"What we've got to do is remove this element of regulatory uncertainty so we can get the gas flowing again," sar! White "Congress should decide this deregulation thing in a hurry If I lose I want to lose now so we can get the supplies we need But think we'll win and I think the industry will increase its gas production, win or lose, as soon as the issue is decided."

"You've got to understand these 20XS we're dealing with in the gas industry. White said "They're not bad guys, but just guys who follow the rules of the game-to maximize profits. This situation of big demand and weak supply is business heaven for them and they're going to make the pest of it like any other businessman would Remove the possibility of windfalls and they'll sell at the current level, which is still a damned good price for them "

But some consumer advocates who agree with White's point that reject of deregulation legislation would brag forth new supplies disagree that the supplies would necessarily be for.hcoming under deregulation They see tougher regulation as the only Power. Inder deregulation said Charles F Wheatley Jr.. general manager of the American Public Gas Association, a group of 200 municipally owned natural gas distribution systems, "producers would not commit

quantities of gas to interstate markets for fear that a year hence they could ask for even higher prices

"The result will be that only small. short-term supplies of gas will be committed under firm contract, or the preducer, will insist on a variety of 1. delinite price escolation cruses

Despite its limited scope White is mere worried about the ministra tion's deregulation bill the he 15 cbet the tot 7 deregulation scheme proposed by Tower Althan the AdCinistration has advertised its bill as casure to deregulate "new" White sees an enormous icophole in its provision to deregulate gas sold in interstate commerce for the first time or earmarked for interstate sale upon expiration of an existing contract.

Rus.

"That loophole of renegotiating old gas would be 10 enormous that it

would make more sense to take Sen. Tower's bill, because everybody would know what we were doing, rather than to engage in a sham or a facade or to Surgest we were talking only about ne tas." White said.

Industry competition-Critics say

Lee C. White

that producers have been able to withhold their supplies because there are no competitive pressures in the gas industry to induce the suppliers to sell. "The producer market reflects serious imperfections and the institutional arrangements allow the major integrated oil companies to dominate Supply decisions and 10 enforce monopoly pricing." said David S. Schwartz, assistant director of the FPC's Office of Economics. "As a result, legislative or administrative decontrol of prices charged by natural gas producers will result in unreasonable cost to consumers and windfall profits to oil and gas companies....

Schwartz, in outlining his case Dec. 13. 1973 before the Senate Interior and Insular Alfairs Special Subcommittee on Integrated Oil Operations, argued that the structure of the industry iN oligopolistic (control by a few major companies) because of the following factors

⚫concentrated ownership by the major oil companies of new gas supplies;

interlocking relationships among the major producers, between the majors and small independent companies. between producers and purchasing pipelines and between oil companies and leading banks

⚫the existence of joint bidding combines among major producers in recent offshore federal lease sales,

the dual role of major producers as purchasers of gas for their own intrastate pipelines and sellers of gas in the interstate market.

Concentration-Economists generally agree that monopoly power results when eight firms have 50 per cent or more of the sales on any one industry

In terms of gas produced in any one 769 year, the concentration ratio for the 5/25/74 gas industry is less than 50 per cent. NATIONAL By this standard, the industry argues that it is competitive

Schwartz said the argument fails to recognize that production in the natural gas industry, unlike other industries, does not equate with new supply availability. Studies by his office, he said, indicate that concentration exists over new gas supplies. He said that control by eight companies, for the period of 1965-1970, ranged from annual levels of 61 to 86 per cent in Southern Louisiana. 76 to 94 per cent in the Permian Basin, and 72 to 99 per cent in the Gulf Coast area, the nation's three largest producing areas In terms of uncommitted reserves reported by producers to the commission, the concentration by eight firms in 1972 ranged from 75 per cent in the federal domain of offshore Louisiana to 100 per cent in Louisiana's offshore state domain.

