Firms Scramble for Huge Kern County Gas Market : Oil Fields Need Steam to Extract Heavy Crude
In Roger Embrey’s office at Southern California Gas is an unusual map of Kern County. Instead of cities and roadways, the map shows green-colored utility pipelines that extend into red blobs signifying oil fields. To Embrey, those blobs represent a gigantic opportunity--the richest market for selling natural gas in North America. “The potential is enormous,” says Embrey, the gas company’s marketing manager.
He’s not the only one who thinks so. Eyeing big profits, seven of the nation’s largest interstate pipeline companies and utilities are making bids to supply gas to Kern County’s oil producers. The oil producers need gas--and plenty of it--to generate steam, which is injected into wells to help extract the county’s bountiful reserves of heavy, waxy crude oil.
The competition for the Kern natural gas market, estimated to be worth $1 billion annually, is complex and sometimes confusing. It is characterized by conflicts between the state’s two largest natural gas utilities; between the utilities and three interstate pipeline consortiums, and between state and federal energy regulators.
Perhaps the biggest conflict involves Southern California Gas and its corporate parent, Los Angeles-based Pacific Lighting, each of which have launched separate bids to serve the Kern market. There are also questions--as yet unanswered--over how this will affect small gas users, such as homeowners and small businessmen.
Unusual for California
The competition between the utilities and the interstate pipeline companies is unusual for California, which isn’t crossed by any interstate lines. Safely isolated from outside competition and fueled by California’s explosive growth, Southern California Gas grew into the nation’s largest gas utility, and San Francisco-based Pacific Gas & Electric, the nation’s second largest.
Conservation and alternative fuels are bringing an end to that growth, in California and elsewhere. In California, the natural gas market is expected to grow by only 1% a year until the year 2000--excluding Kern County--and nationwide, the outlook isn’t much better. With surplus of gas that’s expected to last into the next decade, the utilities, along with the interstate pipeline companies, are seeking out new markets.
The Kern oil-recovery market is, by all accounts, the largest new market on the continent and most gas experts say its unlikely another like it will surface. That’s why the Kern market has attracted some of the largest interstate pipeline companies.
“Without the Kern County oil market, we’re looking at a no-growth business,” says Embrey of Southern California Gas. “That’s not healthy for us, or for anybody.”
The Kern market is evolving because, for the first time in years, natural gas is both plentiful and cheap. Federal deregulation of the natural gas market has created an oversupply of gas that has pushed down spot prices as low as $2.50 for every 1,000 cubic feet, a 20% drop from a year ago, making gas an inexpensive substitute for fuel oil. The spot prices are below the $3.80 that Southern California Gas charges now.
The state Public Utilities Commission estimates that Kern’s natural gas market will grow to $1 billion by 1990 from virtually nothing now, as oil companies complete multimillion-dollar plans to develop the oil fields, among California’s richest. The Kern River field alone contains nearly 1 billion barrels of crude oil reserves, almost the equivalent of such giant strikes as Alaska’s Prudhoe Bay or Colombia’s Cano Limon field.
The difference between the Alaskan oil and the Kern oil is that the Kern oil is heavy--too thick to flow from the ground without help. The oil producers want gas to power their generators which produce steam that warms the heavy crude, making it thin enough to flow.
According to the oil producers, natural gas has a number of built-in advantages. First, it gives them more crude oil to sell, since the oil producers currently burn crude oil to produce steam. They burn about one barrel of crude oil for every four they extract from the ground, or about 150,000 barrels of crude oil a day.
Less Pollution
Second, gas burns more cleanly than crude oil, which produces heavy pollutants that must be removed with expensive anti-pollution equipment. The equipment, called scrubbers, remove sulfur dioxide from oil-produced smoke. The scrubbers must be cleaned frequently, and that means halting oil production for up to a day while the scrubbers are cleaned.
Third, natural gas can be easily used in co-generation, the process of producing electricity simultaneously with steam. Texaco currently operates a 300-megawatt co-generation plant in its Kern River field. It uses most of its electricity, and sells what it doesn’t need to an electric utility.
“It gives us two products to sell,” says Claude Fiddler, manager of Northern California oil production for Chevron, which plans a $1.3-billion expansion in Kern County for oil recovery and co-generation over the next 10 years.
The state’s largest utilities--Southern California Gas and PG&E--already; operate gas lines in the region. “We’re ready and equipped to supply them with gas,” says Gene Satrap, gas supply manager for PG&E.;
But the oil producers don’t want utility gas, and only a handful of producers, including Texaco and Shell, buy utility gas in small amounts. Utility gas prices and supply are strictly regulated by the PUC, and those prices are generally above spot market rates. In times of shortages, the PUC can shift supplies from industrial users to homeowners. “We’re at the bottom of the totem pole as far as reliability is concerned,” says Randy McCrae, a manager in Shell Oil’s natural gas planning department.
Texaco, Shell and Chevron--the largest oil producers in Kern County--want gas from an interstate pipeline, which isn’t regulated by the state, so the oil producers are free to negotiate price and supply contracts for the gas. If they don’t get the price or supply they need, the oil producers reason, they can always switch back to using crude oil.
