Against the backdrop of generally mild weather in the Lower 48, winter unleashed its fury on the West Coast earlier this season. Freezing temperatures and unusually heavy rainfall have fueled demand for natural gas at a time when storage inventories are low, a the drought has reduced hydroelectric power supplies, and regional utilities are struggling to receive coal deliveries.
The result: historically high natural gas prices that have reached levels not seen since the summer of 2018. The price spike has spread across the Pacific Northwest, further south throughout California and to the interior of the Rockies.
On Thursday, PG&E Citygate in Northern California recorded natural gas spot prices as high as $36.00/MMBtu. SoCal Citygate cash hit a high of $33.00, while Malin hit $32.00. And it turned out to be just batting practice.
On Friday, the highest price on the West Coast hit $55.00, with bids up to $60.00.
“I’ve seen prices skyrocket before, but for a short period of time,” said Michael Williamson. His consulting firm Williamson Energy buys wholesale natural gas for end users in California. “This prolonged period of high prices has never happened before. There are a lot of different things happening and they all fall at the same time.
Is it really that cold in California?
A harsh winter has hit the West Coast this month, causing increased heating consumption in a region that normally experiences its highest energy needs in the summer.
The National Weather Service (NWS) said widespread heavy rainfall will begin to blanket the Pacific Northwest and northern California on Friday and further over the weekend in the Northern Rockies, Great Basin and the rest of California. Abnormally high humidity combined with an atmospheric river is expected to usher in heavy snowfall in the mountains, as well as heavy rain for lower elevations along the west coast.
Snow totals are generally expected to be between six inches and one foot for higher elevations, according to NWS forecasters. Lighter accumulations of up to three inches were expected for the interior valleys.
In California’s Sierra Nevada mountain range, several feet of snowfall were expected, while excessive precipitation was possible along the coast of southern Oregon and northern California. Rainfall totals could reach up to four inches, NWS said.
[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]
Even still, with temperatures expected to climb into the 60s in Los Angeles and mid-50s in San Francisco, “it’s not really that cold,” said Marlon Santa Cruz of Fuel and Purchased Power, director of the Los Angeles water and water department. Power (LADWP). The executive said a key issue facing the region was that storage stocks were lagging.
Supplies reclassified, not replenished
Pacific Gas & Electric Corp. (PG&E) in the summer of 2021 reclassified 51 billion cubic feet of storage inventory to cushion gas, rather than working gas. It was the largest reclassification in any region, with some market watchers calling the scale of the change “absurd”.
Williamson said the issue was unrelated to the reclassification. It’s that PG&E hasn’t replenished working gas stocks.
As of December 2, Pacific stocks stood at just 217 billion cubic feet, more than 18% below year-ago levels and nearly 24% below the five-year average, according to US Energy. Information Administration.
The Pacific is the only region that continues to be significantly below historical levels. After a series of above-average injections in late fall, Mountain stocks are about 6% below the five-year average. Eastern stocks are about 2% below this level. The south-central region, meanwhile, now shows a modest surplus.
“It’s the head of the nail,” Williamson said. “If we had a lot of gas in storage, that wouldn’t happen. Now everyone is a hostage.
With a customer base that includes commercial greenhouses and other small customers, sky-high prices are a concern, according to Williamson. He fears that if prices were to remain high – or climb even higher as winter progressed – customers might not be able to pay their bills.
Moreover, the higher prices are not limited to California. In the desert southwest, spot gas prices at El Paso S. Mainline/N. Baja jumped to $35.75 on Thursday, while KRGT Del Pool rose to $32.85. On Friday, spot prices in the region had also climbed to $55.00.
“When does a number get so high that people go bankrupt and stop paying their bills? I think we’re getting closer to that point,” Williamson said.
He likened the situation to the fallout from winter storm Uri, where utilities filed for bankruptcy and spawned lawsuits and investigations into market manipulation. “People are going to take lawyers instead of their wallets.”
Santa Cruz of LADWP agreed that the storage situation in the West is concerning.
However, while inventory in Northern California remains below what the market considers comfortable over the winter, Aliso Canyon storage in Southern California has been “a savior” for the region as it copes with increased demand, he said. The storage, operating at reduced capacity following a major leak in 2015, often had to serve as a buffer during periods of high demand.
In November 2021, the California Public Utilities Commission voted unanimously to increase the amount of gas stored at Aliso Canyon to increase winter supply for gas and electric customers. The decision was seen as an effort to ensure the reliability of the region.
California may not be the most favorable state for the natural gas industry. Several municipalities have banned the use of new natural gas hookups, including Los Angeles. Santa Cruz, however, said the municipal utility was more dependent on natural gas because coal deliveries were also insufficient.
Earlier this month, President Biden averted a railroad strike that could have halted coal deliveries. Yet the strike was only one of the issues plaguing the railroad industry.
Santa Cruz said that as a result of the Covid-19 pandemic, Union Pacific and other railroad companies have been forced to lay off workers. Many laid-off employees never returned as the economy recovered. Now there are not enough engineers to run the trains, he said.
“There is an endemic supply chain problem affecting the coal industry,” Santa Cruz said. “Although the mines are producing, it is the railroad that cannot deliver the contracted volumes. We find ourselves unable to ramp up these coal units like we normally would. We are therefore building this generation with natural gas.
Meanwhile, West Coast customers are battling over limited supplies.
Wood Mackenzie has advised customers of Gas Transmission Northwest’s system maintenance between December 6 and December 8, which could impact up to approximately 300,000 MMBtu/d of volumes passing through Kingsgate.
In the Permian Basin, pipeline work on El Paso Natural Gas and the Permian Highway pipeline also reduced gas deliveries. Ironically, these reductions caused prices in this region to fall below zero.
“All of these constraints, and the market is fighting for stagnant supply,” Santa Cruz said. “It’s unprecedented.”
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