Interlocks-In a study of the Southern Louisiana area, Schwartz reported extensive interlocks among producers and pipelines. Of the 17 major companies operating in the federal offshore domain, Schwartz reported that only four own 50 per cent or more of their production leases independently and that 10 of the 16 on 80 per cent or more of the offshore properties jointly with each other.

Of the 18 largest onshore producers. Schwartz said, 14 had five or more direct interlocks with the other 1. In addition, he said that 38 other medium and large producers had substantial interlock arrangements with the majors

In the last two federal offshore lease sales, Schwartz said, more than half the leases were obtained by production affiliates of pipelines. "This allpervasive backward integration by pipelines is one of the most significant factors frustrating meaningful bargaining between producers and pipelines," Schwartz said.

Schwartz also said that 17 of the nation's leading banks had representatives on the boards of dirctors of two or more oil companies as of 1968. For instance, New York City's Morgan Guaranty Trust Co. had representatives on the boards of Continental Oil Co, Cities Service Co., Atlantic Richfield C. Columbia Gas System. Louisiana Land and Exploration Co.. Belco Petroleum Co and le. Gulf Sullur Co.

Joint bidding-Schwartz said com

JOURNAL

REPORTS ©1974

Charges that natural gas producers may be withholding new gas supplies in anticipation of further price increases have attracted considerable controversy

Much of the basis for this contention by industry critics rests on studies by the Federal Power Commis sion (FPC) that show at least 168 offshore Louisiana gas leases where wells had been "shut-in" but not abandoned. Producers say there are good reasons for each of the shut-ins and that none involves price speculation.

FPC figures

The controversy went public Oct. 18. 1973 when George L. Donkin, then an industrial economist with FPC's division of economic studies, revealed the shut-in figures to the Senate Judiciary Antitrust and Monopoly Subcommittee. Dunkin said the tracts encompassed 787.972 acres, for which oil companies paid almost $1.5 billion in bid bonuses to the federal government (In the case of each of the leases, the United States Geological Survey (USGS), which oversees the leasing program, classified the lease as "producible-shut-in," meaning that at least one well drilled on the lease indicated the presence of oil or gas reservoirs that could be produced in paying quantities. The classification enables producers to get an extension of their lease beyond the primary five-year term after which the producer - theoretically - must produce or forfeit his lease. The extensions are routine, and no offshore lease has yet been cancelled by the government for failure to produce.)

Investigation: Since Donkin's testimony, FPC Chairman John N. Nassikas has ordered a field investigation of the leases, but the results thus far have been inconclusive. In an interim report Jan. 22, the FPC staff said it had experienced difficulty in obtaining reasons why many of the leases were not producing. (Ten companies accounted for 96 per cent of the shut-in leases. according to the FPC report. These, in order of their shut-in acreage. were Chevron, Texaco, Union Oil Co of California, Tenneco, Exxon, Shell, Continental Oil, Gulf, Amoco (an affiliate of Standard Oil of Indiana). and Mobil)

Of the 168 tracts, 60 leases were in their primary five-year term, during which producers are not required to state their reasons for seeking the producible shut-in classification instead of putting the well into production. Operators of only eight of the leases would give reasons why they had sought the classification. Of these, four were awaiting production platforms or pipeline connec tions, three were awaiting marketing facilities, and one was preparing an economic evaluation alter damage to its production facilities.

Of the other 108 leases, 12 were undergoing exploration or being prepared for production and 96 actually were shut in. Of the bona fide shut-ins, 24 were preparing development plans, 21 were waiting for platforms or pipelines, 15 were awaiting marketing facili ties, I were awaiting completion of drilling programs and/or evaluating geological data, eight were prepar

ing economic evaluations, eight were evaluating results of drilling on adjacent leases, four were waiting for drilling rigs, two were embroiled in economic evaluations after physical damages, and two offered no reasons at all, despite the requirement that they do so. Seventy-one of the leases were classified as "producible shut-in" since before 1968

Comment: "On the face of it, this is incredible." Sen. Adlai E. Stevenson III, D-III., a leading critic of the industry, said in an interview. "The well should either be produced or forfeited."

