Sempra Energy?s liquefied natural gas agreement with BP this week will barely offset the expected decline in gas from basins that supply California, according to state and federal sources. The findings also cast doubt on whether LNG will drive gas prices down through gas-on-gas competition. Incremental increases in North American gas production are unlikely to move supply to California, because of competition from other regions, said Bill Gwozd, Ziff Energy vice-president of gas services. LNG imported at Sempra?s proposed Baja California terminal has the potential to reduce gas prices by 25 cents\/MMBtu at the most, but increasing demand for gas in Canada will erase that price reduction, Gwozd said. LNG increasingly will be sold at market prices, according to Phillip Benneche, an analyst for the federal Energy Information Administration, and those prices are likely to rise unless major new sources of gas in North America are tapped quickly. Under the sale and purchase agreement announced October 12, BP will supply Sempra?s Costa Azul import terminal in Baja California with the equivalent of 0.5 bcf of natural gas a day on a floating price basis tied to the Southern California border gas index. On October 14, Sempra entered an agreement with its partner Shell International Gas Ltd. in which Shell will be able to use half the 1 bcfd capacity of the Costa Azul facility. Sempra Energy?s trading subsidiary will be involved in marketing the gas to major industrial users and power generators in Southern California, said Sempra spokesperson Doug Kline. Shell gas is expected to come from Sakahlin Island in Russia, Kline said. BP gas will come from the Tangguh project in Papua, Indonesia, where security is a major concern because of the West Papuan independence movement, which has been characterized as a guerrilla war. Once gas is imported at Costa Azul, to reach California it will have to flow through a pipeline that supplies an average of between 200 and 220 MMcfd to power plants in Baja California, according to knowledgeable industry sources who would speak only on background. They note that Sempra likely will have to supply LNG to meet demand in Mexico, which sometimes reaches between 300 and 400 MMcfd during peak generation periods. In its 2004 Gas Report?a document required by regulators ?Southern California Gas estimates that demand along the Mexican pipeline will grow at the rate of 2 percent a year over the next five years, or more than 20 MMcfd by the time the Sempra facility is slated to open. Costa Azul?s residual gas for the California market may barely offset the projected decline in supplies from the Permian and San Juan basins, which are projected to dwindle by 14 percent each through the end of the decade, according to an analysis presented to the California Energy Commission by National Energy and Gas Transmission (NEGT). While some analysts believe that the state?s supply of Canadian gas will remain fairly level or decline just a little, other analysts see a dramatic decline on the horizon. The National Energy Board of Canada this summer issued a report?characterized as ?gloomy? by some?concluding that ?adjustments in demand will be needed to balance with supply.? Thus, the only area likely to supply more gas to California in the years ahead is the Rocky Mountain region. Indeed, the trend already is reflected in the 2004 Gas Report. Since 1999, Canadian gas has declined, and the El Paso and Transwestern pipelines have barely remained level. But Rockies gas through the Kern River pipeline has increased from 621 MMcfd to 1.242 bcfd, to total 21 percent of the state?s supply. Rockies operators will increase production by approximately 2.1 bcfd, according to the NEGT assessment by Peter Lund, vice-president of pipeline marketing and development for the company. However, that increased production will be split throughout the nation, and perhaps even Mexico. Ziff?s Gwozd believes California will not see an increase in supply from the Rockies unless it outbids Eastern customers. Overall, Lund projected a small increase in North American gas production through the end of the decade, but that will be gobbled up by increased demand, although not so much in California, where demand has actually dropped and is projected to grow comparatively slowly as a result of energy efficiency and loss of heavy industry. El Paso, for instance, told the California Energy Commission that gas demand in the mountain states alone will grow by 1 bcfd by the end of the decade. Demand in western Canada will grow by 1.3 bcfd, and Mexican demand will more than double, growing by 4.5 bcfd for the entire country. Overall, El Paso projects that North American demand will grow from 74.2 bcfd to 88.8 bcfd by 2010, far outstripping native supply unless either LNG is imported in larger quantities or conservation and renewable energy supplant demand. ?Let?s face it, nobody is going to get an LNG facility built in California, except maybe Baja,? said the former staff member of the House subcommittee who ordered the report but now works for a major energy company involved in LNG. Even if more terminals are built, EIA?s Benneche said, that would not guarantee they will be fully supplied. He noted, for instance, that the Lake Charles, Louisiana, LNG terminal is supplied largely on the spot market and must compete with other nations for deliveries. ?At one point, they couldn?t get shipments in,? said Benneche. ?The gas went to Japan.? Sempra?s contract with BP will allow BP to divert gas shipments to other nations and fetch the best price, said Sempra spokesperson Kline. Earlier this week, The Utility Reform Network and Ratepayers for Affordable Clean Energy (RACE) challenged the CPUC?s September 2 decision to make Otay Mesa a joint receipt point for SoCal Gas and San Diego Gas & Electric and allow gas to flow to users in the Los Angeles area without compensation for use of the SDG&E system. ?It?s a big signal that the commission is sending to Sempra that we?re going to bend the rules to accommodate their [LNG] project,? said Marcel Hawiger, staff attorney for TURN. However, the two utilities plan to file an integrated tariff for transporting the LNG later this year, which may make the appeal moot. RACE filed a separate appeal challenging the lack of evidentiary hearings by the commission prior to the September decision, according to Rory Cox, spokesperson for the coalition of environmental and public-interest groups. ?The state still hasn?t established the need for LNG,? he said. RACE believes that renewable energy and conservation can fill any gap between the state?s need for energy and fossil-fuel supplies. Sempra expects to break ground on the Costa Azul facility early in 2005 and open the terminal early in 2008. It is in the process of selecting construction contractors and completing financing arrangements, according to Kline.