western market crisis : gas joins power - cera alert - - - - - - - - - - - - - - - - - - - - - - forwarded by lorna brennan / et the accident further limited pipeline capacity
into california for a two - week period . during that time ,
the market drew heavily on storage inventories and
further weakened storage positions . as hydroelectric
generation declined through the summer , the price
strength extended into northern california . malin , which
had been pricing near parity with the henry hub in the
summer , began trading at a $ 0 . 50 per mmbtu premium to
the henry hub in september . the summer and early fall
market set the stage for continued and more intense
spikes this winter . the following factors are now
driving this market :
* continuing surges in gas demand . gas demand levels
have remained high since early summer , driven by higher
overall demand for electricity and lower hydroelectric
output . demand levels for the third quarter in the us
west averaged 10 . 7 billion cubic feet ( bcf ) per day , up
from 8 . 7 bcf per day during the third quarter 1999 .
persistently strong gas - fired generation production
through the fall months diverted gas to power
production , frustrating efforts to fill storage . this
pressure will continue . the year - over - year demand
increases from the power sector will be compounded , as
evidenced in november , by swings upward in residential
and commercial heating demand of 800 million cubic feet
( mmcf ) per day . overall , cera expects nearly 1 . 6 bcf per
day of increased demand in the west this winter , with
the critical california and pacific northwest regions
showing 1 . 2 bcf per day of increased demand . key power
sector drivers , including the strong economy , colder
weather , and lower hydroelectric generation , will
continue to push gas - fired generation .
* pipeline utilization nears capacity . strong western
demand for gas has pushed utilization rates on western
pipes to high levels . flows from british columbia into
the northwest pipeline have remained at high levels
since summer , while flows from the rockies on northwest
have remained at pipeline capacity . flows on pgt into
kingsgate have remained at or near capacity , although
approximately 300 mmcf per day of excess capacity exists
on pgt into california at malin . likewise , flows out of
the rockies on kern river pipeline have consistently
remained at capacity . the only slack pipeline capacity
remaining for west coast gas markets has been on
southwest pipes . during the past few months , these
pipelines have operated at their highest utilization
rates since the addition of capacity from canada early
last decade . the high utilization of western pipeline
capacity - reminiscent of power plant capacity constraints
that helped propel power prices to all time highs in the
west this summer - leaves very little slack capacity to
provide a relief valve for demand spikes . and that is
exactly what has driven prices during the past few weeks
( see figure 1 ) . given the level of storage inventories
and expected gas demand , flows on the el paso and
transwestern pipelines will have to reach even higher
flow levels from december through march than they have
averaged through november .
* deteriorating storage position . at the start of
november california storage inventories held at 154 bcf ,
a full 32 bcf below the five - year average inventory
level . the strong in - state withdrawals during november
weakened that position to 128 bcf ; the deficit swelled
to 62 bcf . inventories in california have never fallen
below 60 bcf , so deliverability through the end of
winter is likely less than 700 mmcf per day . storage
inventories in california are so low that utilities '
ability to balance withdrawals from storage with
purchases from demand - sensitive price points is severely
limited . if the cold weather blast anticipated for mid -
december materializes , this effort at balance will be
even further compromised for the remainder of winter
( see figure 2 ) .
* short - term contracting . a significant amount of
western gas is purchased or indexed to the spot market .
a shift from term contracts for both gas and pipeline
capacity to spot transactions - in many cases in response
to gas and power industry deregulation - has left the west
much more exposed to spot market volatility . in other
areas of the country , utilities have significant firm
pipeline capacity extending from supply regions to the
citygate and / or have forward purchased gas ( at previous
and lower prices ) for at least some portion of their
winter supplies . as a result , unlike in eastern markets ,
a much larger proportion of the supply portfolio of
california utilities will be exposed to the current
price spikes .