In testimony before the House Select Small Business Subcommittee on Activities of Regulatory Agencies, Donkin, now a research fellow with a Cornell University energy project, cited figures showing that many offshore Louisiana leases formerly classified as producible shut-in are producing large quantities of gas.

For instance, on March 1, 1972, 10 years after the leases were acquired, the Tenneco Oil Co. contracted with its corporate affiliate - Tennessee Gas Trans.nission Co.-for sale of 179 billion cubic feet of gas from Vermilion Blocks No. 217 and 218-leases that had been classified as producible shut in.

And on July 19, 1969, Exxon Corp. contracted to sell an annual volume of 108 billion cubic feet from a producible shut-in lease to Trunkline Gas Co. In a 1971 report to the FPC. Trunkline indicated that at the end of the year, Exxon estimated 680.5 billion cubic feet of gas remained on that tract- the South Timbaler Block 165.

"Uncommitted reserves are not unlike a working inventory." Donkin told the subcommittee. "Provided that the producer's expectations of future price increases are sufficiently optimistic, the prudent business decision would be to shut in today and reap the rewards of drawing down his inventories tomorrow."

Dunkin said his contention was confirmed July 1973 by an FPC administrative law judge, who said in a rate case involving C & K Petroleum Inc., a small gas producer, that "the seller is in a pre-eminent psition and may be able to refuse an offer of an interstate pipeline when there is no extant intrastate purchase This is so because there is a strong possibility that the carrying costs for holding gas off the market are so low compared to future possible benefits ..that the producer may shut in the well if the application is denied even if he has no other immediate market."

The judge projected that carrying costs in that case — even assuming interest rates as high as 20 per cent would be less than $40.000 annually as opposed to a possible gain of more than $2 million. it he waited for higher gas prices.

Critics also point to recent testimes by one of the industry's own officials as evidence tentional withholding In another proceeding before the PC in 1973, a witness for the Okmar Oil Co was isked what se would do if his application to sell gas to Northern Natural Gas Co. at 61 cents per 1.06 cubic feet vere denied. He replied that he would coma: the gas to the • at all "

intrastate market or "not market the..

Industry rebuttal

The gas industry contends that its critics have little appreciation of the time-usually three to five yearsthat it takes to put wells into development and the difficulty in preparing economic analyses to determine whether pipeline projects are feasible and then getting pipeline approval from the FPC.

Gas committee: "These offshore leases are either being produced, or are being actively explored for their nat ural gas potential, or, if commercial quantities of gas are not discovered, the leases are being returned to the government," the industry's Natural Gas Supply Committee said in a recent rebuttal to the withholding charge.

"Information provided by companies holding most of these federal leases shows that actually nearly a third of acreage alleged to be shut in is presently producing or will produce this year. About another third is being actively explored or is awaiting construction of facili ties, FPC certification or analyses of exploration data," the gas supply committee said.

"Commercial quantities of gas have not been found on nother quarter of this acreage," it said. "Interest in the remainder has been sold or will be returned this year to the government under the original lease sale agreement."

he industry has paid through the nose for those leases-$2 billion or more," said Paul M. Feine, an official of the gas supply committee. "We're just not going to pay like that and not produce as quickly as possible. The prices now being granted by the FPC are in the ballpark of what we would expect under price de egulation. So why wait a year when you can start getting a return on your investment that much sooner?" Reserves data

Critics say the controversy over shut-in wells is symptomatic of an even broader problem-that only producers know how much gas is really in the ground and the government lacks the power to audit the data.

