Assuming the Pacific Northwest soon will have added natural gas pipeline capacity into Oregon’s Willamette Valley and elsewhere, the power sector’s growing use of renewables, particularly wind, in the region promises to revise the roles played by gas pipelines and storage, Northwest Natural Gas Co. CEO Gregg Kantor said last Wednesday during a second quarter earnings conference call.

Subject to the economy and some legal factors, the need for added gas pipeline and storage capacity in the region is a given; it is just a matter of when, not if, according to Kantor and other senior executives at Northwest Natural. Earnings increased quarter over quarter for the most recent period and were flat for the first half of this year compared to the same period in 2009.

The gas-only utility reported net income of $6.9 million, or 26 cent/share, for the second quarter, compared with $3.1 million, or 12 cents/share, for the same period last year. For the first six months in 2010, net income was $50.5 million, or $1.90/share, compared to $50.4 million, or $1.90/share, in the first half of 2009.

While reiterating that he thinks at least the eastern part of the proposed Palomar Pipeline, a joint venture of Northwest Natural and TransCanada Corp., will get built, Kantor said he is staying in close contact with the power sector utilities in the Northwest. At least two major variables are driving the utilities’ outlooks: integrated resource plans that call for “a lot more gas” and are wrestling with the economic question of how quickly there will be rebound, and how quickly are the region’s major coal-fired generation plants (Centralia and Boardman) going to be “transitioned out?”

“I think we are going to see a lot more clarity by the end of this year on what is going to happen to coal,” Kantor said. “That issue, along with a clearer look at what the economy is going to do are the deciding factors for the electric utilities.”

Both the coal issue and the aggressive shift in the Northwest to reliance on wind-generated power are driving what Kantor said is a lot of discussions between his gas-only utility and the electric counterparts on how to manage gas storage in the region to support the added peaking generation plants that will have to be built to backup all the wind generation being built (3,000 MW of wind operating, 3,000 MW in construction and development and another 3,000 MW planned).

“The choices that a lot of utilities have now include signing up for pipeline capacity, which is a very expensive way to serve peaking gas-fired generation,” Kantor said. “Otherwise, the choice is find out what storage services can support peaking generation.

“This really changes the value of storage from what is storage’s intrinsic value of dealing with price volatility issues to a question of how expensive is storage relative to pipeline capacity, which is a different way of calculating the value of storage.”

Noting that natural gas prices should stay flat or slightly lower, Kantor reiterated that Palomar remains complementary to the El Paso Corp.’s proposed Ruby Pipeline from the Rockies to the Oregon-California border (see related story).

While continuing to monitor the bankruptcy in which a decision on the NorthernStar Natural Gas Bradwood Landing liquefied natural gas agreement with Palomar has been delayed another three months by the trustee in the case, Kantor said work on the east zone portion of Palomar is moving forward. “While the bankruptcy will likely cause us to modify the project, we believe there remains a critical need for Palomar-East,” he said.

“With existing interstate pipelines at maximum use, it is a question of when — not if — additional pipeline infrastructure is needed to serve the Willamette Valley and the rest of the Pacific Northwest.” Kantor cited “a growing dependency on natural gas” in the region to transition from coal and back up growing use of renewable-based electric generation as making added natural gas infrastructure “absolutely essential.”

And he said the advent of the Ruby Pipeline to the south puts the proposed Palomar Pipeline in a good position to bring in additional supplies from the Rockies. Palomar now is anticipating amending its application at the Federal Energy Regulatory Commission to reflect the NorthernStar Gas situation and whatever comes out of the bankruptcy case, Kantor said.

With $3.1 million still at risk in the west section part of the pipeline project, Anderson said it is not likely that the bankruptcy court will accept the existing agreement with NorthernStar, and thus for the west part of the project to move forward there would have to be a new agreement. If needed, Northwest Natural eventually would have to take a $3.1 million impairment charge against its earnings for this part of the pipeline project, he said.

For both the pipeline and Northwest’s joint venture 20 Bcf Gill Ranch underground storage project in Northern California, Kantor views the push away from coal-fired generation and the growing reliance on wind-generated power in the Northwest as solidifying the ultimate need for added pipeline and storage capacity. He used questions on the conference call related to the storage projects to underscore this point.

There is another 20 Bcf storage potential in the Gill Ranch project that is under construction, and Northwest Natural has call on 5 Bcf of that addition, said Kantor, who eventually thinks that the project will expand when the economy turns around and the market indicates the added storage is needed. He acknowledged that nationally gas storage values are depressed currently.

“We [along with partner Pacific Gas and Electric Co.] have sized both the pipeline and the compressor station to be able to serve that additional capacity,” Kantor said. “We’re as anxious as anyone to get that added capacity on, and I think the marketplace will dictate that. The incentive for both us and PG&E would be to bring that on as soon as the market says it is valuable.”

Kantor said the Mist storage facility in Oregon will be increasingly in demand, too, although there are no current plans to expand that facility. Its use and marketing will change, however, he said. Kantor considers himself bullish about Mist’s prospects, given the electric sector dynamics — particularly the way it’s driving additional peak gas-fired demand for electric generation.

Originally opened in 1988, Mist has since expanded to serve an increasing customer base and now has the total storage capacity of 14 million Dth, with 5 million Dth of that capacity being made available to Portland General Electric under a 10-year contract signed with Northwest Natural in 2005 and other partners.

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