Gas prices are increasing in the U.S. because of market fundamentals, not because of new gas proration schemes, a panel of state regulators agreed at the International Association of Drilling Contractors' annual meeting.
Regulators from Texas, Louisiana, and Oklahoma, states that account for about 75% of U.S. marketed gas production, said they are changing gas proration systems in their states to keep up with evolving markets. For drilling contractors, those markets involve an alarming decline in active rigs (OGJ, Sept. 28, p. 38).
Panel members said basing gas allowables on nominations by interstate pipelines has become outdated because pipelines no longer act as merchants in most gas sales.
Most U.S. gas sells on spot markets, and the role of pipelines in most transactions has become limited to providing transportation. As a result, allowables referenced in recent years to expected pipeline takes routinely exceeded market demand, in some cases by as much as 50%.
In instances in which allowables were set too high, some producers in competitive reservoirs were forced to produce unneeded gas into glutted markets, often for otherwise unacceptable wellhead prices, to avoid the risk of losing future allowables because of underproduction.
New gas proration rules in Texas, Oklahoma, and Louisiana are intended to protect producers' correlative rights and prevent physical waste, not to short gas markets or boost wellhead prices, panel members said.
Energy Information Administration data show Texas in 1990 accounted for more than 34% of U.S. marketed gas production, Louisiana more than 28%, and Oklahoma more than 12%. So gas prorationing systems in those states significantly affect gas markets across the U. S.
MARKET FUNDAMENTALS
Herb Thompson, commissioner of the Louisiana Office of Conservation, said U.S. gas spot prices dropped to about $1/Mcf in February 1992 because many distributors and end users chose to withdraw gas from storage rather than buy gas at the wellhead.
Thompson said spot prices have increased since February not because of prorationing revisions in Texas, Louisiana, and Oklahoma but because the U.S. had an abnormally cool spring while storage supplies were low. Purchasers bid wellhead prices up because consumer demand was unseasonably strong at a time when many companies were refilling storage.
Gas prices have spiked in the past month because Hurricane Andrew damaged many installations in the Gulf of Mexico, cutting off a significant volume of production, he said.
Thompson and other panelists said the inability of old gas prorationing systems to accurately estimate demand contributed to market distortions.
"In last quarter 1991, the Conservation Office granted allowables of 5 bcfd. Louisiana operators produced 3 bcfd. Purchaser nominations were 2 bcfd," Thompson said.
In Texas, pipelines' forecasts of gas demand were becoming increasingly out of phase with markets, Texas Railroad Commissioner Bob Krueger said. Sometimes pipeline estimates were off as much as 50%.
The gas prorationing system in Oklahoma, under which allowables were adjusted on an annual basis, resulted in allowables about 30% more than market demand, said Cody Graves, a commissioner of the Oklahoma Corporation Commission (OCC).
LOUISIANA REVISIONS
When Texas and Oklahoma announced plans to begin revising their gas prorationing rules, Louisiana producers came down on both sides of the question, Thompson said. But reviews of 8 years of Louisiana production and market data revealed the state's prorationing system was not functioning adequately.
Thompson has become convinced it is time for change.
As commissioner of Louisiana's Conservation Office, Thompson is required to prevent waste, promote conservation, and maximize recovery of natural resources while protecting correlative rights.
The state Conservation Office administers the gas prorationing system under Title 30 and sets allowables under Order 29-F, written in 1955 and last amended in 1959.
"In 1955," Thompson said, "interstate pipelines were the primary nominators of volumes of gas Louisiana producers sold. Today, 97% of gas moved on interstate pipelines in Louisiana is carriage gas. Pipelines don't buy it anymore. They just transport it."
The Conservation Office late last month was to take the next step in making gas allowables more reflective of demand on Louisiana gas markets when Thompson and his staff were to review the third draft of revisions to Order 29-F.
TEXAS INTENTIONS
Under Texas's new rules, first used last June to set July allowables, TRC estimates market demand based on producers' expected sales and production in each prorated reservoir, rather than on pipeline nominations. Adjustments are allowed for new wells or workovers in prorated fields.
Krueger said the new rules allow Texas producers to hold gas off the market longer without the risk of losing allowables. TRC had the first check of the new system in mid-September.
"We found that in June 1992 the commission set allowables amounting to 113 bcf more than actual July market demand," he said. "Allowables we set for this October were exactly at the same level as last year's production for that month.
"There is absolutely no effort at the TRC to shut in gas production in order to raise wellhead prices. We don't want to get into a battle with Congress on prorationing because we know who wins those fights."
He said the TRC does not consider gas prices when estimating market demand in Texas. Rather than drive up gas prices, any curtailment of Texas gas production likely would be replaced by supplies from other states or Canadian imports.
OKLAHOMA'S NEW SYSTEM
Similarly, Graves insisted the OCC does not intend to hold gas from consumers but simply protect correlative rights. State leaders are trying to develop new markets for Oklahoma gas rather than to limit production.
"The marketplace is much more dynamic than it used to be," he said. "As regulators, we have to anticipate possible changes and be able to get out of the way whenever we can."
The new prorationing system adopted by the Oklahoma Legislature sets seasonal winter and summer allowables and preserves commission authority to periodically change allowables. The summer allowable is set at 25% of calculated absolute open flow and the winter allowable at 40%.
Graves said OCC is concerned about preserving flexibility to respond to changing market conditions. Oklahoma has passed and Gov. David Walters has signed a rule with an emergency clause commissioners used to invoke winter allowables after Hurricane Andrew forced Gulf of Mexico operators to shut in some production.
He said Oklahoma producers have not asked OCC to continue the emergency winter allowable, and OCC has returned production from prorated fields to summer rates.
"As the gas industry has moved away from more orderly, long term marketing to markets driven by spot prices, regulators have had to find new ways to respond to perceived changes as well as actual changes,' Graves said. "We must be cognizant of changes in the marketplace to set up a regulatory framework that will allow us to respond.
"In adopting new gas proration systems, we have to be sure we are looking as far forward as possible to analyze where trends are leading and where we're going to be 10-15 years from now,
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
