‘Energy Rush’ Sparks Pipeline Pandemonium

Why is Mike Sullivan, the governor of Wyoming, so worried about California’s smog? Doesn’t he have his own problems back home?

Indeed he does, notably a weak economy. One way to fix that is to help clean up California’s air--by shipping Wyoming natural gas out here to burn in place of dirtier oil.

After flying into the hot, smoggy Los Angeles Basin from a recent clean-air publicity event with President Bush in Wyoming’s cool, clear Grand Teton area, Sullivan said:

“Without wanting to offend anyone here, I think we all recognize there’s work to be done. It looks pretty bad.”

Of course, Wyoming’s natural gas is no cleaner than that from Alberta, British Columbia, New Mexico, Texas or Oklahoma, which also want to clear up our smog. But if you’re from Wyoming, then Wyoming gas is indisputably the choice.

Sullivan is merely the most persistent of dozens of natural gas peddlers who have poured into California this year from all across the West. They are writing a rousing chapter in the long history of California’s scramble for natural resources to keep itself going.

The latest episode began a few years ago as a parochial turf battle over which public utility could sell natural gas to a few oil producers in Bakersfield. The oil companies want natural gas to make steam, which they pipe underground to bring California’s tar-like oil to the surface. It is the nation’s biggest new market for natural gas.

But the stakes have risen dramatically in the wake of last year’s spot shortages of natural gas in Southern California and new environmental mandates to use more natural gas in place of oil. The upshot is a greater-than-expected need for natural gas in California, although nobody knows how much.

Triggered a Rush

At the same time, the deregulation of the utility business has transformed a sleepy monopoly industry into a fiercely competitive one. Utility executives must now scramble to protect their usual markets from inroads by outsiders--such as the interstate pipeline developers--who can sell gas directly to the oil companies and others.

All this has triggered a sometimes rancorous gold rush among some of the continent’s pre-eminent energy firms, its most diligent regulators, and some well-placed politicians.

The issues: Which region of North America gets to sell its natural gas to California, which companies get to deliver it, which government bureaucracy gets to regulate it, which elected officials can claim the credit and who gets stuck with the bill.

The idea is to make sure that industry and others can get natural gas reliably and affordably--without creating a situation in which its smaller customers end up paying sharply higher rates to single-handedly support the public utilities.

“I’ve been in this business for 15 years, on both sides of the fence, and this is the most difficult public policy issue I’ve encountered,” said Frederick E. John, senior vice president at Southern California Gas and a former top official at the California Public Utilities Commission.

Five competing pipeline projects--enough to bring nearly 5 billion cubic feet per day into the state, or at least five times as much as anyone thinks is needed in the foreseeable future--are in the works.

The recent announcement of an alliance among two key developers and a prime customer, SoCal Gas, narrowed the players’ options. It has also hastened the day of decision among the state and federal regulators who must authorize the pipelines, with a resolution expected this fall.

Political activity has stepped up accordingly as an influential cast of characters ranging from Sen. Lloyd Bentsen (D-Tex.) to California Assembly Speaker Willie Brown have jumped into the fray.

Likened to Lenny

“They’ve all been playing a child’s Monopoly game the last couple of years,” says Richard Bilas, a member of the California Energy Commission. “Suddenly it’s a real-life monopoly game.”

Ice hockey might be a better analogy. Pipeline lobbyists and others have been bashing the state’s gas utilities for their fierce, though finally abandoned, opposition to all interstate pipelines. One Canadian agent says Southern California Gas and Pacific Gas & Electric remind him of Lenny, the retarded giant in the John Steinbeck novel “Of Mice and Men:” big and dumb.

SoCal Gas, which has run short of gas three times in the past two years, gets more than its share of brickbats in the debate--notably from Southern California Edison’s outspoken Chairman Howard Allen. Allen, moving to buy gas directly from Canada, says SoCal Gas has “good people, but they haven’t done as good a job as they should.”

More recently, SoCal’s own endorsement of Canadian gas for its customers has cheered Allen up. But meanwhile, government regulators are quarreling among themselves.

The state’s two energy regulatory bodies, the PUC and the energy commission, have carped at each other constantly over whether the state needs more natural gas (until last year’s shortages brought the PUC around to the view that we do). And the PUC took the Federal Energy Regulatory Commission to court to challenge its regulatory jurisdiction.

“The PUC pissed the FERC off royally in this whole process, and the feds will go out of their way in their final decision to avoid kowtowing to the PUC,” says a top utility executive.

Among developers, a favorite target has been Coastal Corp. of Houston, whose Wyoming-California Pipeline Co. is regarded as a Johnny-come-lately in the pipeline sweepstakes. Wy-Cal was accused in court earlier this year of copyright infringement for piggybacking on research already conducted by competitor Kern River Gas Transmission Co., which staked out a virtually identical Wyoming-to-California route years earlier.

