Gas shortage likely to shut California power plants

12/6/2000 According to today’s Wall Street Journal, an official at the California Independent System Operator (Cal-ISO) expects the recent natural gas shortage to shut down several of the state’s power plants, prompting rolling blackouts and a continuation of California’s energy troubles.

Although California expected its electricity shortage to end as temperatures cooled, Terry Winter, Cal-ISO’s chief executive, said there remains a “high probability” that a shortage in natural gas could worsen the woes of power plant operators.

“Now we’re wondering how much gas should we eat up today when it may make the problem worse next week,” Winter said.

A cold snap in the Pacific Northwest threatens to limit supplies of natural gas, with temperatures expected to be anywhere from five degrees below normal in Seattle to 16 degrees below normal in Denver over the next few days.

And a light rainfall so far this season means hydro power can’t come to the rescue, putting even more pressure on gas-fired power plants in California to meet its own needs and the Northwest’s as well.

Amid all the troubles with Mother Nature, prices on California’s electricity market hit a price cap of $250 per MW, no longer dropping at midnight. However, that price hasn’t attracted much supply, with Cal-ISO issuing a special request for power Tuesday, Dec. 5. Utilities in the Pacific Northwest are currently offering $1,200 per MW.

After operating full throttle all summer, several Los Angeles-area power plants are now shut down because they’ve exhausted their emission credits. Reliant Energy, with a special waiver from the local air-pollution board, said it plans to start up some of its smaller units if the situation gets critical.

Prices for natural gas continue to rise, hitting levels of $22 to $27 per BTU, and as exports to Mexico increase, supply levels continue to fall. California imports about 85% of the natural gas it consumes.

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-- Martin Thompson (mthom1927@aol.com), December 06, 2000

Answers

This puts a whole new perspective on the California Electric problem.

-- Martin Thompson (mthom1927@aol.com), December 06, 2000.

(12/6/00 2:05:44 PM PT)

NEW YORK -- Natural gas surged to an all-time high Wednesday as cold weather permeated the West and California energy officials warned that insufficient supplies could lead to power outages.

Crude-oil prices also settled higher as the pricing dispute between Iraq and the United Nations dragged through another day.

At the New York Mercantile Exchange, January natural gas soared $1.101, or 15%, to settle at $8.485 per million British thermal units, after peaking at $8.80, well above the previous all-time high of $7.95 set Monday. The February through May contracts also posted contract highs.

'Basically the market is so volatile that a slight breeze in either direction can carry this market 50 cents without significant opposition,' said Tim Evans, an analyst with IFR Pegasus in New York.

Traders cited new cold-weather forecasts pressing against peak demand. The latest inventory report from the American Gas Association was viewed as neutral, although prices retreated slightly after its release at midafternoon.

The American Gas Association reported that in the week ended Dec. 1, gas in storage dropped by 73 billion cubic feet, which was at the low end of analysts' expectations and half of last week's pull from storage.

The association said inventories are 17% below where they were a year ago and 12% below the five-year average.

Mr. Evans of IFR Pegasus was looking for a decline between 80 billion and 100 billion cubic feet.

'This market is really running on adrenaline. I think we have lost any firm grounding with the actual storage levels or actual temperatures,' he said before the storage report was released. 'I don't think we're going to have a sustained correction to the down side until we get some kind of bearish news in order to drive it, and really what we're talking about is some pattern of warmer weather.'

Mr. Evans cautioned that the large premiums being built into gas prices will eventually be removed.

'There's going to be some tiny ... shift in the weather, or shift in the storage, and suddenly all of the people who have been buying it and buying it are going to decide to take profits, and then we're going to see a sharp decline,' he said. 'Sometimes I refer to that kind of decline as profit-taking run amok. It's going to fall farther and faster than you would have thought possible.'

Meanwhile, an official at the agency that operates the California electricity grid said Tuesday there is a 'high probability' that electrical-generating plants in the state could be forced to reduce their output soon because of insufficient supplies of natural gas to fuel the plants. Such an event almost certainly would trigger rolling blackouts.

The Pacific Northwest faces a cold snap, with temperatures expected to be anywhere from five degrees below normal in Seattle to 16 degrees below normal in Denver in coming days.

