Taking the Lid off Natural Gas
NORDLINGER, STEPHEN E.
Taking the Lid off Natural Gas STEPHEN E. NORDLINGER One day in 1956 the late Senator Francis Case of South Dakota rose in the Senate to inform his colleagues that an out-of-state oil company...
...The lower the amount available for the market, the greater the price the companies can expect to be allowed to charge by the FPC...
...To inject competition into the industry, the Government's method of selling offshore leases should be radically changed so that the smaller producers of gas as well as oil get a better chance to win some of the acreage...
...Since then, over the last eighteen years, the major oil companies, which produce the bulk of America's natural gas, have sought with varying degrees of intensity to persuade Congress to remove controls from natural gas prices...
...In fact, any meaningful bargaining between producers and pipelines is frustrated by such vertical integration...
...When eight corporations in one industry hold more than half of the sales in a market, economists are ready to contemplate the possibility of monopolistic concentration of power...
...However, the foreign price level is no more reliable a guide to true market value than is the intrastate price...
...Under the classical rules governing a competitive market system, the industry's remedy should be appropriate: Higher prices would, presumably, dampen demand to some extent and encourage expanded production to the point where a new equilibrium would be established...
...In pressing for deregulation, producers often cite those figures as the true "market value" of gas—the level at which it should be selling in the interstate market to elicit the necessary supplies...
...the issue seemed far from urgent while the nation went on its way consuming a third of the world's power with no fear of scarcity...
...The subcommittees of the American Gas Association, the trade group that submits the statistics, is made up exclusively of employes of the petroleum companies in the various areas surveyed...
...A new development of major significance may doom even this control, Schwartz notes: As shortages mount, these utilities are forming affiliates to search for and produce gas, or to participate in joint ventures with established producers for the same purpose...
...Such sales are currently in the price range of eighty cents to $1 per thousand cubic feet...
...And the possible impeachment or resignation of the President himself does not put one black man in a decent job...
...But the bill passed, only to be vetoed by President Eisenhower in the uproar that followed the Case disclosure...
...black and white, public sector and private, rich and poor, come together again, believe in this country's dreams again...
...And it is up to us—all of us—to determine whether we will be stranded in the high, choppy seas of prejudice and hate, or whether we will steer that boat into the safe harbor of equality and mutual respect...
...bank director interlocks among major oil companies...
...In testimony before the Senate Antitrust and Monopoly Subcommittee, John W. Wilson, former chief of the FPC Division of Economics, said that the vagueness of the questionnaire allowed for "semantic juggling" in calculating reserves which rendered the resulting numbers "meaningless...
...Both reflect monopolistic control —one by a foreign government and the other by the oil corporations...
...They would merely sit on their gas reserves as prices spiraled, waiting for their highest return...
...If all contracts between gas producers and pipelines were to be renegotiated on the basis of unregulated rates in present market conditions, the industry would receive an estimated additional $12.5 billion a year in sales income...
...Nonetheless, only a few months after the reporting date, the Commission received filings showing substantial new commitments...
...Maximizing profits dictates the opposite course...
...VERNON E. JORDAN, JR...
...This large number, it is argued, precludes the possibility of effective combination to any significant extent...
...Last September, the Commission allowed emergency purchases under 180-day contracts without Federal approval of the prices...
...According to George L. Donkin, industry economist with the FPC's Division of Economic Studies, there were 743,000 acres in gas-bearing offshore Louisiana Federal land that companies had "shut in" as of January 1973...
...Proponents of deregulation also refer to the high prices of imported liquefied natural gas, which range from $1 to $1.25 per thousand cubic feet to as high as $2 for limited purchases...
...The Government depends on industry to supply the reserve figures, but their accuracy is open to serious question...
...The industry contends that there is no justification for paying Algeria or other foreign sources such prices while keeping domestic prices artificially low...
...Now, for as little as $15,000 a year, producers can delay actual production indefinitely...
...An effort had been made to change the status of the economists to a noncivil service classification so they would serve at the pleasure of the Commission chairman, thus subjecting them to political influence...
...But Stephen E. Nordlinger is a Washington correspondent for The Baltimore Sun who specializes in coverage of energy problems...
...In determining whether FPC price regulation has been a major factor contributing to the gas shortage, as the industry alleges, it should be noted that in the twenty years since the famous Supreme Court decision in the Phillips case that required the FPC to regulate the wellhead price of gas, prices of natural gas have been allowed to rise by 125 per cent...
