Quo Vadis with Natural Gas
Authors: Pressler Herman P. 
Published: December 2007

For more than 20 years spokesmen for the petroleum industry and the oil and gas producing states have warned the U.S. Government, the consumers, distributors, gas pipe lines and the public that federal control of the wellhead price received by producers of natural gas and subsequently sold to producers of natural gas and subsequently sold to interstate pipelines would ultimately result in a scarcity of this clean, convenient and most desirable fuel.

We know that these predictions have come to pass. It is estimated by the U. S. Geological Survey (USGS) that the undiscovered gas reserves in the contiguous 48 states are 1,550 Tcf more than 70 times the 1969 domestic production. However, in the U. S. as a whole, the ratio of discovered reserves to annual production has dropped from 32.5:1 in 1946, to 13:1 production has dropped from 32.5:1 in 1946, to 13:1 in 1969. Between 1956 and 1968 wildcat drilling dropped by 40 percent; geophysical activity by 56 percent; and total wells drilled by 43 percent. percent; and total wells drilled by 43 percent. For the first time more gas was consumed than was found in 1968, reducing gas reserves by 5.6 Tcf. In 1969, the deficit was 12.3 Tcf, and we feel certain that, when the figures are in for 1970, there will be a further reduction of our discovered reserves.

On January 20, 1971, Federal Power Commissioner Brooke told the Annual Convention of the National Association of Homebuilders that major interstate gas pipelines have "virtually ruled out new customer attachments this winter." Numerous gas distribution companies have informed customers that additional gas service will not be supplied until the company can obtain additional gas supplies, and many companies are declining to make any commitments to new customers.

The Economic Report of the President transmitted to the Congress in February of this year, contains the following statement:

"There appears to be a shortage of one major energy fuel, natural gas; that is, its production is clearly falling short of desired consumption at current prices. Current prices for interstate sales have been kept low by the Federal Power Commission, which sets these prices under law. Not only have prices been too low for desired consumption to be met, but they appear also to have retarded development of new gas supplies. The only satisfactory solution of this problem is to allow the price, at least of new problem is to allow the price, at least of new gas not previously committed, to approach the market-clearing level."

This situation did not arise without a cause. In 1938, the Congress passed the Natural Gas Act to regulate interstate gas transmission companies that purchased gas from the producers and, after purchased gas from the producers and, after transporting it long distances in interstate commerce, sold it to the local distributor or to industry. Prior to this time there was no regulation, either state Prior to this time there was no regulation, either state or federal, for these pipe lines. The gas producers were subject to state regulation, and the Act contained language that was thought to exclude gas producers from regulation under the Act. producers from regulation under the Act. Until 1954, 16 years after the passage of the Act, the Federal Power Commission (FPC) took the position that it did not have the authority under the position that it did not have the authority under the Act to regulate natural gas producers. However, in that year, the U. S. Supreme Court in a split decision ruled that the Natural Gas Act did require the FPC to control the wellhead prices charged for gas by the producers who sell to interstate pipe lines. This decision imposed on the FPC the pipe lines. This decision imposed on the FPC the insurmountable burden of (1) regulating the prices of a competitively produced commodity by use of a law designed to regulate a public utility, and (2) fixing these prices on the basis of the traditional cost of service utility rate-based method. This is the first time in the history of the U. S. that price controls have been imposed in peace time upon a. competitively produced commodity.

A review of the difficult and frustrating story of the Commission's efforts to enforce regulation of wellhead prices is too lengthy to relate. Suffice it to say that under existing controls the gas producer who sells to an interstate pipeline does not know what price he will receive for his gas, how long he will receive a particular price, how much gas he must deliver, or how long he must continue to make deliveries. Once he begins deliveries every provision of his contract is subject to change and revision by orders of the FPC. Not only have the producers' contracts been abrogated, but the gas producer has been required to go through long hearings (some lasting many years) before it knows what its price will be, and even then it is not certain, for prices that have been established by the commission can be, and have been, reduced.

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