That follows a dry season, which means there isn't much water to power hydroelectric plants, putting further pressure on gas-fired plants in California to meet the Northwest's needs as well as its own.

California gas traders Wednesday reported natural-gas prices at El Paso Natural Gas Co.'s Arizona-California border hub hit $40 per million British thermal units, a record for next-day delivery gas prices.

Also at the Nymex, heating oil benefited from the powerful rally in natural gas. The January contract surged 3.52 cents, or 3.6%, to $1.0118 a gallon.

January crude oil rose 32 cents to $29.85 a barrel. At its worst, the contract sank to $28.25, a four-month low. February crude climbed 28 cents to $29.31 a barrel, while January gasoline finished up 1.99 cents, or 2.6%, to 78.21 cents a gallon.

Oil prices, which spent much of the session mired in negative territory, turned high in the final hour of trading on a report that Iraq rejected the U.N.'s proposed changes to the nation's pricing formula for oil exports.

In a telephone discussion with the U.N. oil overseers, officials of Iraq's State Oil Marketing Organization rejected a pricing mechanism presented to them on Tuesday that the overseers believe reflects fair market value.

Iraqi oil officials offered a counterproposal on prices, but the overseers saw it as unacceptable, U.N. officials said. The two sides agreed to resume talks Thursday, and U.N. officials continued to hold out hope that the row over oil prices would come to a conclusion in the next few days, paving the way for a resumption of exports.

Iraq's 2.2 million barrels a day in oil exports came to a halt Friday, after the U.N. Iraq Sanctions Committee, acting on the advice of the overseers, rejected Iraq's proposed prices for December. Customers have said that Iraq is seeking a 50-cent a barrel surcharge to be placed in an account outside U.N. control, but Baghdad officials have denied that.

In a sign that Baghdad may be preparing for a resumption of exports, U.N. officials said that at least one oil tanker in the Persian Gulf had received instructions from Iraqi oil authorities to move to inner anchorage at Iraq's offshore terminal of Mina al-Bakr for possible loading. Two other tankers remained in the area, but it wasn't clear if they had received similar instructions, the officials said.

No shipping activity was reported at Ceyhan, the Turkish Mediterranean port, which also is used to export Iraqi oil.

The U.N. Security Council Tuesday approved a six-month extension of Iraq's oil-for-food program. The program extension includes a contentious proposal to give additional funds to Iraq to cover local costs related to its oil industry. References to weapons inspections in return for an easing of sanctions were dropped.

But Iraq's leaders postponed a decision on whether to accept the latest extension of the oil-for-food program, the official Iraqi News Agency said.

Separately, inventory data from the American Petroleum Institute and the Department of Energy were mixed. The petroleum institute, an industry group, late Tuesday reported that crude-oil stocks dropped by 3.729 million barrels to 287.769 million barrels in the week ended Dec. 1. But the Energy Department reported Wednesday that stocks climbed by two million barrels to 292.1 million barrels.

The petroleum institute said distillate stocks, which include heating oil and diesel fuel, rose by 3.289 million barrels, while the Energy Department reported a bigger build of 3.4 million barrels.

The industry group said gasoline stocks rose by 3.239 million barrels. The Energy Department reported an increase of four million barrels.

In other commodity markets:

METALS: Precious-metals futures ended mixed. February gold climbed $4 to settle at $277.30 an ounce. March silver added five cents to $4.833 an ounce.

March palladium lost $11.55, or 1.3%, to $856.45 an ounce. January platinum shed $2 to $605.4 an ounce.

Among industrial metals, March copper closed up 0.85 cent to 87.75 cents a pound.

GRAINS: Grains and beans settled mixed at the Chicago Board of Trade. March wheat slipped one-half cent to $2.7675 a bushel. March corn lost 1.25 cents to $2.1875 a bushel. March oats edged up one-quarter cent to $1.115 a bushel, while January soybeans ended up 6.25 cents to $5.07 a bushel.

Copyright (c) 2000 Dow Jones & Company, Inc.

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-- Martin Thompson (mthom1927@aol.com), December 06, 2000.