...Senator Philip A. Hart, chairman of the Antitrust Subcommittee, discovered their existence and subpoenaed them...
...This is the price at which gas is selling in the intrastate market— the market within the states where gas is produced —which falls outside Federal regulatory jurisdiction...
...Mr...
...The public disgrace of the former Vice President does not fill the milk bottle of one hungry child in the ghetto...
...But under the monopolistic and oligopolistic situation prevalent in the gas industry, which blocks the new entry of independent producers, higher prices beyond those that cover costs and bring a fair rate of return could merely generate windfall profits...
...To rally public support, the industry itself started publishing newspaper advertisements with such headlines as "The Unnatural Gas Shortage" and "The Unnatural Gas Shortage Revisited...
...But are the prices arrived at under "emergency" contracts or in the intrastate system competitive...
...Compounding the problem, at a time of environmental constraints, is the advantage of natural gas as a "clean" fuel with a low sulphur content...
...Few experts doubt the existence of huge supplies of natural gas in the ground to be explored and developed...
...Rates for the half of the American homes that use gas might double over a relatively short period if controls were removed...
...Leases should also be forfeited if there is no full production within a prescribed, limited period to be determined by the physical characteristics of the reservoir, so that smaller producers could enter the market and allow supplies to increase...
...In recent years, these states have virtually monopolized new gas supplies...
...and dual roles for producers as buyers of gas within the producing states and sellers of gas in the interstate market...
...Studies by the FPC's economists show that between 1965 and 1970, eight companies controlled between sixty-one per cent and eighty-six per cent of supplies in Southern Louisiana, seventy-six and ninety-four per cent in the Permian Basin of New Mexico and West Texas, and seventy-two and ninety-nine per cent in the Gulf Coast...
...Subsequent hearings by Senator Hart disclosed the deep antagonism between some of the top members of the FPC staff and the Commission economists who oppose deregulation...
...Nationwide, it is said, the eight largest producers account for about forty-five per cent of total sales, short of the fifty per cent benchmark...
...The procedures of the FPC should be streamlined to speed up the processing of rate increases, some of which have taken years to complete...
...It is little wonder, in these circumstances, that the survey reported even lower gas reserves than the AGA had claimed...
...In response, some companies reported either zero or negligible reserves...
...According to David S. Schwartz, assistant chief of the FPC's Office of Economics, "all major pipeline purchasers have producing affiliates...
...These developments—the contradictory reports of reserves, the loosely worded questionnaire, the attempted burning of documents—point up the high stakes involved in the deregulation issue...
...The central question at the nub of the controversy over deregulation is how to get these resources out of the ground and into the market at a price that adequately compensates the producer and, at the same time, protects the interests of the consumer...
...With each passing day, the gas in the ground has become increasingly valuable...
...Taking the Lid off Natural Gas STEPHEN E. NORDLINGER One day in 1956 the late Senator Francis Case of South Dakota rose in the Senate to inform his colleagues that an out-of-state oil company had attempted to give him a cash contribution of $2,500...
...The controversy over whether the industry is holding back on production, thus contributing to a contrived gas shortage, is closely related to growing suspicions that the producers have understated their underground reserves to gain higher prices...
...Geological Survey reported last August that there were 943 shut-in wells in the Gulf of Mexico...
...A key improvement would be the Federal regulation of intrastate gas...
...The U.S...
...The Administration that promised to bring people together has exploited the divisions in our society and driven us further apart, and it has now fomented the most profound constitutional crisis this nation has seen in a century...
...The lid would be off...
...Under competition, producers would respond to higher prices and enter the market, increasing supplies as their rewards rose...
...It became one of his top priorities in dealing with the "energy crisis...
...In these circumstances, there is obviously no incentive for a pipeline to bargain vigorously with producers for lower prices...
...Enormous amounts of money are at stake...
...These prices are not based on the cost of finding and developing the gas plus a fair rate of return, but rather on the power of the producers to exploit their monopolistic position...
...The offshore lease sale in the Texas Gulf Coast last June reflected an eight-company concentration of eighty-seven per cent...
...In terms of anticipated future supplies, eight companies controlled gas from about seventy per cent of all three combined wildcat offshore Louisiana lease sales in 1970 and 1972...
...Congress is being asked to make some historic decisions in this session, and growing numbers of Americans wonder whether the lawmakers are capable of measuring up to their responsibilities...
