Kate Thomas
OGJ Online
HOUSTON, Feb. 5�El Paso Corp. has submitted long-term bids for gas and power under the new California law permitting the state to buy electricity directly bypassing state utilities, company officials said Monday.
While the law does not specifically mention gas purchases, Clark Smith, president of El Paso Merchant Energy Co., said the company also is attempting to structure �some deals� on gas that will support power sales. El Paso executives spoke during a press conference and analyst presentation laying out the company�s strategy now that its acquisition of Coastal Corp. is completed.
Federal mandates requiring out-of-state generators to sell excess power to California and gas suppliers to continue honoring Pacific Gas & Electric Co. contracts expire at midnight Tuesday. The Bush Administration has said it will not renew the mandates and negotiators are working around the clock to get new power agreements in place.
�Everyone will reconsider their power sales unless there is a credit mechanism in place,� said Bill Wise, CEO of El Paso Corp., formerly El Paso Energy Corp. Wise said El Paso is continuing to sell gas to Pacific Gas & Electric, a unit of PG&E Corp. so long as �they keep paying.�
The California Public Utilities Commission (PUC) approved a measure Wednesday allowing the utility to pledge its gas receivables as collateral to insure gas marketers, including El Paso, will get paid for continuing to supply the financially strapped utility. The PUC acted after Pacific Gas & Electric said suppliers were threatening to shut off shipments without assurances they�ll be paid. The company claimed it was down to 10 days� worth of gas in storage.
�We have been steadfast in selling gas and power to California,� Eads said.
Wise said companies are having to submit bids of up to 10 years to get electric prices down to levels California officials have said are acceptable. The state has agreed to buy power and issue revenue bonds to pay off the debt.
Noting gas and power transactions are almost 100% short-term right now, Eads said El Paso is projecting an industry transition to long-term contracts. Buyers benefited from low energy prices for a decade, but Eads said last year�s volatility reached a level that is unacceptable to most consumers.
�For the first time, we see opportunity for long-term relations and �restabilization of gas and power,� Wise said. He said El Paso is accustomed to writing long-term contracts and expects to benefit from the shift.
Third largest producer
Now that the Coastal deal is complete, El Paso has become the third largest gas producer in the US as well as third largest in reserves. At 6.4 tcf/equivalent, reserves are up 25%. Wise said the company added 1.9 tcf/equivalent in 2000 and projects production of 1.85 bcf/equivalent this year, up 15%.
He said 75% of this year�s production is hedged at $3.70/Mcf, including some older contracts. Executives said the combined company is expected to generate $1.7 billion in net income in 2001, or $3.25/share, in line with First Call/Thomson Financial consensus.
Executives also touted the company�s LNG strategy in response to higher gas prices. Clark said the company is negotiating for LNG contracts and executives confirmed El Paso expects to spend about $1.5 billion during the next 5 years building LNG terminals for the US and Mexico markets.
El Paso reported it is considering six projects, including three in the US, two in Mexico, and another in the Bahamas. Despite a big increase in the number of rigs drilling for gas, supply has not risen accordingly, Smith said. He estimated there is about 700 tcf of so-called stranded gas globally, and the US could be a rich market where power generation is helping boost gas demand.
The �muted production response� to intense drilling activity is �surprising to us,� Eads said, suggesting the gas market may take longer than expected to come into equilibrium. He attributed the weak response to a lack of drilling inventory by exploration and production companies who have just �lived through lean times.�
