Massive quantities of natural gas in western markets will need to find a new home if California moves forward with its plans to cut power sector carbon dioxide emissions to zero.
If signed into law, a California bill establishing a statewide planning goal of zero-emissions power by 2045 could displace hundreds of billions of cubic feet annually that has been used in California's power generation sector, and potentially be a tipping point for further erosion of gas demand. Natural gas market experts say exports will be the likely outlet for any supplies unused by the Golden State.
Electricity generation typically comprises about a third of the state's gas use, according to an S&P Global Market Intelligence analysis of U.S. Energy Information Administration data. The power sector's gas use in California averaged on a monthly basis about 2 Bcf/d from 2010 through May 2018, although summertime spikes have well exceeded that. California used about 3.3 Bcf/d for power generation on average during August 2012, for instance.
The gas that would be pushed out of California's power markets typically comes into the region from Western Canada on TC PipeLines LP's Gas Transmission Northwest LLC, the Rockies on Kinder Morgan Inc.'s Ruby Pipeline LLC, and the Permian via Kinder Morgan's El Paso Natural Gas Co. LLC and Energy Transfer Partners LP's Transwestern Pipeline Co. LLC, noted Rick Smead, managing director of advisory services at RBN Energy.
For the Western Canadian producers, LNG exports from Jordan Cove or British Columbia's coast may become the outlets to new markets, Smead said. For more southern operators, pipeline exports to Mexico — which have ramped up steadily in recent years, reaching 1.5 Tcf in 2017 — would likely continue to increase, he said.
Getting sufficient infrastructure in place could pose a challenge for redirecting supplies internationally. But both Smead and Francis O'Sullivan, the Massachusetts Institute of Technology Energy Initiative's director of research, said the pace of change should be gradual enough to give operators and markets a chance to adapt.
California's neighbors may also begin to absorb the excess gas, especially if decreased California power sector demand drives down commodity prices in the region, according to O'Sullivan. Industries that have not historically been prominent in the region — petrochemicals, for example — may see the flush of gas as an opportunity to "take up the slack" in regional gas demand, he said.
"I think the system dynamics question is going to be very interesting indeed," O'Sullivan said. "I'm sure [Californians] are not naïve to that fact that the gas is going to find a market. The question is: Is that gas going to find a market that's going to be overall beneficial from a CO2 point of view? Or might that gas find its way into other sectors of the economy that may not necessarily be quite as efficient?"
Where the spare gas ends up and how it is used would likely partially determine the net impacts California's policy shift would have, but if the state is successful in decarbonizing its power sector, the move may also set off a chain reaction that affects other forms of gas use, O'Sullivan said.
For one, support for electrification may grow. With a carbon-free power grid, there would be a stronger climate justification for transitioning fossil-fuel operations and appliances — such as residential heating units — to electric power, he noted.
Residential, commercial and industrial gas users "are going to become the new fronts in terms of the battle for addressing carbon," he said. "Electrification of heating ... in the residential sector is going to be that first battlefront. I think it's fair to say that this may be the first salvo in the overall battle against gas."
California's Assembly on Aug. 28 passed Senate Bill 100, which also stipulates that California's power decarbonization not increase carbon emissions elsewhere in the western U.S. The state Senate, which passed the measure in 2017, followed up Aug. 29 by concurring with amendments and sending the bill to Gov. Jerry Brown for consideration. If signed into law, S.B. 100 may not simply displace generation-related volumes but also could lead to an acceleration in the decline of gas as a primary fuel in the region in general, O'Sullivan said.
But California's regional intentions presume other western states would not seize the opportunity of any resulting surplus to "sell gas as electricity across the wires," added Chris Moser, executive vice president of operations at NRG Energy Inc., which owns several natural gas plants in California.
If California succeeds in decarbonizing its power sector, other states' policymakers could become emboldened and try to take on similar approaches, O'Sullivan noted. "I think progress in this respect begets progress," he said. "Very quickly you might see a real meaningful issue for the natural gas producing basins and so on in terms of an important market starting to erode."
For that domino effect to start, however, California first has to prove its proposal is possible to decarbonize the power sector without relying on gas-fired generation as a flexible backup to intermittent renewables such as wind and solar. Smead questioned whether the state's voluntary proposal would ever translate to full decarbonization.
"Most of the planning I've been around has seen this ramp continuing — not reaching zero gas for power generation, but getting pretty low," Smead said. "Unless they have a great deal of confidence in batteries, this will be really hard to achieve."