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Supply crunch: Why your SDG&E natural gas bill is up 20%

A natural gas production facility in New Mexico, part of the energy-rich oil and gas area in the Permian Basin.
A natural gas production facility in New Mexico, part of the energy-rich oil and gas area in the Permian Basin.



(Business Wire)

U.S. prices have doubled, while energy shortages shake markets in Europe and China.

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There’s a fast-moving squeeze in natural gas production that’s sending prices soaring around the world, especially in Europe. But the crunch is also being felt in the gas-rich U.S. and locally, the gas bills for average San Diego Gas & Electric customers are up 20 percent compared to a year ago.

Natural gas is a key source of electricity, especially for supplying heat during the winter. Prices have ballooned for a myriad of reasons and the tab may grow even higher if it gets colder than normal in the coming months.

“The planets have just aligned,” said Robert Yawger, managing director and energy futures strategist at the investment firm of Mizuho Securities.

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The futures price for natural gas at Henry Hub, a Louisiana natural gas pipeline that serves as the benchmark for the North American natural gas market on the New York Mercantile Exchange, soared past $6 per million British thermal unitsearlier this week. That’s well over twice the price from six months ago, and the highest level since the 2014 polar vortex shivered large sections of the country.

Locally, San Diego Gas & Electric gets its natural gas purchased by fellow Sempra subsidiary, Southern California Gas. The price for what’s called “core procurement” that goes to residential and small commercial customers has nearly doubled in the past year.

When all elements in a gas customer’s bill (procurement, plus costs from transportation and distribution and California Public Utilities Commission-mandated programs) are taken into account, a typical SDG&E residential gas customer paid $30.78 last month, compared to $25.60 in September 2020 — an increase of 20.2 percent.

And considering that the SoCalGas core procurement price for October came in 13 cents per therm higher than September, prices will increase again.

Of SDG&E’s 3.6 million customers, about 873,000 gas meters are serviced by the utility.

Going up, up, up

What’s led to the price spike?

Hurricane Ida explains part of it. Immediately after the Category 4 storm made landfall near New Orleans on Aug. 29, more than 90 percent of offshore production in the vital Gulf of Mexico energy production region was shut down. Production has not returned to normal levels.

According to the Energy Information Administration, gas storage in the U.S. as of Oct. 1 was down 13.9 percent compared to a year ago.

Even before Ida, natural gas production, along with domestic oil production, slumped because of the financial effects of the pandemic.

A natural gas platform off the coast of Fort Morgan, Ala.
A natural gas platform off the coast of Fort Morgan, Ala.
(ASSOCIATED PRESS)

When lockdowns went into effect, the number of people driving to and from work crashed. With roads nearly empty and a glut of gasoline on the market, oil producers shut down their drilling operations. Since natural gas exploration is tied to oil, gas production declined and the oil and gas sector took a financial beating.

Feeling pressure from investors to reduce debt, producers in the shale fields have been slow to return to the market and output from crude and gas has not returned to pre-pandemic levels.

Closer to California, supplies have been constrained since an explosion on the El Paso Natural Gas line, owned by Kinder Morgan, choked off deliveries to Southern California and the desert Southwest.

The 30-inch pipeline killed two and injured another when it ruptured on Aug. 15 in the town of Coolidge, Arizona. The line is still being repaired and the National Transportation Safety Board is investigating what happened.

Then, in early September, the bottleneck combined with hot weather across the West temporarily sent Southern California gas prices to $20 per million British thermal units, about three times higher than normal. The prices settled back into the $5 to $7 range but it made gas analysts take notice because summer is not considered peak season for natural gas. Its peak season is typically reserved for winter when customers use gas to heat their homes and businesses.

“That wasn’t even a big demand day and we went to $20,” said Jeff Richter, principal owner of Energy GPS, an Oregon-based energy analytics company. “What happens when it gets cold and I got heating demand that comes in and I need the power plants to run and I’ve got my pipeline restrained? Why stop at $20?”

Richter pointed to another issue hanging over the market: The big freeze in Texas back in February that led to widespread power outages across the Lone Star State. It led to gas price spikes of $500 per million British thermal units, sending the bills of many customers through the roof and causing a few energy companies to go broke.

“You’re never really out the woods because of that fear that it could get cold enough to where you don’t get that supply,” Richter said. But with demand still in place, “that just makes prices go up.”

If it’s much consolation, the price increase for California gas customers does not translate to more money for utilities.

That’s because since 1982, the state has decoupled the profit power companies make from the amount of gas or electricity they sell to customers. The price of gas and electricity is a direct “pass-through” so the utilities don’t make money off how much the energy costs. Instead, the California Public Utilities Commission sets a predetermined amount the utilities can make.

Yawger, the analyst at Mizuho, thinks gas prices will stabilize — and even fall — in the coming weeks.

“Are we going to back to prices that are about half of what we are now? Probably not ... but I would be surprised if we continue to rip at the levels we’re at now,” Yawger said. “There’s all this talk about the potential for a cold winter. Nobody ever brings up the possibility of a warm winter, despite the fact that that’s probably the most likely scenario, since across the country it was the hottest summer of all time.”

It’s much worse overseas

The situation is more dire in Europe, where prices have increased four- to five-fold.

