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Southern California spot gas premiums narrow on restored Line 4000 capacity

Highlights

SoCalGas completes summer-long Northern Zone work Sep 30

SoCal city-gate's premium to cash Henry Hub halves

Gas inflows into SoCalGas system increased after the Southern California utility restored pressure on its Line 4000 Oct. 1, deflating regional spot gas prices' premiums to cash Henry Hub.

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SoCal city-gate's premium to cash Henry Hub has narrowed to average 67 cents since Oct. 1, around half of the $1.27 premium observed in the seven days prior. Cash SoCal Gas followed a similar trajectory, averaging a 31-cent premium in the first week of October, down from 57 cents in the last week of September.

The spreads narrowed despite robust gas demand, showing that supply-side dynamics were driving the change.

S&P Global Platts Analytics data showed that total inflows into SoCalGas increased around 190 MMcf/d to average 2.24 Bcf/d for the first seven days of October, up from the 2.05 Bcf/d averaged in the seven days prior.

SoCalGas's receipts of Permian gas from Transwestern pipeline have doubled since Oct. 1, increasing around 300 MMcf/d to reach 640 MMcf Oct. 7, according to pipeline nomination data. Intrastate deliveries from PG&E at Wheeler Ridge fell around 200 MMcf/d as a counterbalance, reflecting how shippers flowed gas on to PG&E and then through to SoCalGas as a work-around during the maintenance work.

Inflows from El Paso Natural Gas at Ehrenburg increased around 90 MMcf/d during the first week of October, with full utilization of this receipt point limited by ongoing repair work on EPNG's Line 2000.

Line 4000 maintenance work

SoCalGas' Line 4000 maintenance work, which cut the roughly 1.6 Bcf/d of Northern Zone flow capacity by 720 MMcf/d, began May 1 and ran through the end of September.

On Oct. 1, the system announced that it would increase the operating pressure on Line 4000, boosting total capacity in its Northern Zone to 1.25 Bcf/d.

Capacity at North Needles would in turn rise to 800 MMcf/d, up from roughly 320 MMcf/d of both capacity and actual flows during the maintenance.

Topock receipt capacity remains unavailable due to Line 3000 maintenance, which includes Topock receipts from both EPNG and Transwestern.

Thermal generation in California

Southern California spot gas prices traded at a sizable premium to cash Henry Hub for most of the Northern Zone maintenance period.

Regional cash prices, already elevated by the supply restrictions, received a further boost by California's increased demand for thermal generation this summer.

Data from the California Independent System Operator showed that daily thermal generation has averaged 248 GWh/d since the start of May, up 24% from the five-year average of 200 GWh/d.

Weak hydropower generation, driven lower by drought conditions, and delayed deployment of some battery storage projects have increased the state's reliance on gas to balance peak demand conditions.

Outlook

The restored Northern Zone capacity, along with a recent proposal for California Public Utilities Commission to authorize higher storage levels at Aliso Canyon this winter, have watered down the strength of Southern California's winter forward curves.

SoCal city-gate's winter strip (November 2021-April 2022) reached a record-high $11.05/MMBtu Oct. 1, according to Platts Analytics M2Ms forward curve data. It has since dropped more than $3 to $7.705/MMBtu Oct. 6.

The Commission will vote on whether to increase Aliso Canyon storage capacity Nov. 4. Two possible storage levels have been proposed: 41 Bcf and 68.6 Bcf.

Having more storage capacity available in the SoCalGas footprint would likely have a bearish impact on winter gas pricing in the region, as well as help decrease pricing volatility.