Matthew Simmons has done an excellent job of problem definition in his article (OGJ, Mar. 26, p. 65) on the need for an energy pricing tool. It has been almost 20 years since the domestic industry was "free marketed," and the long-term contracts which had developed the surplus of deliverability were "force majeured" out of existence. Perhaps the financial markets and the energy producers can now be persuaded to sign a long-term contract at less than current market prices, trusting in the sanctity of contract once again. It could happen.
What if we are able to mount a 5-10 year drilling boom and turn our gas production decline around? Once there is surplus deliverability again, will prices be based on contract, competitive fuel cost, or break even lifting cost? Will those poor souls who signed long-term contracts (both producers and purchasers) be held to the contract, go out of business, or be bought out by the gas brokers?
Given the disparity between the finding and development costs and the lifting cost of oil and gas, and the long inventory time of new development (15 to 20 years), the industry has never been able to develop just the right amount of deliverability, at just the right time, in just the right place.
While a new energy pricing tool is needed and has been needed throughout the industry's 140-year history, the only tool that has ever brought any price stability of any kind is production prorationing.
Rockefeller begat the "Seven Sisters," who begat the Texas Railroad Commission, who begat US oil import quotas, who begat OPEC. The production prorationing need not be ruinous. It appears that OPEC is currently holding crude prices in a narrow band with only a 3-5% variation in total world supply-demand. Whether or not they actually have surplus deliverability doesn't matter.
The only requirements for production prorationing to work are that someone is perceived to have excess capacity and the production cutbacks are perceived to be fairly allocated by those taking the cuts. High prices are going to be a fact of life for awhile. If and when we once again develop a surplus, then there will be an opportunity for long-term contracts if companies, bankers, and gas brokers believe that prices are supported by market-demand factors.
As former Railroad Commission Chairman Bill Murray always says, "If we are unable to manage the surplus, then we will surely have the opportunity to manage the shortage."
Jack E. Coffman
President
Sonora Minerals Inc.
Austin
