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INGAA Goes One-on-One With Gas Producers

INGAA Goes One-on-One With Gas Producers

A major pipeline group last week challenged producers' assertions that they would be competitively disadvantaged if regulators were to clear the way for lighter-handed regulation of natural gas pipelines.

Producer claims are based on "two highly questionable arguments: first, that natural gas market growth requires more regulation of pipelines; and second, that if regulators do not reduce pipeline rates, wellhead revenues will fall by $20 million a year, resulting in a significant loss of gas supplies," according to the Interstate Natural Gas Association of America (INGAA) in a briefing paper released last week. The paper responded point-by-point to comments made by Richard Sharples, president of Anadarko Energy Services, during a speech he gave last month on behalf of the Natural Gas Supply Association (NGSA).

INGAA disputed that pipelines still were monopolies. "Today, as a result of industry growth, consumers in market areas have access to multiple supply basins through multiple pipelines. It is difficult to argue that natural gas pipelines operate as natural monopolies under such conditions," the pipeline group countered. "This is not to say that market power does not exist in the gas transportation business. But the growth of competitive gas commodity markets that has followed the deregulation of gas wellhead markets and the restructuring and interconnection of the pipeline industry has vastly reduced the degree to which pipelines can exercise market power."

Sharples had argued that wellhead revenues would nose-dive by $20 million annually if pipeline and distribution rates weren't cut. That's about two-thirds of the $31 million that producers spent last year to find, develop and acquire oil and gas reserves. In contrast, pipelines have invested $26 billion over the past decade to expand capacity.

Producers believe pipelines should have "no problem doing that [raising that amount of capital] again over the next decade, even if regulators clamp down on their rates in order to give producers more money," INGAA said. But, "starving pipelines of capital is no way to increase producer revenues. The way to increase producer revenues is to build more pipelines where they are needed. As more pipeline capacity is built, more gas can move to market. This reduces the build-up of gas supplies 'behind the pipe' and allows gas supply prices to increase. Therefore, gas producers benefit from additional pipeline capacity."

To bolster producer arguments, Sharples also cited a Department of Energy (DOE) report that forecasted that, in order to achieve a 30 Tcf market, the average wellhead price would have to rise to $2.40/Mcf from a 1995 price of $1.61/Mcf, while transmission and distribution margins would have to decline to $1.44/Mcf from a 1995 level of $2.13/Mcf.

"It is not clear why gas wellhead prices will have to increase by more than the projected 49%, while transmission and distribution margins will have to decline by more than the projected 32% in order to achieve the projected 30 Tcf gas supply," INGAA said. "Producers must believe that the rules of the marketplace work differently for [them] than for pipelines. The way to get rates down is to promote competition, not increase regulation."

The NGSA last week took issue with INGAA response paper, saying it "misrepresents" Sharples "straight-forward message." In the end, "the question still remains: How can policies that effectively deregulate monopolies and unnecessarily raise the gas transportation rates lead to significant increased gas sales?"

Susan Parker

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