TRC PLANS TO FINE TUNE GAS PRORATIONING RULES

The Texas Railroad Commission is scheduled to adjust rules in place since July 1992 to balance the state's gas production with market demand.

TRC commissioners say adjustments are needed to fine tune parts of the state's gas prorationing system that are not functioning as intended.

TRC Commissioner Barry Williamson said commissioners have asked the commission's oil and gas staff to develop a detailed plan for a series of corrections of perceived problems. Changes are likely in five key problem areas under commission review:

Operation of the forecast correction adjustment (FCA) factors used to balance monthly production forecasts with production.
Assignments of improper allowables to wells with sharply declining production.
Situations in which limited wells, those that can't produce at rates near their top allowables, capture allowables they can't use.
Procedures for qualifying gas wells to use the 100% absolute open flow (AOF) exemption.
Technical corrections in factors affecting supplemental change adjustments and commission staff adjustments.

Williamson said FCA factors could be revamped without formally changing commission rules. All other proposed changes would require TRC rulemakings.

MORE ACCURATE FCAS

TRC adjusts monthly production forecasts field by field by comparing what producers say they plan to produce-3 months after the fact-with volumes produced.

Generally, if production from a given field differs from that field's production forecast 3 months earlier, the commission adjusts the field's current market demand forecast to account for previous assignments of inaccurate allowables.

In most cases, adjusting current field market demand forecasts keeps in balance the relative rights of each well in the field to produce gas. However, Williamson said, problems occur when an individual well chronically produces less than its allowable and accrues excess underage.

Texas gas prorationing rules allow a given well a specific length of time-as long as 1 year-to produce enough gas to make up the underage or it loses the right to do so. Rules also allow the commission to cancel twice each year a well's excess accrued underage.

Williamson proposes to change proration rules by phasing out during 3 months from the FCA "the effect of unproducible underage." Such a change likely would cause a one time increase over 3 months of reservoir allowables.

ACCURATE ALLOWABLES

If an operator does not file an MD-1 form to forecast market demand in a prorated gas field, TRC rules currently require the commission to estimate likely demand based on production in the same month a year earlier. That estimate is capped by the greatest volume of monthly gas production recorded in the past 6 months.

However, the faster a well's gas production declines, the less accurate commission demand estimates become.

As a remedy, TRC staff has proposed basing demand estimates on production in the most recent 3 months for which production data are available, normally 3-6 months ago.

Williamson said a shorter look-back period should help prevent assigning excess allowables to wells with a rapid production decline but wouldn't be so restrictive as to discourage an operator from shutting in production for operational or strategic purposes.

In any event, the demand estimated by using a 3 month look-back could be overridden if the operator filed a GC-1 gas well capability form.

LIMITED WELL ALLOWABLES

The TRC staff said a core problem with current proration rules is the large number of limited wells. A limited well is defined as incapable of producing near its top allowable, assigned on the basis of either a GC-1 or 6 month look-back.

Such production shortfalls create problems if FCAs including underages from some wells in a given field in a current month cause allowables to be ratcheted downward for everyone in the field 3 months in the future.

To correct the disparity, TRC staff has proposed to create two classes of limited wells: those that could achieve their top allowables and those that couldn't, with the dividing line a specified percentage.

Incapable wells would be classified as administrative exceptions and removed from normal prorationing routines, while capable wells would remain within the prorating system. The commission could adjust the benchmark percentage as needed, and a well could opt back into the proration system if the operator filed a GC-1.

Williamson said creating two tiers of limited wells would help focus the prorating system on capable wells operators choose not to produce in given months.

TIGHTER AOF DESIGNATIONS

Texas Statewide Rule 31(j) allows a field to be excluded from proration rules if expected market demand is equal to or greater than its production capability. Such fields are dubbed "100% AOF."

Because a large number of prorated fields have achieved 100% AOF status, the TRC staff has become concerned that some unqualified fields are exempt from gas proration rules.

To tighten the qualification procedure, the staff has proposed requiring:

Responsible parties to state in an affidavit that there is demand for all gas in a given field. Only a statement is required at present.
Parties in 100% AOF fields to reaffirm that status every year.

Some fields in the past year might have been reclassified as 100% AOF because of real increases in demand relative to productive capacity. Operators of some other fields likely chose the status to avoid possible loss of allowable under the new gas proration system.

While adding an affidavit requirement would require a formal rule change, Williamson said, "To properly meet our legal mandate, we have to make sure everyone is playing by the rules."