August 16, 2017 | by Callie Kolbe
In this week’s Get the Point, we analyze the relationship between storage and prices that have emerged between PG&E and SoCal from last summer to this summer amid the cntinuing lack of access to the Aliso Canyon gas storage facility.
Pacific regional pricing hubs PG&E and SoCal are located in the Northern California and Southern California markets, respectively, and serve as trading hubs for West Coast demand. These two hubs account for a majority of demand in the U.S. Energy Information Administration’s (EIA) Pacific Region. In fact, system demand on PG&E and on SoCal make-up nearly 60% of overall Pacific demand, and their storage inventories also account for nearly half of the region’s demonstrated maximum storage levels.
In January 2017, we first looked at the impact the Aliso Canyon outage had on California storage in Get the Point: “A State Divided”. Going into summer 2017 (as of the week ended March 31, 2017), combined storage inventories at PG&E and SoCal were 106 billion cubic feet (Bcf), or 10 Bcf below the prior three-year average and 31 Bcf below 2016 levels.
The story has developed throughout this summer. Combined inventories currently stand at 145 Bcf, which is only 10 Bcf below last year at the same time, yet have widened to 32 Bcf below the prior three-year average. How did storage levels on these two main pipelines tighten towards last year’s levels but also widen to prior year norms over the course of the last four months?
It is important to first note that while both PG&E and SoCal storage fields stand at deficits relative to last year’s inventory levels, the SoCal deficit is the driver (see graph below). Also, when compared to the prior three-year average, only SoCal remains at a deficit. Despite a mild winter, SoCal entered the summer injection season on April 1, 2017 at a 19 Bcf deficit to the prior year and at its second-lowest inventory for that time in the last four years (39.6 Bcf). This was due to the continued closure of Aliso Canyon since the major leak was detected in October 2015. Not only were injections prohibited at the site since then, but SoCal informed state officials that it was not filling its other three storage facilities in Southern California at traditional levels; as of April 1, 2017, they were at about 40% of the prior three-year average.
However, after a series of strong injections during the past four months of the summer season, the deficit on SoCal’s system has tightened to the current 5.8 Bcf, deficit to last year despite the continued curtailment at Aliso Canyon. This is due to a relatively mild summer-to-date combined with increased net inflows, which have allowed SoCal to refill storage at a rate nearly eight times greater than the comparable period last summer. Last summer, SoCal net injected a total of 1.9 Bcf between April and mid-August, while this year SoCal has injected a net 15 Bcf during the same time frame. However, when compared to the prior three-year average, SoCal’s summer refill to-date rests at barely half of where historical norms would otherwise place it; prior years have injected between 50-70 Bcf. Just as important to note, this change in inventory levels and net flows has had the support of a strengthened SoCal cash basis this year.
PG&E’s storage fields, on the other hand, began the injection season at a lower deficit to last year, yet at a surplus to the prior three-year average. At the beginning of April 2017, PG&E’s inventories sat at 67 Bcf, which was a 12 Bcf deficit to last year and a 6 Bcf surplus to the prior three-year average.
Like SoCal, several weeks of strong injections this summer-to-date have enabled PG&E to tighten its deficit to last year by 8.3 Bcf to the current 3.7 Bcf. Summer-to-date, PG&E has net injected just over 23 Bcf into storage fields as compared to only 15 Bcf at this time last year. However, similar to SoCal, net injections have stayed under the prior three-year average of 28 Bcf. As PG&E’s surplus to the prior three-year average has tightened to its current 1.8 Bcf, the market has exerted upward pressure on PG&E cash basis.
As the graph below shows, the combination of upward strength at both PG&E and SoCal city-gates has on average maintained a fairly similar summer-on-summer differential at these two hubs. However, August-to-date is trading significantly tighter.
Periods of tight spreads between PG&E and SoCal are not uncommon as witnessed throughout April and May 2016 and June 2017. The availability of hydropower in the area, among other supply and demand dynamics, can often put pressure on these hubs. At the beginning of August last year, the two hubs were experiencing 75oF weather, a mildly dry climate and an outage at Aliso Canyon. PG&E cash basis averaged $0.36/MMBtu and SoCal’s cash basis averaged $0.02/MMBtu, rendering a wide spread of 34 cents.
This year, the fields have entered into August with a less dry climate but again with 75 oF weather and an outage at Aliso Canyon. However, a combination of increased net deliveries of gas to interconnecting pipelines and nearly flat year-on-year demand changed the storage patterns on these two pipelines. As illustrated in the graph above, August-to-date PG&E cash basis has traded at an average of roughly $0.43/MMBtu, while SoCal has traded at $0.39/MMBtu, which has narrowed the spread to 3 cents.
In general, both demand and available supply on PG&E’s system has remained relatively flat summer-on-summer. Average summer demand has softened slightly, coming in slightly more than 0.1 Bcf/d lower, August-to-date demand is fairly flat, and net interconnet deliveries have stayed flat at 1.9 Bcf/d.
The dynamic that has varied this year for PG&E’s cash basis has centered around which interconnects have supported the system’s injection demand. PG&E traditionally relies on its southern Baja path system to feed incremental storage demand as typically the northern Redwood Path flows at maximum capacity.
Analysis of PointLogic Energy flow data exposes that this summer, on average, less gas has been making its way onto the system from its southern interconnects. Transwestern and Kern River deliveries into the system have seen the largest declines summer on summer. The August run-up in PG&E cash basis has attempted to support a flip to this summer’s trend with increased southern volumes; however, as SoCal basis follwed and the spread collapsed, increases from the southern portion were only able to partially offsetting declines from northern-sourced volumes. As a result, insufficient incremental volumes were added that could be used for increased injections on PG&E’s system.
Like PG&E, SoCal’s summer-on-summer demand has been flat, yet the system has sourced an additional 0.1 Bcf/d from net interconnects to help alleviate the storage deficit. August-on-August, SoCal has relied 3% more on supply from net interconnects. The changes have been with El Paso Pipeline, where the system has delivered an incremental 0.15 Bcf/d to SoCal at Ehrenberg in La Paz County, Ariz. Transwestern has also delivered incremental volumes to the SoCal system, though these volumes have tapered off this August as cash basis strengthened at both SoCal and PG&E.
Aliso Canyon’s Effect on Summer 2017
The outage at Aliso Canyon which began in October 2015 has had mild but lasting effects on flow, pricing and storage dynamics in the Pacific Region. Specifically, SoCal’s inability to fully utilize Aliso Canyon (which is the system’s largest storage field with a capacity of 86 Bcf) and the resulting storage deficit has resulted in more competition this year between Northern California and Southern California. This competition has had a domino effect on cash basis at SoCal and PG&E, which has contributed to tighter spreads this August.
Over the next month, demand across the Pacific Region is expected to settle at near normal as mild temperatures are anticipated for the region. The expected soft demand levels should place downward pressure on SoCal and PG&E. However, as both systems continue to face storage deficits, the need to source supply from outside the state could keep upward pressure at both hubs.
The swing factor, in addition to weather, will come from the next chapter of Aliso Canyon which was recently approved to resume limited injections on Aug. 1. Depending on how quickly Aliso Canyon begins injections and whether traders believe that the modest allowed injections (an additional 8.8 Bcf to a total of 23.6 Bcf at Aliso Canyon) have reduced the potential for supply shortages, we could see wider spreads return as the system continues to erase its storage deficit.
PointLogic will continue to monitor Pacific demand, net flows, and storage very closely. Updated data is available from the PointLogic Energy Storage Module and from our weekly demand and storage report series.