...In this time of division we call for the nation to come together again...
...A wild controversy was raging at the time over the oil industry's tactics in pressing for an end to the Federal regulation of natural gas prices...
...There was a time when gas consumers could look to local public utilities to exercise some restraint on prices through their opposition to unwarranted increases before the FPC...
...Only aggregate information is passed along...
...If decontrol were to be applied only to contracts that expire this year, the added annual income would be $1.5 billion...
...Against these facts, the industry cites the existence of 3,218 corporations, 35,738 individuals, and 10,795 partnerships in the producing business as evidence of competition...
...Just a year ago, as awareness of a coming fuel shortage increased, the situation changed abruptly...
...Diminished supplies of gas have, in turn, contributed to increased demand for oil...
...The evidence points in the other direction...
...Gas rates may go higher, but they should be based on costs plus a fair rate of return...
...Furthermore, such increases would remove competitive restraint, causing higher prices for oil, coal, and other fuels...
...In the absence of Federal regulation, and with minimal resistance, if any, to higher producer prices from pipelines or utilities, what is likely to happen to the price paid for gas by forty-three million customers who have no alternative source of energy...
...On these points, concentration of more than fifty per cent is strongly indicated...
...For each penny per thousand cubic feet above the regulated rates the industry receives about $220 million...
...An increase in its prices, therefore, will provide no assurance of new supplies...
...The royalty rate, now 16.5 per cent, should be raised, but the initial acquisition cost of the "cash bonus system" should be scaled down or eliminated so as to avoid the hundreds of millions of dollars now needed to acquire some leases...
...Howard William Pifer III of the Harvard Business School, who served on the staff that prepared the data for the inventory of proved reserves for the FPC's National Gas Reserve Survey, says the report, issued last July, failed "to meet the criterion of an independent evaluation" of the gas industry...
...Calculated on another basis—and an equally reasonable one, judging from industry comments—the new return to producers could reach $18 billion...
...BLACK WATERGATE It is now apparent that the entire web of intrigue, subversion of democratic values, and illegal and quasi-legal acts that go under the overall name, "Watergate," had its origins long before the actual break-in at the Democratic headquarters...
...It is not to be expected that the pipelines will fight for lower prices...
...He said that two-thirds of the members on the supply study group were affiliated directly or indirectly with the producing industry or Government...
...In consequence, he observes, "Of late the opposition of private gas distributors [utilities] to escalating producer price requests at the Commission level has evaporated...
...The industry—buttressed by the Administration and the Commission itself, all of whose five members are Nixon appointees—maintains that regulation has kept prices artificially low, thus encouraging demand beyond the willingness and ability of gas producers to provide the needed supply...
...Supplies to the consumer could well remain inadequate as the producers capitalized on the shortages...
...The result, according to the industry, is a critical shortage of gas, which meets a third of the nation's energy requirements...
...at $1, it would total $18 billion...
...Rather it is clear that the industry deliberately decided to hold down drilling and production for two reasons: first, because the relatively low cost of gas, compared to oil, poses a threat to maximizing the profits of the major companies that produce both fuels, and second, because it has been hoped that the regulated price ceilings would be removed...
...The present 5,000-acre blocks should be scaled down...
...The indictment of the former Attorney General does not make the future appear brighter for a single welfare mother...
...gas deregulation was placed at the top of the industry's legislative agenda...
...Indeed, black people were subjected to a "Black Watergate" that started with the so-called "Southern strategy," the politicization of crime, busing, and quotas, the Haynesworth-Carswell nominations, the cutbacks in social spending and programs...
...The Commission also sent questionnaires recently to producers to obtain information on their uncommitted reserves available for sale...
...potential gas reserves amount to 2,100 trillion cubic feet—about 100 times current annual levels of consumption...
...Should all contracts nationwide be re negotiated at the seventy-five-cent level, the added an nual return to the producers would reach $12.5 billion...
...A third of the nation's supplies are consumed in those states— Texas and Louisiana primarily—and a lot is wasted as boiler fuel, a much less economical use than for residential heating...
...While the Nixon appointees on the Commission have been busily advocating deregulation, the economists on the FPC staff have developed detailed information that points to a gas industry marked by interlocking relationships among major producers and between these producers and pipelines: joint bidding combines for offshore leases...
