CHAPTER 13 WHAT IS HAPPENING TO OUR NATURAL GAS MARKETS?

• Jurisdiction: United States

Natural Gas Marketing
(May 1987)
CHAPTER 13
WHAT IS HAPPENING TO OUR NATURAL GAS MARKETS?
David W. Wilson
Gas Acquisition Services, Inc.
Denver, Colorado

I am here today to talk about what is happening in our gas markets. We seem to be in the current mode of extreme intra-industry fighting while our markets continue to deteriorate. Today I want to point out just a few of the ramifications of this reduced gas demand and talk about a few things that need to be done to stabilize our industry.

First, since we are in New Mexico, lets look at the New Mexico situation. There are three primary consuming states that buy New Mexico gas — New Mexico, California and Arizona. Between 1985 and 1986, total demand in those three states fell from 1997 bcf to 1680 — a drop of 16%. This demand drop has occurred in spite of approximately a 25% price drop in average delivered price. Yet many in the state of New Mexico have been told by representatives of some major interstate pipelines that the problems in the state of New Mexico producing areas is "open access" transportation! That argument is ridiculous on its' face. The facts are that without the volumes of spot gas being available through what transportation is being offered, the reduction in gas demand would have been even greater. Also, the pipeline purchasing practices in the early 1980's of buying deep decontrolled gas, tight gas, and imported LNG at prices that reached $12 per mcf (with significant amounts from their own producing affiliates) did more to encourage additional uneconomic supplies and to reduce demand than any other single factor in the gas industry! The market signals these practices sent to both producers and end users were exactly the wrong signals at the wrong time.

This drop in demand, which, incidentally, has not yet abated, has led to the myriad of problems being faced in the gas producing areas. For this and other reasons, the pipelines have generally not honored their contracts with producers. This has particularly impacted small producers since most of them are very reluctant to pursue litigation. Most fear that during the period of litigation that they will not be able to sell their share of gas to the pipeline that they have sued — with some justification. Those producers that are large enough to absorb reduced gas sales have found that the courts have generally upheld their contract rights.

The drop in overall U.S. demand has also led to the price drop experienced in all...