Critics say this "data gap" inevitably leads to higher FPC gas price ceilings because a major factor in the agency's rate calculation is the level of gas reserves that the industry reports to the commission. These figures. which are compiled by the American Gas Association (AGA), a group of about 270 gas distributors and 30 pipeline companies, are used by the FPC to determine productivity rates- the average volume of gas extracted for each foot of well that is drilled. The lower the productivity, the higher the price ceiling the FPC grants. Understate reserves: Critics contend that the AGA figures are too conservative and purposely may understate

reserves in order to drive prices up. Critics say they have uncovered numerous examples of discrepancies between the AGA figures and other reserve studies that are not recognized by the FPC for rate making purposes. Among them:

In the FPC's 1971 Southern Louisiana Area Rate Case, the AGA reported estimates of 24.1 trillion cubic feet of reserves in the federal domain of offshore Louisiana. Reports from interstate pipelines to the FPC showed that reserves already committed to the pipelines from the same area totaled 34.1 trillion cubic feet. A 1973 study by the FPC's Office of Economics showed that pipeline data for 31 Southern Louisiana leases discovered in 1971 and 1972 projected ultimate recovery of 4.9 trillion cubic feet, of gas on those leases. while AGA estimates for fields discovered in the entire Southern Louisiana area for the same period were only 3.2 trillion.

In testimony before the Senate Judiciary Antitrust and Monopoly Subcommittee in June 1973, James î Halverson, director of the Federal Trade Commission's Bureau of Competition, said some internal company documents reviewed by his office showed reserve estimates 10 times greater than the estimates submitted at the same time for the same fields to AGA.

Rebuttal: The AGA contends that precise geological estimates of reserves are impossible and that the nation is better served by a careful accounting of its potential gas supply.

The AGA's definition of proved reserves is gas recoverable under existing economic and technological conditions-either gas from existing reservoirs or from new fields where there have been "conclusive formation tests" from exploratory drilling.

"We reject the contention that our definition is conservative," Edwin F. Hardy, AGA's manager of gas supply, told NJR. "The pipelines want to paint a glowing picture to keep the FPC and the banks happy.

"If you want to be optimistic and report more reserves you'll only end up with negative revisions in the future as the reserves are actually developed." Hardy said. Despite AGA's tight standards, this is precisely what has occurred for each of the past four years, in which the year's net revisions from earlier estimates have been negative. In 1973, negative revisions totaled 3.5 billion cubic feet, which amounted to 35 per cent of the year's new gas discoveries of about 10 trillion cubic feet. Most of the negative revisions were reported from wells in the Texas Gulf Coast area, where pressures from new reservoirs have fallen more rapidly than had been anticipated. The quicker the pressures fall, the smaller a reservoir is indicated.

Hardy also criticized Halverson's charges that producers understate their reserves in reports to AGA. "Each company has more than one definition of reserves," he said. "They've got to do that for advance planning purposes. They take a ballpark projection for their long-range planning, but when you get down to the point of making a basic, decision on installing a drilling platform, you want damn hard figures."

772 petition has been stifled by joint 9/8/74 bidding by major companies in recent NATIONAL offshore lease sales. In the 1970 and JOURNAL 1972 sales. Schwartz said there were ©1974 21 bidding combinations among ma

REPORTS

jors and between majors and independent companies. In 15 of the combines, pipeline affiliates were partici pants. Of the majors, only Exxon chose to bid independently of other companies

Dual role-Finally, Schwartz said. major producers who own their own pieplines - Exxon. Continental, Phillips, and Texaco are able to create pressures for higher interstate prices by bidding prices up in the intrastate market "This dual role of buyerseller by the major petroleum compa BICS undermines the essential independence required for intercorporate rivalry fundamental to the assumption of a workably competitive market." he said.

Consumer Energy Act

Consumier advocates dissatised with the current regulatory scheme hut favoring continued controls have developed an alternative of their ownthe Consumer Energy Act, which seeks to induce more production by making independents more competitive and by streamlining regulatory procedures for the 20 major companies that would remain under regulation.

