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California Gas Fundamentals Portend Difficulties this Summer and Beyond

In the Summer of 2021, California experienced low hydroelectric availability, high electric demand, and significant natural gas supply disruptions. This combination of events exerted significant upward pressure on regional natural gas pricing and resulted in lower-than-normal gas storage inventories in the West at the beginning of the winter heating season. This price pressure was particularly acute in Southern California where SoCal City Gate traded at a $2.20/MMBtu premium to Henry Hub from June through September. The premium pricing in Southern California was driven in large part by sustained periods of blowout pricing which drove up the summer average. As we enter the Summer of 2022, many of these same conditions remain in place in California. Today’s Energy Market Insights examines these factors and the resulting pricing implications for the upcoming summer and beyond.

During the summer of 2021, California saw increased demand for natural gas due to the low availability of a major traditional source of electric generation. As discussed in a previous Energy Market Insight, hydroelectric generation in California was at historically low levels as a result of severe, sustained drought conditions. This sharp drop in hydroelectric generation led to an increased reliance on natural gas fired generation to make up for the shortfall – tightening natural gas supplies and exerting upward pressure on basis in California and beyond.

As we enter the Summer of 2022, severe drought conditions persist as evidenced by current reservoir volume data.

For the state as a whole, major reservoirs remain at ~66% of historical averages and at ~98% of the levels seen in May 2021. In Northern California, where the majority of hydroelectric generation is located, the picture is much the same as evidenced by volume levels at Shasta and Oroville – reservoirs serving two of the state’s largest hydroelectric plants. While current volumes at Oroville have improved somewhat from those seen in May 2021, they remain at only ~70% of historical levels. Further, volumes at Shasta have deteriorated and now stand at only ~85% of May 2021 levels – less than half of historical norms. Collectively, the two reservoirs are at roughly the same level as in May 2021 – similar to the trend seen in the rest of Northern California and in the state as a whole. With current reservoir levels very close to those seen in May 2021, it is likely that hydroelectric generation will once again be severely constrained in the Summer of 2022, leading to another cooling season heavily reliant on gas fired generation.

In addition to low hydroelectric availability, California saw significant disruptions to natural gas supply during the Summer of 2021. On August 15, an explosion occurred on the El Paso Pipeline near Coolidge, AZ. In the aftermath of the explosion, deliveries to Southern California were severely curtailed throughout the remainder of the summer with deliveries at Ehrenberg immediately dropping 200 – 300 MMcf/d from pre-explosion levels.

This significant drop in supply was a key contributor to the upward pressure on regional prices during this period. While volumes at Ehrenberg briefly recovered in 1Q22, they have since returned to the levels seen just after the explosion. Kinder Morgan, the parent company of El Paso, has indicated that there is no firm timeline for a return to normal operations and NTSB is still investigating the incident.

The regional supply deficit due to the ongoing issues on El Paso has been somewhat mitigated by Canadian imports to the West Coast. Canadian natural gas imports have averaged ~300 MMcf/d higher YTD compared to the same period in 2021.

While the increased Canadian imports may help to alleviate some of the supply shortfall on the West Coast as a whole, the effect may be less pronounced in Southern California where end users must now compete with those in the Pacific Northwest and Northern California for Canadian gas rather than obtaining supplies which would have previously been delivered directly from Arizona.

The ongoing issues with gas supply when coupled with the probable continued elevated reliance on natural gas generation will most likely have both short-term and long-term impacts on basis pricing in California and beyond.

Most obviously, pricing in Southern California, as represented by SoCal City Gate basis, will likely continue to see significant upward pressure and remain elevated when compared to historical levels. Indeed, current SoCal CG forward pricing signals Summer 2022 basis to be very similar to that seen in Summer 2021 and much stronger than that seen in 2019 and 2020.

SoCal City Gate saw several periods of blowout pricing during the Summer of 2021 with outright pricing reaching as high as ~$20/MMBtu on individual days. With very similar underlying fundamentals, SoCal CG will remain vulnerable to blowout pricing episodes in the Summer of 2022 if further supply disruptions or spikes in demand occur.

In addition to exerting short-term upward pressure on regional basis in the Summer of 2022, tight supplies will likely result in gas storage once again struggling to fill to desired levels ahead of the winter heating season.  Indeed, current EIA Pacific Region (West Coast) storage volumes are ~44 Bcf below May 2021 levels and ~15% below the 5-year average.

With current levels even weaker than those seen at the beginning of Summer 2021, it is probable that the Pacific Region will enter this winter heating season with an even lower gas storage inventory than that seen in 2021 – also far below historical norms. As seen in recent years, low storage volumes in the Western US are likely to exert further upward pressure to basis in California and beyond – most notably at Opal.

In conclusion, with underlying supply and demand conditions very similar to those observed in 2021, the Summer of 2022 is likely to see sustained pricing pressure on basis in California and beyond. In addition, it is probable that the Western US will once again exit the summer with low gas storage inventories, setting the stage for upward price pressure on basis throughout the region as cold weather sets in. For more on BTU Analytics’ outlook for natural gas prices and basis in the Western US and beyond, request a sample of BTU Analytics Gas Basis Outlook Service.

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Jon Bowman is a Senior Utility Analyst with FactSet’s Utilities and Regulatory Team and focuses on utility regulation and economics in the western United States. Jon previously worked for BTU Analytics as an Energy Analyst and held several positions related to resource planning, forecasting, and pricing analysis in the Utilities and Manufacturing industries. Jon holds a B.S. in Mathematics from Tulane University and a M.S. in Industrial Engineering from the University of Illinois at Urbana-Champaign.

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