* no alternatives . a lack of fuel - switching capability
prevents a meaningful demand response to higher gas
prices . power prices continue to move in lockstep with
the increase in gas prices . not surprisingly , gas prices
pushed the cost of gas - fired generation beyond the
federal energy regulatory commission ' s ( ferc ' s ) proposed
price cap of $ 150 per megawatt - hour , setting the stage
for a reassessment of this price limit . a small and
declining portion of power generators are liquid fuel
capable . significantly , air emissions restrictions -
already plaguing power markets with much higher
emissions credit costs this year - will make any further
switching to liquid fuels in the crucial california
market highly unlikely this winter . a recent meeting of
the south coast air quality management district , which
has jurisdiction over the los angeles area , concluded
with no relief granted to generators running short of
emissions credits .
market forces unite for price spikes during november
the first cold weather - related demand spike demonstrated
the combined power of these forces and the vulnerability
of the western markets . a cold weather system in mid -
november brought temperatures averaging 47 percent
colder than normal - the temperatures actually averaged 14
percent colder than a normal january week - and provided
the additional demand boost that taxed the gas delivery
systems on the west coast . capacity constraints on
moving gas into california that appeared during the
summer extended north into the pacific northwest as
heating loads climbed . this core demand compounded the
effects of continued strong demand for gas for power
generation .
the high power demand was the result of the intersection
of the annual low point for hydroelectric generation and
a series of planned and unplanned nuclear and coal power
plant outages . gas demand in the us west during the last
two weeks of november was boosted to approximately 15 . 5
bcf per day , driven by heating demand increases of 2 . 8
bcf per day above normal levels and power plant outage -
related demand increases of 1 . 0 bcf per day .
these demand spikes caused buyers - already dependent on
the spot market - to bid citygate prices to record high
levels through the last two weeks of november and into
december . since demand outstripped supply , prices rose
dramatically at all western price points , and flows of
natural gas to western markets increased over high
summer levels . citygate prices surged beyond $ 40 . 00 per
mmbtu on daily spot markets and averaged nearly $ 15 . 00
per mmbtu for december bidweek at topock . daily spot gas
prices have reflected imbalance penalty prices in many
western market regions .
west coast to remain disconnected through the winter
although the week of november 13 could prove to be the
peak demand week in the west this winter , cera does not
expect any significant retreat in gas prices on the west
coast any time soon . storage inventories are so low that
the ability to beat back demand spikes with high storage
withdrawals is not an option for gas utilities .
generators , which already rely heavily on the spot
market for supplies , are faced with a bidding war for
scarce supplies . colder - than - normal weather would likely
keep west coast prices in the $ 20 . 00 - $ 40 . 00 per mmbtu
range . more normal weather would allow a slow decline
from current levels of over $ 20 . 00 per mmbtu down into
the $ 15 . 00 - $ 20 . 00 per mmbtu range . however , the storage
situation and underlying demand strength mean that any
return to a lower pricing range is unlikely until early
january .
this winter will prove a critical test for western gas
markets , and the end of the heating season will likely
provide the first opportunity for lower price levels in
the west coast market . as heating loads diminish
significantly in march and storage deliverability is no
longer a critical issue , premiums should retreat back
into the $ 1 . 00 - $ 2 . 00 per mmbtu range . as hydroelectric
generation begins to increase , the pressure could
subside even further , but storage injections during the
spring shoulder season will likely limit price declines
even during the spring .
the unique vulnerability of the pacific northwest
the west coast price pressure is not limited to
california . high demand in the pacific northwest ( and
more indirectly in california ) will keep upward pressure
on prices from sumas to stanfield . northwest pipeline
capacity from the rockies was already fully utilized at
the onset of the cold weather and even so can only
provide gas so far into the pacific northwest . the
combined california and pacific northwest demand pushed
stanfield up in spite of the limited volumes that are
bidirectional there . the only supply source for the load
centers in southern british columbia and even more so in
northern pacific northwest ( such as seattle ) are from
westcoast at sumas . the westcoast mainline from the
producing fields in northeast british columbia has also
been operating at capacity . the same bidding forces felt
in california have been evident at these western
canadian price points , pushing sumas prices into the
$ 20 s per mmbtu . these forces will persist , keeping sumas
at a premium to aeco over the winter - and in much closer
relationship to california prices .
