Even as natural gas pipeline operators take action to balance system capacity with an oversupply of natural gas flooding the market, prices at the SoCal Citygate have consistently held a substantial premium to values at nearby delivery locations, prompting the question, why?
Spot prices at SoCal Citygate averaged less than $1.00/MMBtu above the Henry Hub until winter 2022, when the differential exploded to average $30.00 in December and nearly $15.00 for the full winter. That’s “close to three times the previous winter’s price and the highest on record for that period,” said RBN analyst Sheetal Nasta in a recent blog.
While other California and West Coast markets saw similar price spikes – Malin hit $32.00 on Dec. 9 and PG&E Citygate surged to $44.50 – most markets have since corrected, according to NGI Daily Historical Prices.
For example, NGI’s daily spot price at Malin averaged $2.770 on Tuesday (Nov. 7), while PG&E Citygate deals averaged $3.795. Yet, despite posting the most significant day/day decline of $1.075, SoCal Citygate trades averaged a hefty $7.205.
One Southern California industrial user told NGI that the fundamental question is how to explain the price differential between PG&E Citygate and SoCal Citygate.
“How do you explain this much of a price differential when Southern California Gas Co. (SoCalGas) has said we were getting too much gas, we have to restrict it to the point where if you don’t comply, we will penalize you?”
It appears that the issue is not one of oversupply but of too much demand. SoCalGas from April to Nov. 7 had issued 167 high operational flow order (OFO) events in response to daily demand for gas exceeding the capacity of its system.
“So, you have a situation where too much gas is getting nominated into the system,” said NGI’s David Dutch, vice president of Business Development and Client Support. “So OFOs and drastic cuts in the nominations are being made.”
Dutch, a former natural gas trader focused primarily on West Coast markets, said the necessity of the supply provides one explanation for the elevated prices at the SoCal Citygate.
“For folks that absolutely need their gas and cannot be cut, they have to purchase gas in the same day market, which often involves in-ground storage transfers,” he said. Those with gas in the ground or extra gas to sell are extracting massive premiums to make this gas available, he added.
Even the biggest buyers are affected, including the Los Angeles Department of Water and Power, according to the manager of Fuel and Purchase Power, Marlon Santa Cruz. He told NGI the utility had seen its use cut. “Not all of the supply we are attempting to bring into the state is coming through the system.”
There’s more behind the volatility than that, market participants said.
Pipeline Work, Limited Storage
“Over the last, give or take, year, the trend has been increasing, potentially because of maintenance on the Line 2000 segment of El Paso Natural Gas (EPNG),” one market participant told NGI.
The major artery that delivers Permian Basin gas supply to California was out of service for 18 months from August 2021 after an explosion.
Nasta also noted the increase in flow following Line 2000’s return in February. Total westbound flows from the Permian jumped year/year, averaging 2.6 Bcf/d for the April-October period. That was up from 2.1 Bcf/d in the same period in 2022 – and the highest level in four years.
“Yet SoCal Citygate prices didn’t come down that much,” the market participant said. “Prices remain elevated, likely because while supply was improving, demand grew, particularly from the power generation sector.”
Nasta said hydroelectric supply and coal-fired generation shortages may have contributed to growing demand. Notably, parts of the West last year were mired in a years-long drought that curtailed hydroelectric generation at some facilities. Coal had issues too.
“Add all that up, and that might be behind the price differential,” the market player said.
That said, at least on the supply side, the Southern California region appears to be well stocked for winter. After falling to more than 20% below the five-year average last winter, stocks in the Pacific region have risen to 285 Bcf. That level is about 3% above the five-year average, according to the U.S. Energy Information Administration.
Notably, SoCalGas recently received approval to increase the amount of working gas in storage at the Aliso Canyon facility to 68.8 Bcf. That is the highest amount deemed safe following a massive methane leak in 2015. As of Thursday (Nov. 9), inventories at Aliso Canyon were at 54.4 Bcf, according to the SoCalGas electronic bulletin board.