Cleaned Up Their Act

Personalities, notably Coastal’s controversial Chairman Oscar Wyatt, have also entered in. Coastal is notorious in the energy industry for breaking contracts and filing lawsuits, a reputation that probably hasn’t helped it in the pipeline contest. Although it was first to win a federal certificate to build a pipeline, it is running last among the four most probable developers in signing up customers. Not one Kern County oil producer is among them.

(Edison’s Allen may be the only executive willing to talk openly about this, declaring in an interview earlier this year that “California doesn’t need Oscar Wyatt.” A month later, Edison turned around and became one of Wy-Cal’s only two signed-up customers. Allen explains: “I asked around Washington and found out they’d cleaned up their act.”)

Thousands of large and small gas producers in four states and two Canadian provinces, eager to contribute to the cause of clean air in Hollywood, await the chance to tie into these proposed pipelines and break out of their long energy slump.

Will Help Pay Cost

The potential is enormous for places such as Wyoming, which gets most of its revenue from energy production and has fallen on hard times lately with the slump in energy prices. Gov. Sullivan, an amiable Democrat, has thus been working California like a candidate on the stump.

With plenty of natural gas but limited ways to transport it, Wyoming state leaders agreed to subsidize $250 million of the projected $750-million cost of a California-bound pipeline for any developer that moves at least 350 million cubic feet of gas per day out of the state. Clean air and the price and supply advantages of various gas sources are constantly evoked in the debate. But there are so many hidden agendas and such contradictory arithmetic that some participants despair of ever getting the full story on which source of natural gas is best for California.

It is no coincidence that Chevron--a big Kern County oil producer--has signed up to buy natural gas from one of the Wyoming pipelines or that Texaco, another Kern County player, has signed to buy from the proposed expansion of lines to Texas. Chevron has its own abundant gas reserves in Wyoming--and Texaco has big reserves in Texas.

Similarly, Shell Oil’s Kern County operations would presumably benefit from one of the Canadian options--not just because Shell Canada is a major gas producer but also because it is a partner in a proposed pipeline from Alberta to Wyoming that would tie into a Wyoming-California line.

“There are so many divergent views and so many divergent interests,” says John of the gas company. “The games you can play in the hearing rooms with the economics are mind-blowing. To this day, nobody has a really good feel, on an apples and apples basis, of what the true costs are.”

When the California Energy Commission tried earlier this year to figure out the best economic package for California--and decided that it was a combination of Wyoming and Alberta natural gas to supplement the current supplies from the Southwest--it rang political alarms.

Interested in Issue

Rushing to defend the virtues of Texas, Oklahoma and New Mexico natural gas in a letter to Gov. George Deukmejian were five of the six U.S. senators from those states, a formidable group: Bentsen and Phil Gramm of Texas, Pete V. Domenici of New Mexico, and David Boren and Don Nickels of Oklahoma.

Speaker Brown, a Texas native, has made a number of appearances in the Lone Star state with energy officials there who are scrambling to ensure that Texas’ big gas market in California isn’t stolen by Wyoming or Alberta. Although there is no legislative role in the decision, an aide says Brown is “interested in the issue and exploring all the avenues.”

“He had dinner with the governor of Wyoming, too,” the aide adds.

Although energy commission members deny it, some oil industry officials think that the political intervention has caused the commission to back away from the Wyoming-Alberta recommendation.

“They’re distancing themselves from it,” said Paul Premo, manager of natural gas regulatory affairs at Chevron in Houston, which backs the Wyoming route. In response, noting the failure of the FERC to so far issue a certificate to the Kern River pipeline, Premo said Wyoming Sens. Malcolm Wallop and Alan Simpson are being enlisted to hurry the process along.

“We’re encouraging political contacts at high levels to point out that this delay could be compromising the viability of the project,” said Premo.

The landscape changed earlier this month when Wyoming and Texas interests joined forces by agreeing to merge their respective pipelines just inside California at Barstow. This alignment, when linked to existing or proposed lines from Canada, would bring gas from Canada, Wyoming and the Southwest--exactly the geographic diversity that customers say is needed to avoid the type of shortages that have hit Southern California lately.

That venture among two pipelines--and potentially a third--is considered a front-runner along with a project of PG&E;’s pipeline subsidiary, Pacific Gas Transmission, to expand its existing line into California from Canada. PGT’s is the only line that is fully subscribed with customers.

Gas from Canada is especially attractive because of low operating costs in the gas fields and the reported agreement by Canadian producers to advantageous pricing terms.

It is likely that up to four of the projects will win state and federal authorization to start construction, but only proof of real live customers will persuade financiers to back the projects. Thus, the developers are furiously courting California industry, utilities and oil producers and trumpeting the signing of each new customer.

