The furnaces will be kicking on across northern states about the time you read this as a new heating season be- gins. Looking at the big picture, this could be another difficult winter for the natural gas business. Projections place storage at 3.6 trillion cubic feet as the injection season ends—on the high end of the historic range—despite declining production. A num- ber like that usually means soft prices, and another warm winter like 2015-2016 wouldn’t help.

One big market that might buck another soft heating season, though, is California. The Golden State very well could have a gas shortage—and price spikes—this time around.

Changing demand, coupled with the state’s notorious bureau- cratic overreach, might turn this winter into a boom time for Rock-
ies gas producers who want to move gas west. And as someone who has spent a fair amount of time in and around the Piceance and Green River basins, I think that’s great. Spot prices at the Opal, Wy- oming, hub on a recent day were 25 cents below Louisiana’s benchmark Henry Hub price. That’s not bad in perspective with times not too long ago when the differen- tial was measured in dollars.


The region’s producers have suffered from low prices due to distant markets and insufficient pipeline capacity. The capacity problem seems to have worked itself out as the midstream has added the Rockies Express, Ruby and Kern River lines in recent years. Now, the industry needs demand—and California could supply it.

Raymond James told investors in a recent research report that “we view certain pockets of the natural gas market as having even larger upside than the overall market. Specifically in the Pacific region, natural gas storage is actually down slightly year-over-year.

“Given inventory injection constraints, we expect to see mini- mal injections over the next two-three months leading to the po- tential for a very bullish natural gas price environment for Rockies and West Coast producers. In fact, if our bullish thesis plays out, we expect to see natural gas prices in this region match or eclipse the ~$4/MMBtu price level,” the report added.

It’s no surprise that the troubled Aliso Canyon storage field of Southern California Gas Co. plays a role in the story. The depleted oil field is the largest storage complex on the West Coast. But after one of the field’s injection wells started leaking late last year, Cali- fornia regulators prohibited new injections there until all 114 wells in the field complete a battery of tests. That will take time and won’t happen before winter.

“At this point, there is no visible time frame for the storage facility to begin injection operations to replace the lost natural gas. Given the leak and lack of injections, the facility is currently holding 15 Bcf [billion cubic feet] of storage, or 71 Bcf below its capacity,” according to Raymond James.

State regulators are beginning to wonder what to do, including whether to propose a limit on the use of gas for power generation. But with inadequate gas and insufficient hydropower due to a lingering drought, options will be limited. One option seriously under consideration by some is to import LNG via Mex-ico’s Costa Azul terminal, located across the border from San Diego. One wonders, will some of that gas be “imported” from Texas, Louisiana and Oklahoma?

Given the developing situation, one gas trader confided to me that California “will be in a world of hurt if it turns cold and stays cold” this winter.

“Who stands to benefit? Natural gas producers in the Rockies!”Raymond James declared. “In our view, all the necessary in- gredients are available for a large seasonal move in natural gas prices on the West Coast this winter. You have (1) relatively low gas storage combined with (2) greater than average natural gas demand and (3) falling supply numbers. Moreover, with several of the large operators in the Rockies capital-constrained plus other operators that are focusing their drilling activity on other plays … Rockies gas prices (Opal) will likely need to move higher than the market anticipates to see an increase in drilling activity, likely be- tween $4 and $4.50/MMBtu.”

Stay tuned, and if you have a trip to California scheduled for this winter, be sure to pack a sweater.

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