Several smaller power companies in the United Kingdom have gone bankrupt and some manufacturers of gas-intensive products like fertilizer and steel have cut production or even considered temporarily shutting down their operations.

A colder than normal spring on the Continent and extended periods of below-average production from wind farms because of less breezy weather contributed to the problem. A giant natural gas field in the Netherlands that has been largely shut down due to environmental concerns has also been a factor.

Europe’s biggest economy, Germany, is also feeling the effects of taking down its nuclear fleet after the Fukushima accident. To avoid using coal to make up the difference, the grids in Germany and other countries have leaned on natural gas, leaving them more vulnerable to the Russian-owned gas giant, Gazprom, for reliability.

Gazprom has decreased exports to Europe, leading some to speculate that Russia is looking to pressure Germany to certify its Nord Stream 2 pipeline, which would bypass Ukraine and send gas west, across the Baltic Sea. Gazprom denies any manipulation.

Policies to fight climate change have also pushed up prices. Europe’s cap and trade mechanism puts a price on carbon by requiring power plants, fossil fuel providers and other large industries that emit greenhouse gases to buy permits. The price for credits spiked this year after the number of permits was reduced to toughen emissions rules.

That’s led critics of green energy policies to point to what’s happening in Europe as a preview of things to come in the U.S. and California. Supporters say the increase in gas prices only underscores the need to transition from fossil fuels but even some backers fear higher prices and potential energy shortages could lead to a consumer backlash.

In an indication how volatile the situation is, on Wednesday morning Dutch gas prices hit near-record levels. But then, hours later, Russian President Vladimir Putin said Moscow was willing to work to help stabilize prices. Markets — perhaps relying more on hope than experience — responded favorably, with European futures prices dropping more than 9 percent for the day.

The squeeze has also hammered China’s electric grid, where about two-thirds of the country reported blackouts earlier this month because of energy shortages.

While China has scrambled to boost natural gas supplies, a shortage of coal has been the larger culprit. With demand increasing as the global economy rebounds from the pandemic and the Chinese government seeking to meet some of its carbon reduction commitments, energy prices have more than doubled.

“China’s power shortages are a reflection of the global strain in energy markets and won’t be resolved overnight,” London-based consultancy Capital Economics said in a note to clients. China’s energy issues may well make global supply chain problems worse.

An LNG debate starts to rumble

Asian and European markets look to meet their gas needs by importing liquefied natural gas, or LNG, from foreign countries, including the U.S. Through the LNG process, gas is cooled to minus-260 degrees Fahrenheit, goes into large storage tanks and then can be loaded onto double-hulled ships.

“The demand has just skyrocketed,” the CEO of one of the biggest LNG exporters in the U.S., Jack Fusco of Cheniere Energy, said on CNBC last month. “We are completely sold out as a company of 90 percent of our production for the next 20 years.”

One of the major LNG players in the U.S. is Sempra, the San Diego-based energy company and parent of SDG&E and SoCalGas.

Sempra is the majority owner of the $10 billion Cameron LNG facility on the Louisiana Gulf Coast and has broken ground to add an export component to an already existing LNG plant, Energía Costa Azul, in Baja California. Sempra also has plans to build a massive LNG facility near Port Arthur, Texas.

The first commissioned cargo of liquefied natural gas, or LNG, leaves the Cameron LNG facility
The first commissioned cargo of liquefied natural gas, or LNG, leaves the Cameron LNG facility in Hackberry, Louisiana, in May 2019.
(Sempra)

Environmental groups have long opposed LNG exports, saying they extend global reliance on natural gas, a fossil fuel.

But with natural gas prices climbing, another group is lodging complaints. Some manufacturers — who use a lot of energy to run their factories — say the U.S. should limit LNG shipments. It’s estimated that 11 percent of domestic natural gas production gets shipped to markets in other countries.

The trade group Industrial Energy Consumers of America sent a letter to U.S. Energy Secretary Jennifer Granholm three weeks ago, urging her to order reductions in LNG exports until U.S. gas inventories reach their average five-year storage levels.

“U.S. consumers, the health of the economy, and national security should take priority over LNG export profits,” the group wrote.

An LNG trade group responded with their own letter to Granholm, saying the calls to curb exports amounted to “hyperbole and fear.”

As one would expect, Sempra also opposes export reductions. Brian Lloyd, regional vice president for Sempra LNG, said it’s “cherry picking” to discuss this year’s high natural gas prices as the economy ramps back up without mentioning that gas prices dropped well below $2 per million British thermal units in 2020 when pandemic lockdowns were instituted.

“We’re firm believers in markets,” Lloyd said. “The best (solution) for high prices is more production, which $6 natural gas we think will bring to the market pretty quickly. And you look at futures prices and we get out 12 to 18 months and we’re right back under $4.”

U.S. companies didn’t start exporting LNG until 2016 but in those five years, the U.S. has become the world’s third-largest exporter, trailing only Australia and Qatar.

Nationally, natural gas makes up 40 percent of electricity generation, followed by renewables (including hydroelectricity) and nuclear at 20 percent each, coal at 19 percent and petroleum at 1 percent. In California, natural gas accounted for 48.35 percent of in-state generation in 2020, followed by 33.35 percent renewables, 9.4 percent large hydro and 8.53 percent nuclear.