Competing for Gas Sales in a Fluctuating Market
Authors: Derrick A.M. 
Published: December 2007

Competition for gas markets has increased over the past 2 years because of a declining demand and a supply surplus. The price of gas at the burner tip is approaching and, in some instances, has exceeded the price of alternative fuels. Expensive deep wells in the Anadarko basin will have a difficult time remaining competitive.

Introduction

The U.S. demand for natural gas increased each year from the end of World War 11 until the early 1980's. The gas supply was generally adequate to meet this demand until the early 1970's. The demand increased as a result of price controls of interstate gas at levels below cost of alternative fuels. As the country suffered through a gas supply shortage during the 1970's, the U.S. Congress and the president were forced to take action to increase the gas supply. president were forced to take action to increase the gas supply. The result was the passage of the Natural Gas Policy Act (NGPA) of 1978. In addition to raising the prices for gas found above 15,000 ft [4,572 m], the NGPA deregulated deep gas found at the end of 1979.

The high demand for gas plus the deregulation of gas found below 15,000 ft [4572 m] created a substantial increase in exploration and drilling activities in the deep basins throughout the country. As a result of the success of these activities in the Anadarko basin of western Oklahoma and the Texas panhandle, substantial quantities of deep gas were discovered. The heavy concentration of both inter- and intrastate pipelines serving this area created ready market at prices several dollars higher than were permitted to be paid for the regulated gas supply. permitted to be paid for the regulated gas supply. Competition drove the price to the level of No. 2 fuel oil prices and, in many instances, even higher. In addition to these high prices, purchasers were willing to take gas on a very high load factor-up to or exceeding 90% of the individual well's deliverability.

Increasing gas prices, leveling of oil prices, and several other factors caused the gas market to soften during 1982. It appears that some changes in gas contracting will be necessary to recapture some of the market lost to alternative fuels.

El Paso Natural Gas Co. (EPNGC) also experienced a declining demand for gas beginning in 1982. One of the primary factors causing this decline was the high take-or-pay or high minimum bills for Canadian gas in the California market. Other factors, such as an abundant supply of hydroelectric power, also contributed.

Proceedings before the Economic Regulatory Admin. and the Federal Energy Regulatory Commission plus proposed federal legislation may revise the NGPA in the near proposed federal legislation may revise the NGPA in the near future. It appears that several actions may be in order to restore the sagging demand for gas.

To regain markets, the price of delivered gas must be competitive with other forms of energy. To be competitive, each segment of the gas industry must be assured that all possible steps have been taken to reduce costs of finding, drilling, producing, transporting, and distributing the product. All segments of the industry must understand each other's problems and make every effort to cooperate.

If those of us in the gas industry who forecast markets for gas had been compensated over the last 4 years on the basis of forecasting accuracy, most of us would be attempting to find other jobs or at least would be moonlighting. Many factors have contributed to the fluctuating markets including the decline in the price of crude oil, the business recession, abundance of hydropower for the generation of electricity in many parts of the country, conservation by the gas consumers, warmer than normal weather, fewer housing starts, and other factors of varying degrees of importance. Many of the large gas consumers, such as steam generating plants, are capable of switching to residual fuel oil when gas is not available or when gas is the more expensive source of energy. We are seeing some signs that some of the negative factors will be at least partially offset with the upturn in the economy. Also, it appears that the gas industry is realizing that gas must be priced competitively relative to other forms of energy and is taking corrective steps to solve the problem.

The Early Years

Gas in the U.S. was priced below other forms of energy until 2 years ago. Interstate gas companies have been under the jurisdiction of the federal government since 1938 when the Natural Gas Act was passed. In 1938, the interstate gas transmission industry was fairly young, but the states realized that the interstate lines were free of their jurisdiction; therefore, Congress was encouraged to pass the Natural Gas Act and place these companies under the jurisdiction of the Federal Power Commission (FPC). The price of gas at the wellhead was not a big issue until the price of gas at the wellhead was not a big issue until the U.S. supreme Court ruled in the Phillips case in 1954 that the price of gas at the wellhead would be under the jurisdiction of the FPC. Gas being priced below other forms of energy until recently resulted in gas displacing other, energy sources. While gas was increasing in demand, there was not a sufficient incentive to explore and drill for gas.

JPT

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