California's somewhat lightened restrictions on pulling gas from the Aliso Canyon storage field seek to minimize price volatility in the region.
Early this month, the California Public Utility Commission approved revisions to a November 2017 protocol regulating the way Aliso Canyon can be utilized. The new proposed guidelines strive to no longer use Southern California Gas Company's largest storage facility as "an asset of last resort" but rather as a facility that addresses both system reliability challenges as well as pricing impacts in Southern California.
Previously, withdrawals from Aliso Canyon were only allowed if a curtailment was imminent, typically at a Stage 4 operational flow order, while now withdrawals can occur at a much lower OFO order, Stage 2, and likely reduce the number and severity of single-day gas price blowouts.
"The relationship between natural gas prices and electricity prices is especially apparent during high electricity demand days, because a significant portion of peak electricity supply is generated from generators burning natural gas," wrote the CPUC of its decision.
The initial proposal on July 1 sparked a steep selloff in the forward curve, with the balance of summer dropping 25 cents to $1.03/MMBtu above Henry Hub and the winter 2019-2020 strip dropping 21 cents to a $1.29/MMBtu premium to Henry Hub.
Both strips have continued to decline substantially over the three weeks following the initial proposal. Surprisingly, little price movement has occurred since the official approval, which points to the assumption of strong market confidence the new revisions would get approved, likely due to them being proposed directly from the CPUC, according to S&P Global Platts Analytics.
The new protocol will allow SoCal Gas to draw Aliso down to 70% of its maximum allowable inventory, as long as it had hit the 70% mark between February 1 and March 31. It will also allow Aliso withdrawals if the Honor Rancho or Goleta fields decline to 105% of their month-end minimum inventory requirements during the winter.
Last winter, a total of 29 Bcf was withdrawn from non-Aliso storage facilities while Aliso drew down a total of 14 Bcf throughout the winter, according to Platts Analytics. Aliso Canyon withdrawals occurred on a total of 39 gas days during the heating season, with the longest consecutive withdrawal lasting 14 days from February 10 through 24.
Although Aliso Canyon withdrawals have not been utilized to meet summer demand, the new protocol makes it possible to see some Aliso Canyon withdrawals in the coming months if demand spikes high enough. However, with Aliso Canyon storage inventories currently full, summer exit inventories will likely not be at risk, according to Platts Analytics.
The greater flexibility in the use of Aliso Canyon will take some pressure off the company's remaining storage facilities, which were pulled down close to minimum levels last winter. The ability to spread out withdrawal volumes during high-demand periods will allow for greater availability of supply prior to the issuance of higher-level OFOs. This will result in lower and less frequent price spikes on both the gas and power side this winter, according to Platts Analytics.