customer response : another log on the backlash bonfire
with power plants and gas utilities paying the current
high spot prices , consumers ' bills from vancouver to san
diego will ultimately reflect these high commodity
prices . the gas industry has been preparing for rate
shock this winter , warning regulators and customers
alike . however , the price spikes in the west and the
sustained premiums in western markets move beyond
alarming . capacity holders are reaping significant
rewards for their investments in capacity positions ,
resulting in a substantial transfer of wealth from
consumers to capacity holders . market power and market
gaming accusations that have hit the power markets will
find easy application in their gas market counterpart
( no matter what their merits ) . some level of
investigation into the natural gas markets during or
following this challenging winter should be expected . as
has occurred in the power markets , this will now turn
attention to gas purchasing practices , particularly in
california . the likely outcome of this process will be a
shift away from the heavy reliance on spot purchases
toward a more flexible portfolio approach .
* * end * *
follow url for pdf version of this alert with associated graphics .
come shoot the rapids with us at ceraweek 2001 , " shooting the rapids :
strategies and risks for the energy future " in houston , february 12 - 16 ,
2001 ! for more information and to register , please visit
http : / / www . cera . com / ceraweek /
this electronic message and attachments , if any , contain information
from cambridge energy research associates , inc . ( cera ) which is
confidential and may be privileged . unauthorized disclosure , copying ,
distribution or use of the contents of this message or any attachments ,
in whole or in part , is strictly prohibited .
terms of use : http : / / www . cera . com / tos . html
questions / comments : webmaster @ cera . com
copyright 2000 . cambridge energy research associates
western market crisis : gas joins power - cera alert
- - - - - - - - - - - - - - - - - - - - - - forwarded by lorna brennan / et the accident further limited pipeline capacity
into california for a two - week period . during that time ,
the market drew heavily on storage inventories and
further weakened storage positions . as hydroelectric
generation declined through the summer , the price
strength extended into northern california . malin , which
had been pricing near parity with the henry hub in the
summer , began trading at a $ 0 . 50 per mmbtu premium to
the henry hub in september . the summer and early fall
market set the stage for continued and more intense
spikes this winter . the following factors are now
driving this market :
* continuing surges in gas demand . gas demand levels
have remained high since early summer , driven by higher
overall demand for electricity and lower hydroelectric
output . demand levels for the third quarter in the us
west averaged 10 . 7 billion cubic feet ( bcf ) per day , up
from 8 . 7 bcf per day during the third quarter 1999 .
persistently strong gas - fired generation production
through the fall months diverted gas to power
production , frustrating efforts to fill storage . this
pressure will continue . the year - over - year demand
increases from the power sector will be compounded , as
evidenced in november , by swings upward in residential
and commercial heating demand of 800 million cubic feet
( mmcf ) per day . overall , cera expects nearly 1 . 6 bcf per
day of increased demand in the west this winter , with
the critical california and pacific northwest regions
showing 1 . 2 bcf per day of increased demand . key power
sector drivers , including the strong economy , colder
weather , and lower hydroelectric generation , will
continue to push gas - fired generation .
