Issues and Analysis: Interest wanes in California pipeline projects with slide of natural gas prices

Ann de Rouffignac
OGJ Online

Jan. 21, 2002 — When natural gas prices spiked to more than $60/Mcf in California last winter, pipeline companies rushed to fill a perceived capacity shortage. More than 1 bcfd of new capacity was announced.

At least 230 MMcfd of capacity is scheduled to be completed later this year, but after last year’s flurry of announcements, some plans have been quietly put on the back burner. Stagnating demand has called into question decisions to increase pipeline capacity so rapidly.

Economic conditions and energy demand in California have turned 180? in the past year. Prices of gas and electricity have plummeted to $20-$30/Mw-hr from more than $100/Mw-hr, and proposed power plants have been put on hold. Electricity consumption drives gas prices in the state, where power generation comprises 44% of all gas consumed, according to the Public Utilities Commission of California (PUC).

“With the economic downturn and fewer new power plants than anticipated, doesn’t that sound like a lot of empty pipelines?” asked Gerald Keenan, partner with PWC Consulting in Chicago. “Everybody is reassessing expectations regarding growth in gas demand and electric generation construction. What was a trickle is now Niagara Falls.”

John Olson, an analyst with Sanders Morris Harris in Houston, was skeptical about many of the proposed pipeline additions. “I wouldn’t hold your breath on all those deals,” he said.

A few companies are going ahead. Transwestern Pipeline Co., a unit of Enron Corp., is proceeding with its 150 MMcfd capacity expansion to serve the California market, said Transwestern spokeswoman Gina Taylor. “Construction has begun and is on schedule. We expect it to be in service by June 2002.”

Questar Corp.’s Southern Trails Pipeline from Blanco, NM, to the California desert is due completion by the third quarter. The pipeline will add 80 MMcfd of capacity from the Four Corners area to California, said Questar spokesman Steve Chapman. FERC has certified a capacity of 120 MMcfd.

Williams Cos. Inc. is forging ahead with plans for a 906 MMcfd expansion of the Kern River pipeline that serves California. Although environmental approvals are pending, the company expects FERC to grant a certificate by May. Construction would begin in June and be completed next year. Williams expanded Kern River by 135 MMcfd last summer, bringing capacity to 835 MMcfd.

Plans delayed

But some of the biggest projects have hit a wall.

The greenfield Sonora interstate pipeline announced last year by Calpine Corp., San Jose, Calif., and Kinder Morgan Energy Corp. is on the shelf. The $1.7 billion, 1 bcf pipeline would extend from the San Juan basin in New Mexico to Needles and Topock near the California border.

At the time, Calpine Energy Services LP, a unit of Calpine Corp., San Jose, Calif., entered a firm bid for capacity on Phase 1 of the project and a nonbinding bid for Phase 2. “Nothing new is happening on the Sonora Pipeline,” said Larry Pierce, spokesman for Kinder Morgan, Houston. “A few things happened in the market to slow things down a bit.”

Calpine also has pushed back the date for completing a pipeline to serve the Otay Mesa electric power plant near San Diego. The California Energy Commission (CEC) originally expected the pipeline to be in service by September 2002. But the pipeline has not received a FERC certificate, and the power plant is not expected to be in service until July 2003, the CEC said. Calpine did not return phone calls.

El Paso Corp. is playing down its proposed Ruby pipeline project to bring Rocky Mountain gas to California. “That hasn’t gone anywhere,” said spokeswoman Kim Wallace. “We don’t even have board [of directors] approval for it. That pipeline is pretty far out there.”

The in-service date for the conversion of the All American oil pipeline to gas also is running behind schedule. It won’t be ready until the end of this summer at best, said Wallace. “We had thought it would be in service in the fall of 2001,” she said.

Although CEC expected the pipeline to carry an extra 230 MMcfd, the initial conversion won’t expand the pipeline capacity to deliver gas to California, Wallace said. That capacity is for “system flexibility” gas, or capacity used to replace capacity on the El Paso interstate, if there is a compressor outage or some other event causing a temporary loss, she said.

A second proposed phase of the All American project would add 320 MMcfd of capacity to California. “Right now with $2/Mcf gas, there is not too much demand for that,” Wallace said.

The Tuscarora Gas Transmission Co. pipeline, owned by Sierra Pacific Resources, Reno, and TransCanada Pipeline Ltd., will be expanded by 95 MMcfd to supply power plants and distribution companies in Nevada. The customers are bringing gas from Canada on Pacific Gas & Electric Co.’s pipeline before it ties into the Tuscarora. “The expansion will not impact California at all,” said Tuscarora general manager Greg Galbraith.

One other interstate pipeline, PG&E Gas Transmission Northwest, plans a 140 MMcfd expansion of interstate pipeline capacity beginning in the fall of 2003. PG&E expects FERC to approve the expansion later this year. “There is no in service date on this,” said PG&E spokeswoman Megan Frey. “We’re still moving ahead, though.”

Capacity needed
The apparent delays have reopened the debate about the ability of pipelines to deliver enough gas to California if demand rebounds when the recession ends. Some observers are sure there will be another natural gas price crisis in California if more capacity isn’t built.

“Was the gas crisis solved in California?” asked Wayne Andrews, analyst with Raymond James & Associates in Houston. “No. We just got a downturn in the economy. Natural gas consumers used fuel oil or anything else they could in reaction to the high prices.”

Andrews said California is a huge consumer market that and gas demand will surge when the economy turns around, especially if the infrastructure is there. “Having a flood of natural gas is not a problem for California,” he said. “There needs to be more infrastructure built.”

He said it is normal for pipeline infrastructure to grow by “big lumps and spurts,” adding that “Shortages followed by periods of too much capacity are to be expected.” With scant new capacity coming on line in 2002 and doubts about some scheduled to be operating in 2003, current lackluster demand for gas is expected to keep prices in check for now.

But in a recent assessment of gas infrastructure, CEC said it expects Californians to pay natural gas prices higher than the national average because of interstate capacity problems. California is at the end of pipeline systems and upstream demand for gas threatens the long-term supply for the state, CEC said.

“Population and economic growth by gas utility customers in Arizona have already consumed some of the existing pipeline capacity that used to deliver gas to California,” CEC said.

The CEC said it is unclear if electric generators or other gas customers in surrounding states have acquired capacity on the proposed pipeline expansions, making it difficult to determine whether the additions will increase California’s supply.

A study by the PUC released in the fall found demand fell 11% on the Southern California Gas Co. intrastate system because of a reduction in usage by gas-fired electricity generators. Further, the PUC expects gas demand to be affected by more efficient gas-fired power plants that will replace 30 to 40-year-old plants.

Contact Ann de Rouffignac @

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