Falling Prices Challenge Gas Firms
Some call for Texas, Louisiana, and Oklahoma to act jointly to control natural gas output
COULD Texas, Oklahoma, and Louisiana succeed where the Organization of Petroleum Exporting Countries failed?During the 1980s OPEC tried repeatedly to buoy leaden oil prices by limiting the output of its 13 members. But cheating within and competition without always shot OPEC's quota system full of holes. Still, United States natural gas producers are looking hard at some form of prorationing, following what Daniel Yergin, president of Cambridge Energy Research Associates, calls "the natural gas blood bath of 1991." Warm weather last December caused US gas consumption to decline 8 percent from the previous year. Surplus gas in storage drove January's price down by 30 percent, and the price fell in each of the following five months. Spot prices in July hit $1.13 per thousand cubic feet (mcf), the lowest in 12 years and well below replacement cost. "These gas prices are killing us," says James Pate, chief executive officer of Pennzoil Company. Pennzoil reacted in July by curtailing volumes for spot market sales by one-third until prices rise above $1.50. "I hate to subsidize other states with our valuable resource," Mr. Pate adds. Mitchell Energy and Development Corporation, an independent producer, curtailed gas production by 50 million cubic feet per day when the price slid below $1.50. New reserves can't be found for less than $2.50, says chairman George Mitchell. Other producers, however, say the cost is as little as half that. As the price of gas plunged, most companies produced flat out in an effort to maintain revenue, with devastating consequences. Raymond Plank, chairman of Apache Corporation, points out that gas has sold on the spot market this month for $1.35 per mcf. That's like selling oil for $8.10 per barrel, he says. (Oil trades around $22 currently.) A survey of producers attending an Arthur Andersen oil and gas symposium in Houston this month found them in a gloomy mood. Only 36 percent will focus their domestic exploration this year on natural gas, down from 53 percent in 1990. Last year producers had predicted gas would sell for $1.90 per mcf this year. Now they forecast a price of $1.60 for 1992. For 1995, they see $2 instead of $2.50. For 2000, they expect $2.70 rather than $3.50. Some producers hail prorationing as a way to force prices up and stop the sale of gas for less than its true value. They envisage coordination among the three states that account for 75 percent of US gas production. Dr. Yergin says Texas, Oklahoma, and Louisiana could successfully proration output by their gas producers. "It wouldn't take very much prorationing to affect market psychology," he says. "We've been wondering why we haven't heard more about this." Pate, who says Pennzoil is studying the issue, questions whether it would work without involving Canada. "Every time I talk to our gas people, they're talking about Canadian gas," he says. But Canadian producers' share of the US market will remain at 10 to 14 percent, so they aren't essential to prorationing, Mr. Mitchell argues. He has been working with other independent producers to advance prorationing. The Texas Railroad Commission, which each month decides how much oil and gas can be produced in the state, will hold a hearing on prorationing Oct. 9. For years the commission has let companies produce all the oil and gas they want. The Texas Independent Producers & Royalty Owners Association has criticized this as over-reliance on signals from the industry. Letting production exceed demand has led to "a sloppy market situation which has posed an overwhelming threat to sound production economics," TIPRO officials say. Not all producers agree. "I think it would be the worst thing in the world for us," says William Adams, chairman of Union Pacific Resources Company. He says prorationing would destroy consumer confidence that gas producers are willing to guarantee a stable supply of gas. Instead, Mr. Adams recommends aggressive marketing and long-term contracts. His company sells 85 percent of its production under agreements that last five to 15 years. In exchange for the supply commitment the company makes, consumers pay a premium over the spot price, he says. He adds that before the federal government began deregulating the gas market during the 1980s, customers never had a firm supply during winter. The local gas company could just "call you up and cut you off. No one should be cut off when it gets cold." Pate says that a recent public opinion poll found natural gas to be the clear fuel of choice for American consumers because it's clean and inexpensive. Their only concern was deliverability during winter. "Just because we have a product with all these advantages doesn't mean we're going to win the war," says Richard Kinder, president of Enron Corporation, which delivers 18 percent of the natural gas consumed in the US. Mr. Kinder gives the industry a grade of "D minus" for its performance in reaching out to state and federal regulators, legislators, and consumers. One reason that demand for gas isn't higher, Mr. Plank asserts, is that local distribution companies are gouging consumers. Looking at New York residential gas prices, Plank found that in 1984 gas cost $7.64. The producer got $2.66, the pipeline $1.44, and the local distribution company $3.54. In 1990 gas cost New Yorkers $7.45. The producer's share fell to $1.68, and the pipeline's to $1.37. But the local distributor's share ballooned to $4.40 as it pocketed the savings from the producers and the pipeline rather than passing them along to New Yorkers. "The benefits of deregulation have fully escaped the consumer," Plank charges. And that hurts producers because it holds down demand for gas.