* pipeline utilization nears capacity . strong western
demand for gas has pushed utilization rates on western
pipes to high levels . flows from british columbia into
the northwest pipeline have remained at high levels
since summer , while flows from the rockies on northwest
have remained at pipeline capacity . flows on pgt into
kingsgate have remained at or near capacity , although
approximately 300 mmcf per day of excess capacity exists
on pgt into california at malin . likewise , flows out of
the rockies on kern river pipeline have consistently
remained at capacity . the only slack pipeline capacity
remaining for west coast gas markets has been on
southwest pipes . during the past few months , these
pipelines have operated at their highest utilization
rates since the addition of capacity from canada early
last decade . the high utilization of western pipeline
capacity - reminiscent of power plant capacity constraints
that helped propel power prices to all time highs in the
west this summer - leaves very little slack capacity to
provide a relief valve for demand spikes . and that is
exactly what has driven prices during the past few weeks
( see figure 1 ) . given the level of storage inventories
and expected gas demand , flows on the el paso and
transwestern pipelines will have to reach even higher
flow levels from december through march than they have
averaged through november .
* deteriorating storage position . at the start of
november california storage inventories held at 154 bcf ,
a full 32 bcf below the five - year average inventory
level . the strong in - state withdrawals during november
weakened that position to 128 bcf ; the deficit swelled
to 62 bcf . inventories in california have never fallen
below 60 bcf , so deliverability through the end of
winter is likely less than 700 mmcf per day . storage
inventories in california are so low that utilities '
ability to balance withdrawals from storage with
purchases from demand - sensitive price points is severely
limited . if the cold weather blast anticipated for mid -
december materializes , this effort at balance will be
even further compromised for the remainder of winter
( see figure 2 ) .
* short - term contracting . a significant amount of
western gas is purchased or indexed to the spot market .
a shift from term contracts for both gas and pipeline
capacity to spot transactions - in many cases in response
to gas and power industry deregulation - has left the west
much more exposed to spot market volatility . in other
areas of the country , utilities have significant firm
pipeline capacity extending from supply regions to the
citygate and / or have forward purchased gas ( at previous
and lower prices ) for at least some portion of their
winter supplies . as a result , unlike in eastern markets ,
a much larger proportion of the supply portfolio of
california utilities will be exposed to the current
price spikes .
* no alternatives . a lack of fuel - switching capability
prevents a meaningful demand response to higher gas
prices . power prices continue to move in lockstep with
the increase in gas prices . not surprisingly , gas prices
pushed the cost of gas - fired generation beyond the
federal energy regulatory commission ' s ( ferc ' s ) proposed
price cap of $ 150 per megawatt - hour , setting the stage
for a reassessment of this price limit . a small and
declining portion of power generators are liquid fuel
capable . significantly , air emissions restrictions -
already plaguing power markets with much higher
emissions credit costs this year - will make any further
switching to liquid fuels in the crucial california
market highly unlikely this winter . a recent meeting of
the south coast air quality management district , which
has jurisdiction over the los angeles area , concluded
with no relief granted to generators running short of
emissions credits .
market forces unite for price spikes during november
the first cold weather - related demand spike demonstrated
the combined power of these forces and the vulnerability
of the western markets . a cold weather system in mid -
november brought temperatures averaging 47 percent
colder than normal - the temperatures actually averaged 14
percent colder than a normal january week - and provided
the additional demand boost that taxed the gas delivery
systems on the west coast . capacity constraints on
moving gas into california that appeared during the
summer extended north into the pacific northwest as
heating loads climbed . this core demand compounded the
effects of continued strong demand for gas for power
generation .
the high power demand was the result of the intersection
of the annual low point for hydroelectric generation and
a series of planned and unplanned nuclear and coal power
plant outages . gas demand in the us west during the last
two weeks of november was boosted to approximately 15 . 5
bcf per day , driven by heating demand increases of 2 . 8
bcf per day above normal levels and power plant outage -
related demand increases of 1 . 0 bcf per day .
these demand spikes caused buyers - already dependent on
the spot market - to bid citygate prices to record high
levels through the last two weeks of november and into
december . since demand outstripped supply , prices rose
dramatically at all western price points , and flows of
natural gas to western markets increased over high
summer levels . citygate prices surged beyond $ 40 . 00 per
mmbtu on daily spot markets and averaged nearly $ 15 . 00
per mmbtu for december bidweek at topock . daily spot gas
prices have reflected imbalance penalty prices in many
western market regions .
