof capacity going from the Southwest into the state of California[rise].” She further minimized the effect that the loss of thecontract deal will have on El Paso. “This contract [represented]about five cents per share for the entire corporation. So it’s notterribly material to the entire scheme of things at this company.”

The El Paso westbound capacity has been marred by controversyfor more than two years, when Dynegy Inc. first contracted for theentire 1.2 Bcf/d package. Producers and marketers on El Paso’ssystem have been opposed to the pipeline placing so much of itscapacity in the hands of one company, as well as to the contractterms. As a result, they and California regulators have battled thecontract arrangement every step of the way at FERC and in thecourts.

Critics of the El Paso-Enron transaction were relieved somewhatby Enron’s exit because of the marketer’s affiliation withTranswestern Pipeline, a competitor of El Paso’s. But they’reworried about what’s in store. “It’s better that it’s not Enron orsomeone that’s affiliated with Transwestern, but if El Paso just[awards] the same package of all that capacity to one player againand they [the capacity-holder] horde the capacity like Dynegy did,we still have anticompetitive problems,” one market observer noted.

“If El Paso becomes partners with whoever the marketer isholding that capacity, where El Paso gets 25% of their profits[beyond a certain level], driving up the differential between theSan Juan Basin and the California border, we still have problems,”he noted. He said it would have “improved things” if El Paso wouldhave permitted Enron to keep Blocks I and III capacity, and awardedBlock II to someone else. But that wasn’t going to happen becauseEl Paso views the three capacity blocks as a “package deal,” hesaid.

“If Enron wasn’t going to do the Block II then a lot of themoney that Enron was supposed to pay El Paso was gone. And ifallowed to keep Blocks I and III, Enron would have gotten realcheap access to the Permian Basin and some access to the San JuanBasin. But El Paso would never see its 25% share beyond $35million.” El Paso “wasn’t going to allow that to happen, so…..ElPaso just took it all back,” the source speculated.

In a related development, FERC last week denied El Paso’s request to stay part of the order that disallowed primary delivery rights for the Block II capacity to southern California. In that order, the Commission had ruled that the terms of El Paso’s 1996 turned-back capacity settlement limited primary rights for Block II capacity solely to the delivery point at Pacific Gas & Electric-Topock, and designated Southern California Gas-Topock and Mojave-Topock as alternate delivery points (See NGI, Jan. 31).

FERC’s decision would have required El Paso to amend the termsof its original negotiated contract deal with Enron that listed allthree Topock delivery points as primary for the Block II firmcapacity. Without primary rights at SoCal-Topock, the “commercialvalue” of the Block II capacity nose-dived, sources said, and hadprompted widespread speculation that Enron was looking to unloadthe Block II capacity. Marketers and producers value firm capacityto SoCal-Topock much more than they do capacity to PG&E-Topockbecause they can get higher netbacks for their San Juan Basin gas.But they feared that if Block II capacity had received primaryaccess at SoCal-Topock, the delivery point would become more taxedthan it already is.

The SoCal-Topock point, more specifically El Paso’scapacity-allocation practices at the point, have long been afestering problem for El Paso shippers. The Commission ordered asweeping review of the pipeline’s allocation procedures afterproducers and marketers complained that El Paso was overbookingcapacity to SoCal-Topock, resulting in significant shippercurtailments. Last November, FERC directed El Paso to come up witha new proposal for capacity allocation, which the pipeline isexpected to file on Feb.9 (see NGI, Nov. 15).

Amoco Production, Burlington Resources Oil & Gas andMarathon Oil urged the Commission to reject El Paso’s stay request,saying that it was simply “delay tactics.” FERC seemed to agreewith the producers. In a one-paragraph decision, the Commissionlikened El Paso’s stay request to a “request for an extension oftime” in which to comply with its decision on delivery rights.

“It was a big victory for [existing] firm users of theSoCal-Topock points when the FERC refused to grant the stay,”commented one source.

Pulling out all the stops, El Paso also sought rehearing ofFERC’s mid-January order even before the Commission rebuffed itsstay request. Without a favorable decision on rehearing, “theresult may well be a diminution of the value of Block II capacity,”El Paso told FERC.

El Paso contends the Commission’s ruling on primary deliveryaccess, if unchanged, would thwart the intent of the 1996settlement, which called for the pipeline and its customers toshare the risks associated with unsubscribed capacity on El Paso’ssystem. In return, El Paso agreed to share a portion of therevenues it received from re-marketing the capacity.

Susan Parker

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