The Perfect Storm Fuels Massive Natural Gas Price Squeeze on the West Coast; Northern California is $55/MMBtu

With mostly mild weather in the Lower 48, winter has unleashed its wrath on the West Coast a little early this season. Cold temperatures and unusually heavy rainfall have boosted demand for natural gas at a time when storage supplies are low. drought has reduced hydropower supplies, and regional utilities are struggling to accommodate coal supplies.

The result: historically high natural gas prices that have risen to levels not seen since the summer of 2018. The price increase spread across the Pacific Northwest, further south into California and the interior Rocky Mountains.

On Thursday, Northern California’s PG&E Citygate raised spot natural gas prices to $36.00/MMBtu. SoCal Citygate cashed in at $33.00 and Malin cashed in at $32.00. And it proved to be just batting practice.

On Friday, the highest price on the West Coast was $55.00 with offers up to $60.00.

“I’ve seen prices go up before, but only for a short time,” said Michael Williamson. His consulting company, Williamson Energy, buys wholesale natural gas for end-use customers in California. “This cycle of sustained high prices has never happened before. There are so many different things happening and they all fall at the same time.”

Is it really cold in California?

Bitter winter weather has gripped the West Coast this month, increasing heating consumption in a region that sees peak energy needs in the summer.

The National Weather Service (NWS) said widespread heavy precipitation will begin to cover the Pacific Northwest and Northern California on Friday, then the Northern Rockies, Great Basin and the rest of California by the weekend. Anomalous high humidity associated with an atmospheric river is expected to bring heavy mountain snow as well as heavy rain to lower elevations along the West Coast.

According to NWS forecasters, snow totals should generally be between six inches and a foot for the higher elevations. Lighter accumulations of up to three inches were forecast for inland valleys.

California’s Sierra Nevada mountain range is expected to receive several feet of snow, while southern Oregon and the northern California coast will experience heavy rain. Rainfall amounts could reach up to four inches, the NWS said.

[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]

Temperatures are forecast to climb into the 60s in Los Angeles and the mid-50s in San Francisco, said Marlon Santa Cruz, manager of the Los Angeles Water Department of Fuel and Procurement. Power (LADWP). The head of the executive said that the main problem facing the region is the backlog of storage resources.

Supplies Reclassified, Not Refilled

Pacific Gas & Electric Corp. (PG&E) classified 51 billion cubic meters of storage reserves in the summer of 2021 as cushion gas rather than working gas. It marked the biggest classification of any region, with some market watchers calling the scale of the change “preposterous”.

Williamson said the problem isn’t about reclassification. PG&E was not rebuilding working gas reserves.

Pacific reserves totaled 217 billion cubic feet as of Dec. 2, more than 18 percent from a year earlier and about 24 percent below the five-year average, according to the U.S. Energy Information Administration.

The Pacific is the only region that remains significantly below historical levels. After a series of above-average injections in the late fall, Mountain shares sit about 6% below their five-year average. Eastern stocks are about 2% below this level. The South Central region is now in a slight surplus.

“That’s the nail on the head,” Williamson said. “If we had a lot of gas in storage, this wouldn’t have happened. Now everyone is a hostage.”

With a customer base that includes commercial greenhouses and other smaller customers, excessive pricing is a concern, according to Williamson. He worries that if prices stay high or rise further as winter progresses, customers won’t be able to pay their bills.

Moreover, high prices are not limited to California. Note gas prices in the desert southwest, El Paso S. Mainline/N. On Thursday, Baja rose to $35.75 and KRGT Del Pool rose to $32.85. By Friday, cash prices in the region also rose to $55.00.

“At what point does the number become so high that people go bankrupt and stop paying their bills? I think we are getting close to that point,” Williamson said.

He likened the situation to the aftermath of Winter Storm Uri, where utilities filed for bankruptcy and launched lawsuits and investigations into market manipulation. “People are getting ready to grab lawyers instead of pocketbooks.”

Other issues

LADWP acknowledged the storage situation in Santa Cruz, West is a concern.

However, while inventories in Northern California are short of what the market sees comfortably in winter, the Aliso Canyon storage facility in Southern California has been a “savior” for the region as it copes with increased demand, he said. After a major spill in 2015, the warehouse, operating at reduced capacity, often had to act as a buffer during periods of strong demand.

In November 2021, the California Public Utilities Commission voted unanimously to increase the amount of gas stored in Aliso Canyon to increase winter supplies for gas and electric customers. The decision was seen as an attempt to ensure credibility for the region.

California may not be the friendliest state to the natural gas industry. Several municipalities, including Los Angeles, have banned the use of new natural gas connectors. Santa Cruz said the municipal utility relies more on natural gas because coal supplies are also in short supply.

President Biden earlier this month averted a strike among railroad workers that could have disrupted coal supplies. Still, the strike was only one issue that troubled the railroad industry.

Santa Cruz said Union Pacific and other railroad companies have been forced to lay off workers in the wake of the Covid-19 pandemic. Many of the laid-off workers never returned as the economy recovered. Now there are not enough engineers to operate the trains, he said.

“There is an endemic supply chain problem affecting the coal industry,” Santa Cruz said. “Although the mines produce, it is the railway that cannot deliver the volumes stipulated in the contract. We cannot increase our coal-fired installations as usual. Thus, we organize that generation with natural gas.”

Meanwhile, West Coast customers are struggling for limited supplies.

Wood Mackenzie has notified its customers that maintenance will be performed on the Northwest Gas Transmission system from December 6 to 8.

Pipeline work in the Permian Basin, El Paso Natural Gas and the Permian Trunk Pipeline also disrupted gas supplies. Ironically, these cuts brought prices down to zero in that region.

“All these restrictions and the market is struggling for sustainable supply,” Santa Cruz said. “This is unprecedented.”

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