While many El Paso Natural Gas shippers were thankful that the contract conversion on Sept. 1 finally ended years of nomination cuts on the system, a new FERC order could lead to new constraints and may bring back nomination cuts in a hurry, according to some observers.

“Full requirements” (FR) shippers on El Paso converted to new contracts on Sept. 1 that require them to divvy up the receipt point rights in the comparatively low-priced San Juan Basin by specifying exactly how much capacity they need on the pipeline. In the past, these same shippers were given unlimited rights to San Juan Basin receipts. Because the San Juan Basin was the lowest-priced supply on the system, there were constant overnominations for the capacity, which led to sharp cuts by the pipeline company when gas actually flowed. Shippers often would nominate twice the capacity they needed, hoping that after the cuts by the pipeline an adequate amount of capacity would remain to meet their demand requirements.

The new capacity scheme agreed to in a settlement had put the primary firm delivery point rights of the converting “full requirements” shippers all at the California border rather than at their actually intended delivery locations east of California in order to utilize displacement capacity and avoid potential constraints on El Paso’s three crossover pipelines, which connect the North and South Mainlines. El Paso’s capacity scheme was necessary because of the strong demand for San Juan Basin gas accessible from the North Mainline and the limited amount of capacity on the crossovers.

But on Aug. 29, FERC ordered the pipeline to give the former FR shippers the option of choosing new primary firm delivery point rights on the pipeline system rather than accepting the California border as their primary delivery point.

According to some stakeholders, this order essentially throws a monkey wrench in the pipeline company’s capacity plan and may lead to renewed capacity cuts.

“It’s going to screw up the gas flow,” said a source who didn’t want to be named. “By letting them reallocate those points, they basically changed what El Paso had done and what El Paso thought would work. By reallocating the primary delivery points on the system, it will cause constraints on the crossovers. I think the Commission may not have realized the effect of what they have granted in this order.

“Shippers were doing ‘hurrahs’ in the trading rooms this week because there weren’t any cuts. I’m worried that it’s going to be a short-lived situation.”

In a bulletin board notice posted late Thursday, El Paso said that it is “concerned that reliability of firm transportation service” on its system “cannot be fully achieved without taking into account the fact that the physical capacity on El Paso’s three main crossover lines — the San Juan-Permian crossover, the Havasu crossover, and the Maricopa Line — in the aggregate, is substantially less than the capacity to flow gas east-to-west on El Paso’s North and South Mainlines.”

El Paso said it had “embraced these north-to-south crossover limitations” in its original plan. The agreement between El Paso, FERC and shippers specifically prohibits the pipeline, for as long as these capacity constraints continue, from selling additional firm capacity rights through the constrained crossover lines unless new capacity is constructed.

As a result, El Paso said, “relocation of delivery rights associated with San Juan receipt rights will require that the FR shipper swap those San Juan receipt rights for Permian or Anadarko receipt rights to avoid exacerbating the north to south capacity problem.”

To avoid continuing cuts on the pipeline, east-of-California shippers could find themselves having to purchase much more higher-priced Permian Basin and Anadarko Basin supply than they originally anticipated. That also could have the effect of increasing demand and prices in those basins, some observers said.

El Paso said Friday that it was issuing a shipper-personalized form for requests to re-designate primary delivery point rights. Only converting FR shippers are eligible to request to move their California primary delivery point rights upstream to their historical FR delivery points under this process. “A request to re-designate a primary delivery point must not increase the physical north-system-to-south-system transportation requirements,” El Paso said.

It also said requests to relocate Topock delivery point rights associated with Permian or Anadarko Basin receipt rights will be accepted “even though such moves will increase the possibility that constraints will be encountered due to a lack of displacement capacity provided by south to north transportation transactions.”

Requests to re-designate primary delivery point rights with Permian or Anadarko Basin receipt point rights will be accepted only through 5 p.m. MDT Sept. 11.

El Paso said the process to re-designate the primary delivery point rights will be completed no later than Sept. 17. For additional details contact El Paso’s contract services division at (719) 520-4509.

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