...Finally, a new oil and gas corporation patterned on the Tennessee Valley Authority, which some Congressmen—most notably Senator Adlai Stevenson, Illinois Democrat—have been promoting, should be formed to explore for gas on Federal land and, most importantly, to set a yardstick against which the industry's actual costs of production could be measured...
...The oil industry argues that if the Federal lid were taken off the wellhead prices, they would rise until they reached the price level of competing sources of energy...
...At eighty cents, the income gain would be $13.5 billion...
...This theory, however, disregards a crucial aspect of the natural gas business: Contrary to all of its contention, the industry is not workably competitive...
...Even the joint bidding for leases of public lands promotes competition by allowing companies with limited financial resources to participate...
...The more President Nixon and the members of the FPC have spoken of deregulation, the less advisable it has appeared to produce...
...Any increased prices paid by a pipeline for gas can be used as a basis for paying equally higher prices to its producing affiliate, thus enhancing the profits of the parent company...
...As Lee C. White, former chairman of the FPC, had said, it is a "national scandal" that prices remain unregulated within the states that produce the gas...
...The answer is not too difficult to calculate, given the FPC's propensity to soften controls and, in fact, to deregulate prices on an "emergency" basis even without authorization from Congress...
...But black people do insist that the current crisis be resolved, for while we lack the vindictiveness some people would consider understandable, we know above all that we have a stake in a government that is stable, that can govern, and that will reverse those policies that have been harmful to us...
...The Commission's so-called "area rates" now average thirty-five cents per thousand cubic feet, but prices in an "emergency sale" in South Louisiana rose to sixty-five cents, in the Permian Basin of New Mexico to sixty cents, and in Oklahoma to sev enty-five cents...
...It makes no sense, then, to attribute the gas shortage to price regulation...
...In addition, any price paid by a pipeline is considered a legitimate cost of doing business by the FPC, and the pipeline can simply pass the cost along in higher rates...
...It is small wonder, then, that oil lobbyists roam the halls of Congress intent on mustering support for various versions of gas bills, all of which have the purpose of removing controls from the wellhead price that the Federal Power Commission has regulated for the last twenty years...
...a Black Watergate that began with the suggestion of "benign neglect" and ended with the clear determination to leave the hopes and aspirations of black people to "twist slowly, slowly, in the wind...
...But black people take little comfort from the present difficulties faced by men so many perceive as having acted against our best interests...
...They were torn up and stuffed in a burn bag, but the incinerator failed to function...
...Rather than run the risk of having this information, no matter how incomplete or ambiguous, fall into public hands, a staff member of the Commission ordered that the documents be destroyed...
...Furthermore, doubt has been raised about the FPC's recent attempt to verify the industry's figures...
...Weaken these and you weaken the prospects for change...
...Senator Case, who had been in the sure column, switched and voted against deregulation...
...The industry reports these facts, but the detailed explanations, verified by the Government, are lacking...
...As a national resource, this gas should be made available to the entire nation under controlled prices...
...What steps, then, could be taken to increase supplies without penalizing the consumer...
...All attempts have failed...
...Over this period, the Consumer Price Index has risen fifty-seven per cent...
...Jordan is Executive Director of the National Urban League...
...A full-scale campaign began on Capitol Hill...
...But the relevant figures, as the FPC economists point out, are not aggregates nationwide, but concentrations of control over new supplies and measurements of company activity in separate producing areas...
...it is reasonable to anticipate just the opposite...
...I've become fond of quoting Whitney Young's penetrating observation that "we came over here in different ships, but we're in the same boat now...
...The realities of the industry, dominated by such giants as Exxon, Shell, Amoco, Gulf, and Phillips have been vividly described by members of the Office of Economics of the Federal Power Commission...
...The reforms we seek and the goals we are fighting for depend in large part upon governmental stability, public faith in the governing process and in the integrity of the courts and the governing institutions...
...In the Congressional climate of acute concern over fuel scarcity, the industry pressed for approval of the trans-Alaska pipeline and for a relaxation of restrictions on offshore drilling and construction of deep-water ports for supertankers...
...The pipeline companies that buy from the producers might be expected to inject competitive price restraint as they bid for supplies, but this has not happened...
...President Nixon, the beneficiary of $5 million in 1972 campaign contributions from oil executives and principal shareholders, took a firm stand in favor of Federal decontrol of natural gas prices...
...Watergate has eclipsed such questions as gas deregulation, but on these issues, too, is the measure of Congress taken...
Vol. 38 • March 1974 • No. 3