"This is really a deregulation bill in that you end up with only 20 companies regulated," said Sen Stevenson, the bill's primary sponsor, in an inter

view

"We want to regulate no farther than is necessary to protect the economy from extortionate energy prices. If we don't do something modest like this, the public is going to demand nationalization of the industry if things continue as they are."

The theory underlying the bill is that the gas industry's current struc ture is anticompetitive and that the only hope for competition lies with strengthening the independent sector of the industry.

The bill would totally exempt some 3.700 small producers now under FPC regulation, including a few major integrited companies which control less than 1 per cent of the market Wellhead of price controls also would be dropped for these producers. But for the 20 companies remaining under FPC regulation, the agency's jurisdic tion would be extended to the intrastate market and the FPC would as

David S. Schwartz

sume jurisdiction over wellhead oil and petroleum refinery product prices as well as gas prices Government off and oil product price controls now administered by the Federal Energy Administration (FEA), are scheduled to expire on Feb 28, 1975. but they would be extended indefinitely for the 20 top majors under the Stevenson bill

The independent exemption would be for an indefinite period However, the FPC would review its impact every five years and report its findings to Congress Any independent that engaged in "anticompetitive behavior or unfair or deceptive acts or prac tices" would be subject to temporary or permanent withdrawal of its exemption.

To remove anticipations of further gas price increases that might induce producers to hold back production, the bill would abolish the FPC'S alternative pricing procedures and replace them with a single nationwide rate proceeding governing all sales of gas and oil by the regulated companies. The provisions would make statutory the procedure the FPC already is attempting to launch under a broad interpretation of its administrative authority

The nationwide rates, to be established by Feb 1, 1976. would be based on producer costs plus a fair rate of return. In determining the rate of return, the commission would consider "all factors which are relevant to as suring that the nation has adequate supplies of oil or gas at reasonable prices to the consumer"

Leslie J Goldman an aide to Stev enson who has partisipated in drafting the bill. told NJR that the non-cost

factors considered in the fair rate of return concept would include the costs of alternative fuels and an assessment of the incentives necessary to promote exploration and production. He said that prices would go up, but "not to extortionate levels because you'd have the competition from a growing number of independent producers who will be out to sell a whole lot of gas

Goldman predicted that the anal price under the rule making proceeding would be in the range of 55 cents a 1,000 cubic feet.

To give each side a fair heating. while eliminating the delay that took place during the FPC's trial type hearings in the area rate cases of the 1960s, the bill would authorize the FPC to permit consolidated test, nony by single representatives of the parties to the case, including consumer groups The bill would direct the commission to base its rates on substantial c dence in the record taken as a whole The rates would be reviewed by the commission every two years to determine whether adjustment was neces sury.

To give the IPC a better fix on producer costs and profits the bill would require regulated comp, nies to file re ports on their operating data, including oil and gas reserves. Each comp ny would be required to have its a serve reports confirmed by ar independent petroleum engineer certed by the FPC

In a related provision, the measure would direct the comtalssion to Su the proved reserves and potential resources of crude oil and natural gas in the United States annually, ider try volumes committed to contract and volumes not committed or not duced and the reasons for their noncommitment or non-production

The bill also would permit the FPC to set aside any order of a state regulatory commission regarding the tran portation or sale of oil and gas at it finds that the order puts an unduc burden on interstate commerce TN is aimed at low dath production ceilings set by state commissions to prevent low-cost oil being dumped on the market by a firm wanting to undercut the market's price structure

All the above provis uns are in Titl I of the bill. which the Commerce Commitice plans to get oa separately before turning to the measure's other sections

Other provisions: II of the would roll back de music oil prices

the 20 top companies to Dec. 1, 1973 levels. At these levels, new oil produced by the majors would sell for about $7 a barrel and old oil for $4.25, compared to current prices of $9 and $5.25

Title III would establish a Federal Oil and Gas Corporation to explore. develop and produce natural gas and oil on federally owned lands. The corporation would be designed to serve as a yardstick to determine reasonable production costs just as the Tennessee Valley Authority (TVA) does in the electric power field "The corporation

would give us a way of checking. through actual experience. the efficiency and price performance of the private oil companies, Stevenson

said.