Reviewing Two Proposals
However the oil producers have little choice over which pipeline--if any--services them. The Federal Energy Regulatory Commission regulates the interstate pipeline system and no pipeline can be built without its approval. FERC is currently reviewing two proposals: the Mojave, a 372-mile pipeline that would begin in Topock, Ariz., where two large interstate pipelines converge; and the Kern River, a 827-mile pipeline that would ship gas from southwestern Wyoming in the gas-rich Overthrust region. A third proposal, the El Dorado, is still in the talking stage. One project, at most, will get FERC’s approval.
The partners in the proposed $825-million Kern River pipeline project are Tenneco, the nation’s biggest interstate pipeline company, and Williams Cos., also an interstate pipeline company. The partner of Producers Gas in the proposed $285-million El Dorado pipeline project is a subsidiary of TransCanada Pipelines, one of Canada’s biggest pipeline companies. The El Dorado would extend for 383 miles from Topock, Ariz., to Kern’s oil fields. It follows roughly the same route as the Mojave, taking gas from the same source, the El Paso and Transwestern pipelines.
The PUC is challenging FERC’s authority over the Mojave project. Although it objects to both interstate pipeline proposals, it is claiming jurisdiction over the Mojave because its begins one mile from the state border--hardly distant enough to be viewed as an interstate line, according to the PUC. Harvey Morris, a PUC staff attorney, says the commission is concerned about the effect of the pipeline on smaller users, namely homeowners and small businessmen.
According to Morris, the PUC is worried that the interstate pipelines wouldn’t be satisfied with the Kern oil-recovery market and would offer cheap gas to large industrial customers. One such customer, United States Borax & Chemical, has already expressed interest in buying gas directly for its huge chemical plant in Boron in Kern County, which is at the doorstep of the proposed Mojave and Kern River pipelines.
Would Affect Everyone
If that happens, Morris says, gas rates for everyone else are likely to increase, since the price charged by utilities for gas is based in part on how much gas is sold. “In some way, everyone will be affected,” says Morris, although he said no one yet knows by how much.
The Mojave and Kern River partners both say they are not interested in serving anyone but the oil producers. Says Russ Workman, president of the Mojave project, “We don’t want someone whose need for gas rises when they’re canning peaches, then falls when they’re doing something else.”
That give-and-take pales, however, compared to the disputes between PG&E; and Southern California Gas. In June, the PUC told PG&E; to stop supplying Shell and Texaco in Kern County and to turn the business over to Southern California Gas. The decision surprised the oil producers, which had built their own pipelines to tie in to PG&E;’s line, Shell’s McCrae said.
Under a 1961 agreement between the two utilities, the PUC had little choice. More than two decades ago, when Kern consisted of little more than farmland, PG&E; and Southern California Gas agreed to divide the state at Kern County. The agreement gives PG&E; a monopoly in the north and Southern California Gas a southern monopoly.
Under that state-approved agreement, 90% of the Kern oil fields, including Texaco and Shell, lie squarely in Southern California Gas territory.
Utility Is Angry
PG&E;, which says it served the market only at the behest of Shell and Texaco and because Southern California Gas wasn’t able to do it at the time, was angry. “No one anticipated that this market would be there,” Satrap said. “Otherwise, we would never have agreed to it.” The state PUC told both utilities to come up with a new agreement to split the state, and has given them until mid-September to do so.
In the PUC’s view, an orderly plan to serve the market would provide ammunition in its battle against the interstate pipelines, since one thing FERC considers is whether existing pipelines are sufficient to serve a market.
What really nettles PG&E; is Pacific Lighting’s participation in the $320-million Mojave project, along with El Paso Natural Gas and HNG-Internorth, the nation’s second largest pipeline company. Its participation in the Mojave puts Pacific Lighting in competition with its own Southern California Gas subsidiary.
Southern California Gas says it can supply 450 million cubic feet of gas daily, or up to 60% of expected Kern demand, without adding another inch of pipe. But Pacific Lighting says it joined the Mojave partners because it doubts the oil producers will ever buy much gas from a utility. PG&E; argues that an interstate pipeline system is wasteful, since both it and Southern California Gas have pipelines in Kern County.
Pacific Lighting’s president acknowledges that the arrangement is unusual. “We’re determined to serve the market any way we can; if not with the utility, then with the pipeline,” Joseph R. Rensch says.
The president of Producers Gas, the Lear Petroleum subsidiary that is involved in the El Dorado pipeline proposal--a third proposal not yet submitted to FERC--says Pacific Lighting has adopted its split approach to “maintain a monopoly.”
“Those two utilities have had a monopoly in the California market for years. This is the first time they’ve faced competition and they’re doing everything they can to stop it,” says Jack Lafield, Producers Gas president.
UTILITY PROPOSALS
Two California utilities, Southern California Gas and Pacific Gas & Electric, already serve the area, (see map below), and are bidding to serve the increased natural gas needs of Kern County oil fields. The oil companies’ major concern is supply. The state requires that in times of shortage the utilities must serve residential gas customers first and, if necessary, interrupt deliveries to large industrial customers.
PIPELINE PROPOSALS
Two major interstate pipeline ventures have been proposed to serve the Kern County oil fields. Tenneco and Williams Cos. are proposing an 827-mile Kern River pipeline project that would ship gas from southwestern Wyoming. El Paso Natural Gas and HNG-Internorth, which have existing piplelines from Texas to Topock, Ariz. near the California border, have joined with Pacific Lighting in proposing a 372-mile Mojave pipeline to bring gas to Kern County. A third proposal is in the talking stage.
