A Race Worth Billions

A modern version of coals-to-Newcastle is being played out in Kern County: a multibillion-dollar race to furnish natural gas to the oil companies. The battle has triggered new animosities between California’s two big gas utilities, Pacific Gas & Electric Co. and Southern California Gas Co., each of which seeks to serve the lucrative new market. But it also has united the two California firms in opposition to interstate pipeline companies that see a chance to strike a real bonanza.

The story behind the story is this: Kern County oil is extremely heavy and will not flow from the ground to the surface even when pumped. The oil companies have built plants to generate steam, which is forced down into the oil reservoirs. The steam warms the crude oil to the point at which it will flow. Producers have been using some of the oil to run the generators that produce the steam. But it takes about one barrel of oil to bring three to the surface, and that creates air-pollution problems. So the firms now are looking to natural gas to run the generators.

With no interstate gas pipelines running the length of California, PG&E; and the gas company have an effective monopoly in the state, splitting their service territories through Kern County. The state Public Utilities Commission has directed the companies to decide which firm will serve which oil companies by negotiating. So far they have failed to agree. About 90% of the anticipated demand is in what has been considered SoCal territory up to now. In the absence of agreement, the PUC will settle the issue, but that will take time.

Now come three interstate gas pipeline companies intent on stealing away the Kern oil business from both PG&E; and the gas company. They would spend hundreds of millions of dollars to build pipelines to import gas from as far as Wyoming, 827 miles away.

The pipelines make an attractive offer of long-term contracts, guaranteed prices and no interruption of supply. With the utilities, they claim, oil producers could be cut off in times of shortages under regulatory orders designed to protect supplies to homes and critical businesses. The utilities claim that this will not happen, but it has in the recent past.

The utilities also fear that the pipelines will not be content to sell gas just to the Kern County oil producers, but will try to steal other industrial customers away from them. The pipelines claim that they have no such intention. But, as an illustration of the size of the stakes involved, a partner in one of the pipeline projects is Pacific Lighting Corp., the parent company of Southern California Gas. That’s known as hedging your bets.

The state PUC is supporting the utilities and opposing the pipelines. The PUC also is competing with the Federal Energy Regulatory Commission for jurisdiction over the two pipelines that would originate at Toprock, Ariz., only a mile or so from the California state line.

The PUC’s position is curious, considering its general role of assuring adequate supplies of energy to customers at the lowest price that still assures the supplier a reasonable profit. The PUC is worried that the interstate lines would attempt to pirate other SoCal and PG&E; industrial customers, thus threatening higher prices for the average consumer. Between the PUC and the FERC there should be some regulatory means of preventing that and, at the same time, encouraging healthy competition for the oil field business.

Perhaps the state Energy Commission, which is studying the issue, will produce a more objective assessment of what is best for California.