To natural gas producers in the U.S., price has become an obsession. Rightly so. No one thought that gas late in the winter of 1991-92 would sell at the wellhead for less than $1/Mcf. Once again, many producers, most of them small independents, must struggle to survive, fates dependent on volatile spot and futures markets.
Pressed by desperate producers, therefore, Oklahoma and Texas might tighten production allowables. Supporters of the move argue conservation but mostly want higher prices. Aside from the philosophical questions raised by government market intrusions, they make a compelling case.
OTHER PROBLEMS
The market does not treat all producers equally. Gas production shut-ins are not all alike. Some producers can constrict output more easily than others can. Prorationing can help smooth out these inequities. Without deeper prorationing, persistently low prices will force more producers out of business.
If the gas industry business did not have other problems, these and other such facts of business life might eclipse the philosophical objections to prorationing. But the industry does have other problems-problems that prorationing could only make worse.
The gas industry has arrived at an economic and regulatory crossroads. Decisions made now-by producers, by pipelines, by gas consumers, and by regulators-will shape the gas market for years into the future. All decisions must take into account the long term effect on demand.
To cash-hungry producers selling gas at less than replacement cost, prorationing no doubt seems like the last remaining route to. the long term. Yet prorationing represents a temporary fix at best on the supply side of the market equation. On the demand side it could mean permanent loss.
According to conventional wisdom, most gas market growth potential resides in power generation. Nonutility generators, however, have slowed capacity additions pending reform of the Public Utility Holding Company Act. And utility managers and their regulators harbor astonishing doubts about the long term security of natural gas supply and stability of the fuel's price. That misconception must change and do so quickly if gas is to secure its logical place in the long term power generation fuel mix. How can it, however, with so much gas changing hands under on-and-off, 30 day agreements and producing state Governments contriving shortage to prop up the price?
Producers don't have to cheer $1/Mcf gas for the lift it gives demand. They do, however, need to acknowledge the possibility, that prices won't improve much anytime soon, even if winters turn cold again. Deliverability somehow appears when needed despite prices below $1.50/Mcf. Maybe it can't do so much longer. Then again, maybe it can. Technology and cost-conscious management work wonders these days.
CULTIVATING SUPPLY
That's part of the problem. The gas industry in recent years has cultivated supply better than it has demand. Environmental imperatives, ever-improving consumption economics, and regulatory efforts to make transportation more competitive promise a new and better future for gas. But that future won't materialize without new markets. And new markets won't develop if prospective customers continue to doubt security of gas supply.
The gas industry must make market development its top priority-a tall order for producers trying just to survive. Measures that stifle gas market potential can only prolong a dreary status quo.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