But some of the commitments are “pretty loose,” as one top utility official says. Customers are hedging their bets, having already “committed” to buy at least 1.6 billion cubic feet per day from various proposed pipelines--perhaps twice what will be needed in the next few years.

“We’re kind of watching the parade,” says Edison’s Allen. “We don’t know which project will ultimately be the best one.”

Question of Capacity

Edison and some other customers tout the advantages of building more capacity than necessary--including supply security and the competition and lower rates that should result. But there are troubling implications.

Much of the public policy debate has turned on whether the state should encourage enough pipeline capacity to cover extremes in energy demand, system breakdowns and other events, such as occurred during cold snaps the past two winters. Supplies grew so tight that, to meet its obligation to residential users, SoCal Gas had to slash gas deliveries to big customers that are capable of switching to other fuels.

The industrial customers were angry about it, but the PUC and the gas utilities fear that the alternative--a system with enough excess capacity to avoid such problems--could force rates up dramatically for smaller gas users.

Deregulation has enabled big commercial users to buy their gas directly from producers and bypass the public utilities, so the ongoing fixed costs of supporting the utilities’ half-empty pipelines will fall on residential and small business users who are buying less natural gas.

“Not everybody can be a winner in this competition,” says Bilas of the state energy commission. “Somebody’s got to be a loser. I just hope it isn’t the state of California.”

PIPING GAS TO CALIFORNIA The rush is on to bring natural gas to California. Five competing pipeline projects--enough to bring nearly 5 billion cubic feet per day into the state--are in the works. A sixth project, through northern Mexico, is inactive.

Wy-Cal Pipeline: A 1,000-mile, $665-million line from Opal, Wyo., to Needles, Calif., and then to the Bakersfield area. To be built and operated by subsidiaries of Coastal Corp. of Houston. Capacity of 650 million cubic feet of natural gas per day. Would draw from the gas-rich Overthrust Belt of the Rocky Mountains. First pipeline proposal to win a certificate from the Federal Energy Regulatory Commission. Two customers--Southern California Edison and Pacific Gas & Electric--have agreed to buy 100 million cubic feet per day.

Kern River Gas Transmission Co.: A 762-mile, $750-million line that essentially matches the Wy-Cal route but begins at an intersection with a major existing line from Canada, the Northwest Pipeline. A joint venture of the Williams Cos. of Tulsa, Okla., which also owns the Northwest Pipeline, and Tenneco Inc. of Houston. Capacity of 700 million cubic feet per day, which would come from the Overthrust Belt and from Canada. Would merge in Barstow with another new line serving the Southwest. Partners claim customers for 620 million cubic feet per day: Chevron, Southern California Gas, Los Angeles Department of Water & Power, Mobil, Union Pacific, Berry Petroleum, M. H. Whittier Corp., and the City of Long Beach.

Mojave Pipeline Co.: A $270-million line from Topock, Ariz., to Barstow, where it would merge with the Kern River pipe and continue toward Bakersfield. Capacity of 400 million cubic feet per day. A joint venture of Enron Corp. in Houston and El Paso Natural Gas Co., a unit of Burlington Resources. Would connect with two existing lines from natural gas fields in New Mexico, Oklahoma and Texas, which now supply about two-thirds of California’s gas. Second developer to win a federal certificate. Claims two customers for up to 310 million cubic feet per day: Texaco and Occidental Petroleum. Would draw from existing gas fields and from potentially important new sources of “coal-seam gas” in New Mexico.

Pacific Gas Transmission Co.: A $1.1-billion expansion of about 1,000 miles of existing pipeline from Kingsgate, B.C., at the U.S.-Canadian border to the Bakersfield area. Would increase capacity into California by about 600 million cubic feet per day and by 150 million cubic feet per day into Washington and Oregon. A joint project of Pacific Gas Transmission and its parent, Pacific Gas & Electric of San Francisco. Claims to be oversubscribed, including requests for 350 million cubic feet per day from three local utilities: Southern California Edison, San Diego Gas & Electric, and the City of Long Beach. Seven utilities and 30 private customers overall.

Altamont: A $600-million line from Wildhorse, Alberta, to Opal, Wyo., where it would tie in with one of two proposed Wyoming-California lines. A 700-million-cubic-feet-per-day joint venture of four big Canadian gas producers: Shell Canada, Amoco Canada, Mobil Oil Canada and Petro Canada. Altamont line is viewed as key to success of Kern-Mojave alliance because direct access to cheap Canadian gas is top priority of many California customers.

Mexus: A plan to carry Texas natural gas through northern Mexico and into Southern California, proposed by Texas investors and developers. Once seen as a way to also import natural gas from Mexico. Not active.