ENHANCING NATURAL GAS PRODUCTION
WORKSHOP SUMMARY

INTRODUCTION

This report presents the results of the Natural Gas Workshop sponsored by the Energy Commission and Division of Oil & Gas and Geothermal Resources (DOGGR). The workshop was held in Hearing Room A at the Energy Commission, from 1:30 p.m. to 5:00 p.m., on May 28, 2003. The workshop was well attended by approximately 45 representatives of industry, government, and environmental organizations. A list of attendees and their associated contact information is below.

The workshop was conducted to examine current natural gas production capability in California and what could be done to increase production in the short and long term consistent with environmental protection requirements. The focus of the workshop was on enhancing production from currently producing wells, and developing new and undiscovered natural gas resources in California. Three major issues were identified that will be explored further and will be the subject of subsequent workshops. Those issues are: the divestiture of the PG&E gathering system; the formation of a regulatory workgroup to reduce the time required to obtain drilling permits; and the off-specification gas issue.

California is becoming increasingly reliant on natural gas as the energy source of choice for the generation of electricity and industrial use. The demand for natural gas is increasing not only in California, but throughout the nation. California produces about 15 percent of its natural gas demand with the remaining 85 percent imported; 25 percent from Canada, 50 percent from the Southwest, and 10 percent from the Rocky Mountains.

ISSUES

Presentations were made by the California Natural Gas Producers Association (CNGPA) / California Independent Producers Association (CIPA), Oxy Resources of California, and Calpine. An issue statement was also submitted by Terry Allred of Transamerica Corporation, and Jonny Voiles, an independent oil developer from Texas. Many attendees participated in a lively discussion of the issues.

The following potential issues were identified by the attendees during the course of the workshop:

• The permitting process for natural gas wells needs to be streamlined so that permits are issued in a more timely manner


• The San Joaquin Valley needs a permitting process specifically for gas wells rather than oil wells


• The access to off shore reserves should be allowed and exploration and production activities resumed


• The utility owned gathering and compression systems are antiquated, poorly maintained, capacity constrained, and rarely extended, and then only at exorbitant prices


• Difficulties were reported in building new gathering systems


• The divestiture of PG&E's gathering system to private companies needs to be encouraged (The divestiture by PG&E's of its system for gathering California natural gas production was agreed to in the 1997 Gas Accord Settlement and approved by the CPUC. However, producers complain that PG&E has not divested, and according to CIPA, much of the historic system has been reclassified by PG&E as transmission or distribution lines for the purpose of delivering gas to end-use customers. This has limited the ability of producers to utilize the gathering lines because of pressure or gas quality issues that impact the new delivery customers).


• The arbitrary floor of 50 MCF/d as the minimum amount of production that PG&E will accept is discriminatory and is restricting in-state production


• The regulation of gathering activities discourages private companies from building gathering systems


• Transportation charges for natural gas injected or withdrawn from non PG&E storage facilities are a disincentive to storage


• Off specification gas is not being taken in Southern California because of potential damage to natural gas powered vehicles


• Low Btu gas is not being utilized in Northern California


• Mineral right owners are not being notified in a timely manner prior to surface development and are being precluded from developing the minerals.

In order to address the many and complex issues identified during the workshop, the Energy Commission staff offered to conduct additional workshops focusing on individual major issues. Several of the issues listed above are sub-issues to larger questions discussed. Therefore, the major issues listed below are being proposed as the subject of additional workshops.

Formation of a Regulatory Workgroup

Oxy Resources discussed the difficulties that they have encountered in obtaining drilling permits for their project at Grizzly Island, in the Sacramento River Delta. They specifically mentioned the lack of coordination between federal and State regulatory agencies and the fact that the permitting process is serial. That is, an application is submitted to one agency and then, after that agency reviews and approves the permit application, it is then sent to the next agency. This sequential process greatly adds to the time required for the final permit to be issued. A parallel process was recommended (where a permit application would be submitted for approval concurrently to multiple agencies) to shorten the total elapsed time before a final decision on a project is made.

In addition, the formation of a Northern California regulatory workgroup to promote cooperation and increased communication between gas producers and federal and State regulatory agencies, was proposed to help streamline the drilling permitting process. The proposed Northern California Workgroup could be patterned after a similar workgroup that is operating in the San Joaquin Valley with the U.S. Bureau of Land Management (BLM) serving as lead agency. According to workshop participants, the San Joaquin Working Group has been very effective in simplifying and reducing the time necessary to obtain natural gas drilling permits.

Divestiture of PG&E Gathering System

CNGPA and CIPA, along with other meeting participants, brought up the issue of divestiture of the PG&E gathering system. According to the CNGPA/CIPA presentation, a significant amount of natural gas production is currently shut in or not being drilled due to the lack of availability of pipeline access. In addition, the mandatory minimum production of 50mcf/d that PG&E will take at its metered connection points is considered discriminatory by the producers, and precludes gas from being sold into the market.

Furthermore, it was stated that in most other states the gathering systems were owned by private companies. Participants felt this was a more efficient way to do business. The privatization of the gathering system was strongly advocated by some attendees. PG&E was interested in further exploring which parts of their gathering system could be privatized.

Off-Specification Gas Issue

Producers reported that Sempra is not taking certain gas in the San Joaquin Basin and in Southern California that does not meet the California Air Resources Board (CARB) specification for natural gas powered vehicles. Much of the natural gas produced in the San Joaquin Basin and in Southern California is associated with oil, and therefore has a higher Btu content than the natural gas vehicle engines are capable of operating on. Even though vehicle fueling only represents approximately one percent of the demand, it is dictating the standard for all gas quality. The use of higher Btu gas also may increase certain emissions which could be a problem in impacted air basins such as the southern San Joaquin Valley and the Los Angeles Basin. Producers report that it is very expensive to remove the heavier hydrocarbons from natural gas and there is no ready market in California for some of the resultant by-products.

In Northern California, low Btu-gas is the more prevalent problem and is estimated to comprise as much as one-third of the gas reserves. It was suggested that allowing private storage of gas and offering PG&E incentives to blend gas could help alleviate this problem.

Summary

The intent of the meeting was to seek ways of enhancing the production of natural gas in California. Several proposals were discussed. Additional workshops to address the major issues of streamlining the permitting process, divestiture of the PG&E gathering system, and expanding the use of off-specification gas from the San Joaquin Basin and Southern California will be the subject of additional workshops.

If you have any questions or comments, please contact Mike Purcell at the California Energy Commission, by e-mail at mpurcell @ energy.state.ca.us, or call (916) 654-4048.