west coast to remain disconnected through the winter
although the week of november 13 could prove to be the
peak demand week in the west this winter , cera does not
expect any significant retreat in gas prices on the west
coast any time soon . storage inventories are so low that
the ability to beat back demand spikes with high storage
withdrawals is not an option for gas utilities .
generators , which already rely heavily on the spot
market for supplies , are faced with a bidding war for
scarce supplies . colder - than - normal weather would likely
keep west coast prices in the $ 20 . 00 - $ 40 . 00 per mmbtu
range . more normal weather would allow a slow decline
from current levels of over $ 20 . 00 per mmbtu down into
the $ 15 . 00 - $ 20 . 00 per mmbtu range . however , the storage
situation and underlying demand strength mean that any
return to a lower pricing range is unlikely until early
january .
this winter will prove a critical test for western gas
markets , and the end of the heating season will likely
provide the first opportunity for lower price levels in
the west coast market . as heating loads diminish
significantly in march and storage deliverability is no
longer a critical issue , premiums should retreat back
into the $ 1 . 00 - $ 2 . 00 per mmbtu range . as hydroelectric
generation begins to increase , the pressure could
subside even further , but storage injections during the
spring shoulder season will likely limit price declines
even during the spring .
the unique vulnerability of the pacific northwest
the west coast price pressure is not limited to
california . high demand in the pacific northwest ( and
more indirectly in california ) will keep upward pressure
on prices from sumas to stanfield . northwest pipeline
capacity from the rockies was already fully utilized at
the onset of the cold weather and even so can only
provide gas so far into the pacific northwest . the
combined california and pacific northwest demand pushed
stanfield up in spite of the limited volumes that are
bidirectional there . the only supply source for the load
centers in southern british columbia and even more so in
northern pacific northwest ( such as seattle ) are from
westcoast at sumas . the westcoast mainline from the
producing fields in northeast british columbia has also
been operating at capacity . the same bidding forces felt
in california have been evident at these western
canadian price points , pushing sumas prices into the
$ 20 s per mmbtu . these forces will persist , keeping sumas
at a premium to aeco over the winter - and in much closer
relationship to california prices .
customer response : another log on the backlash bonfire
with power plants and gas utilities paying the current
high spot prices , consumers ' bills from vancouver to san
diego will ultimately reflect these high commodity
prices . the gas industry has been preparing for rate
shock this winter , warning regulators and customers
alike . however , the price spikes in the west and the
sustained premiums in western markets move beyond
alarming . capacity holders are reaping significant
rewards for their investments in capacity positions ,
resulting in a substantial transfer of wealth from
consumers to capacity holders . market power and market
gaming accusations that have hit the power markets will
find easy application in their gas market counterpart
( no matter what their merits ) . some level of
investigation into the natural gas markets during or
following this challenging winter should be expected . as
has occurred in the power markets , this will now turn
attention to gas purchasing practices , particularly in
california . the likely outcome of this process will be a
shift away from the heavy reliance on spot purchases
toward a more flexible portfolio approach .
* * end * *
follow url for pdf version of this alert with associated graphics .
come shoot the rapids with us at ceraweek 2001 , " shooting the rapids :
strategies and risks for the energy future " in houston , february 12 - 16 ,
2001 ! for more information and to register , please visit
http : / / www . cera . com / ceraweek /
this electronic message and attachments , if any , contain information
from cambridge energy research associates , inc . ( cera ) which is
confidential and may be privileged . unauthorized disclosure , copying ,
distribution or use of the contents of this message or any attachments ,
in whole or in part , is strictly prohibited .
terms of use : http : / / www . cera . com / tos . html
questions / comments : webmaster @ cera . com
copyright 2000 . cambridge energy research associates