Here's as good a treatise on the subject as I've seen.  I think this article 
does an excellent job of trying to explain the recent California market 
phenomenon...


Tuesday, November 28, 2000
Gas Daily

No quick fix for soaring California gas prices
In the past year, gas prices in most regions have doubled and in some cases 
tripled.  But no
region has seen the breadth of the price blowout now under way in the West.
While Henry Hub futures on the NYMEX appear to be leading the way for higher 
winter
prices nationally, most industry professionals are watching in amazement at 
the fundamentals-driven
price surge centered in the Pacific Northwest and California.

The cost of gas in Southern California has been skyrocketing.  Prices last 
week started
trading in the $7-$7.50 range and by Wednesday were trading $14-$18.
The cost of gas entering into the Northwest region of California via the N.W. 
Sumas,
PG&E Citygate, and Malin interconnections also soared to incredible heights, 
some pricing
nearing $20/mmBtu.

The most obvious cause of the dramatic escalation is scarcity of gas.  The 
bullish fundamentals
in California include heavier-than-normal heating loads due to uncommonly 
cold temperatures,
planned and unplanned nuclear plant outages that substantially increased 
demand
for gas-generated power, depletion of storage in Southern California and 
transmission constraints on regional pipelines.

Improving deliverability into Southern California is key to bringing the 
market back into
balance, said one trader, noting constraint-causing problems that have 
plagued pipelines serving
the region, including Kern River Gas Transmission, El Paso Natural Gas and 
Transwestern
Pipeline.

Those problems had come to a head in part because of high summer prices that 
helped
drain storage in Southern California and discouraged refill before the 
winter, he said.  Now,
unseasonably cold weather has hit the region, amplifying market needs to meet 
heating loads
and produce power. Add growing and competing markets in the desert Southwest 
and Northern
California and you have a crisis.

&It shows that when you get all the stars aligned, there is not enough gas to 
meet demand,8
he said.  At most, only 15%-20% of California,s supply of gas comes from 
in-state producers, with
the other 80%-85% coming from out-of-state, said Bill Woods with the 
California Energy
Commission.  Roughly 60% comes from the Southwest, 15%-20% comes from Canada, 
and the rest is
Rocky Mountain supply.

&At the moment, there is a lot of gas being purchased out of Canada.  But 
because of
imposed restrictions and other flow transmission problems, prices are 
soaring,8 he said.
At the moment, a lot of the new gas production in the Southern California 
area is mainly a
byproduct of oil exploration and production * so any new natural gas 
production will be
associated with what the demand for oil is, he said.
A majority of the &dry gas8 producers are located in the northern part of the 
state, which
until recently, was primarily a captive market of Pacific Gas & Electric.  
But new production
efforts are under way, he said.

&I definitely think that there needs to be some additional action taken to 
enhance our own
in-state production efforts, but there are a lot of bureaucratic hurdles to 
contend with before a
company can just go in and start drilling,8 he said.
&Hopefully, once the cold weather comes off, and our electricity loads start 
moderating,
I think pricing will adjust respectively. But until then, I guess we have no 
choice but to
deal with it.8
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