Natural Gas Contract Negotiations—Pipeline and Producer Position, and Influence of Federal Regulation
Authors: Hinton C. H. 
Published: May 2021

Natural gas is a commodity which can be neither manufactured nor reproduced in the span of a lifetime. The purchaser of a commodity seeks the terms and conditions of purchase most advantageous to his interests. The seller also wants to secure terms and conditions which are best for his interests. These factors control the “arm's-length” bargaining pattern of purchase and sale of any commodity. Natural gas is somewhat unusual because a purchaser in a free market generally can offer much more advantageous terms for single large-volume packages than for the same volume in smaller units.

Despite these seemingly obvious, basic economic factors, federal regulation of the sale of natural gas in interstate commerce has given no recognition to the value of natural gas, the commodity, but has regulated sales on a cost-of-service basis.

Natural gas is produced by oil and gas producers and by pipeline companies known as “pipeline producers” whose principal business is transmission of gas.

The positions of the purchaser (the pipeline) and the seller (the producer) before regulation were decidedly different. Most of the original natural gas pipelines were financed, built, and owned mainly by producers because they were needed to market the large volumes of natural gas developed incidental to the search for oil. The Public Utility Holding Company Act of 1935 forced the oil and gas producers to divest themselves of interstate pipeline interests.

Contract provisions and negotiations developed from the time of great excess of supply over demand to the present time, when demand commonly exceeds supply. Provisions of contracts reflect these changes in the market situation. Pipeline companies which purchase natural gas maintain facilities for the constant study of the many factors which affect supply and demand.

Prices which can be paid to independent producers for gas to be sold in interstate commerce are regulated strictly by the FPC. This regulation has resulted in such inflexibility in contract negotiations that the rate at which gas is to be delivered is almost the only point of negotiation.

Area guideline prices—the unrealistic, artificial two-price system for “old” and “new” gas— have caused more complications and still further reduced “arm's-length” bargaining for natural gas.

Gas-well completions are fewer, demand for natural gas is increasing more rapidly than are proved reserves, and intrastate markets are capturing continuously greater percentages of available gas. Approximately 53 per cent of all gas produced in the 10 largest gas-producing states is consumed within those states.

Artificial shortages of natural gas are occurring because of uncertainties of regulation. If burgeoning requirements for natural gas are to be met, the entire theory and practice of regulation must be revised realistically to recognize that natural gas is a commodity and to reflect conditions extant in the industry. If the consumer is to be served adequately, all producers, whether so-called “independent” or pipeline, must receive like treatment.