Title IV of the bill would provide small producers of oil and gas equal treatment with the majors by establishing a new system of bidding for drilling rights on federal lands and by ensuring that petroleum pipelines owned by major oil companies accept hpments from independent distributors, who have charged they are denied access despite the pipelines' commin carrier status. "We want to make the pipelines common carriers in fact as well as in namie." Stevenson said

The pipeline section would require pipeline owners to establish service and storage facilities for independent shippers who meet minimum volume requirements of 10,000 barrels of crude oilr 5.000 barrels of other petroleum products The bill also would strengthen Interstate Commerce Commission (TCC) regulation over the pipelines by requiring pipeline owners to obtain an ICC license (called a "certificate of public convenience and necessity") before they could construct or extend oil pipelines or acquire them from other owners. Pipelines also would be required to get PC appro al before they could abandor pipeline facilities

The bidding procedure in the bill would require that at least 50 per cent of federal oil and gas lease sales be made on the basis of royalty bidding rather than cash bonuses 1'e bonuses nake it difficult for independents to bid except as part of joint ventures with majors (For reports on oil and gas leasing, see Vol 6. No 16. p 592 and No. 14, p 512

Title of the act would revise the franchise ster under which small de ers sell br. nded oil products at gas stations lesed from the major Companies or at stations they own

selves (where the sales are often

Adlai E. Stevenson III

unbranded.). The bill would protect station operators-both branded and unbranded - from sudden, arbitrary termination of leases or franchises and provides that, in the event of shortages, supplies would be allocated fairly to all classes of retailers.

The sixth and final title of the bill would raise the current rate structure for natural gas and other forms of energy, whereby lower rates are offered to large volume users than to residential consumers. The bill provides for graduated rate increases for increased consumption. This revised structure would "encourage conservation rather than waste." Stevenson said.

Changes: The current version of the bill represents the second substantial revision the measure has undergone since it was introduced as S 2506 Oct 1, 1973. Earlier provisions which have been deleted include proposals for congressional veto power over proposed new FPC gas price ceilings, an optional procedure whereby state regulatory commissions could continue to regulate intrastate markets if they met minimum federal standards. transfer of oil pipeline regula tion from ICC to FPC. and a tighter definition of independents. under which about 25 additional companies would have been classified as majors subject to regulation The changes were largely attributable to criticism by supporters of the measure who want to ensure that it gets through Opposition: Thus far. support that Stevenson expected from independents has failed to materialize fact. the Independent Petroleum sociation of Ar rica (IPAA)-trade

In

Dewey F. Bartlett

group for the independent oil producers-is as strongly opposed to the bill as is the American Petroleum Institute, which represents mostly the majors.

"We're for total decontrol of prices." Lloyd N. Unsell, an IPAA vice president, told NJR. "You won't help the situation at all unless you deregulate the whole industry. The com. panies that would still be regulated control 74 per cent of gas produc

tion.

"It's like four guys selling apples on the street. The government tells three of them that they can't charge more than a dime. If you're the fourth guy, you can't sell that many 15 cent apples." (Supporters of the bill sa that the analogy would be accurate with respect to a situation in which supply and demand were in equilibrium but that in the existing shortage. deregulated independent producers could get the higher price.)

Strong opposition to the bill has come trom the Nixon Administration, which is perplexed that the measure is drawing attention away from its own deregulation bill "The notion that we can somehow solve our energy problems by maintaining gov ernment-dictated price controls for crude oil, refined products and natural gas is a false concept." FEA Director John C. Sushill told Stevenson's committee April 22. "It is the same concept that led us into our pres ent intolerable and worsening dependence on others for essential oil and gas supplies.

Other opponents of the bill include the Chamber of Commerce of the United States, various textile manu