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Saved by Warm Weather, But Not In the Clear Yet: A Look at the California Gas Storage Market

January 24, 2018 | By Callie Kolbe

In a report issued on Nov. 28, 2017, officials from the California Energy Commission (CEC), California Public Utilities Commission (CPUC), California Independent System Operator (CAISO) and the Los Angeles Department of Water and Power (LADWP) stated that Southern California was at heightened risk of inadequate natural gas supply this winter. The report noted the possibility of a supply shortfall of as much as 500 million cubic feet per day (MMcf/d) if peak demand conditions emerged while several gas pipelines serving Southern California remained inoperable.  

The CEC then released an update on Jan. 9, 2018 stating that warm weather throughout November and December enabled Southern California “to serve a large portion of demand using receipts of pipeline gas instead of relying on gas from underground storage.” The update projected a January month-end storage inventory of 55 billion cubic feet (Bcf) and a February month-end inventory of 30 Bcf.

With only a handful of days left in January, it's time to see how the state has fared so far this winter. In this issue of Get the Point, we look at how a warm winter in California has allowed the local gas market to evade supply shortfalls and price hikes even amid multiple maintenance events.

PointLogic can confirm that warm winter weather has saved the region from having to draw heavily on storage inventories even as maintenance events have restricted inter-regional supply. However, a new round of maintenance activities and the possibility of sinking temperatures throughout the next two months of winter could change the game and result in a tight regional market.

It’s been a warm winter in the West

 Winter regional deman comparison

The graph shown above illustrates lackluster demand in the West region this winter. While the eastern half of the country set demand records at the end of December 2017 and the beginning of 2018, the West stumbled along with demand that was 4% lower than the prior year throughout December and nearly 20% lower throughout January.

As compared to the prior five years, demand levels in the West this past December came in the second lowest (lowest in the last five years occurred in December 2014). Additionally, demand this January has come in at the lowest level in the last five years. 

Despite earlier uncertainty surrounding supply shortages, inventory levels have stayed strong

Above-average regional temperatures have kept storage withdrawals lower than is typical for the first half of winter (see below). 

Western regional winter temperature comparison

Significantly lower demand across the West region has left storage inventories with a shrinking year-on-year deficit. As the graph below illustrates, the year-on-year storage inventory deficit in the region as a whole has shrunk by nearly 35% since the beginning of December due to lower withdrawals from storage through the first half of December and the recent weeks in January.  

 Regional Inventory: EIA Pacific

However, within the region, PG&E’s gas inventories have behaved differently as the system’s inventory widened its deficit in the second half of December and still lags behind prior years.  

PG&E Storage Inventory

Storage inventory, as reported by the PG&E system, began January at nearly a 6 Bcf deficit to last year and has only recently tightened to less than 1 Bcf. The way interstate receipts made it on to PG&E’s system amid maintenance events affecting Southern California sheds light onto why PG&E’s inventories were pulled down from mid-December through mid-January.

First, throughout December less gas came down into PG&E from GTN because it was being delivered to Oregon and Washington for heating demand. As a result Northern California relied more heavily on storage. Second, as the “bomb cyclone” hit the East and Midwest in early January, volumes making their way into PG&E’s system by Ruby Pipeline dropped by nearly 0.5 Bcf/d to barely 0.1 Bcf/d (in other words, they were flowing east instead of west). The decline in supply again led to Northern California relying more heavily on storage.

Additionally, PG&E’s southern sections received less gas as the Needles outage on SoCal’s system returned to partial service on Dec. 22, 2017 and drew incremental volumes away from PG&E. Prior to the return to service at Needles, receipts from Transwestern at Topock had averaged about 340 MMcf/d for the first 20 days in December, which was nearly 200 MMcf/d higher than during the same time frame last year. After partial service began, that level dropped to an average of 255 MMcf/d through the end of December and fell further to 140 MMcf/d through the first three weeks of January. A recent unplanned maintenance at Needles which began on Jan. 17 coincided with a temporary surge in PG&E receipts from Topock as volumes were again pushed away from SoCal and into PG&Es system.

After the current maintenance is completed, volumes will again drop away from PG&E and exacerbate the need for storage withdrawals along PG&E’s system through February. Should weather forecasts turn colder in combination with weaker pipeline receipts, we would expect to see support for stronger Malin pricing over the next month.

Warm weather again in February?

PointLogic Energy is currently expecting softer demand to continue through the next couple of months; however, as forecasts solidify, colder weather would push demand expectations to the high side.

The most recent National Oceanographic and Atmospheric Administration outlook, illustrated below, suggests that possible cold spells in Northern California could develop through February and that Southern California has an “equal chance” (or EC) of normal weather next month, which bodes well for both storage inventories and demand.  

Western regional demand forecast

One month Outlook

For consumers in California, a warm winter has been a boon. Warm weather has hidden the severe risk Southern California was exposed to amid high capacity outages. Additionally, PG&E has been able to balance decreased inflows with increased storage withdrawals, which have kept regional prices in check. However, if temperatures unexpectedly dip significantly below normal, SoCal Border basis could have a sharp reaction.

Stay tuned to PointLogic’s coverage of storage markets and the Western region as the winter heating season peaks.

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