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Texas Producers Call for Tighter Regulation Over Pipeline Operators

Natural gas producers, able to publicly air their grievances in hearings before the Texas Railroad Commission (RRC), are repeating one belief again and again: the lack of competition in Texas enables pipeline operators to dictate the contract terms for shipping gas to the marketplace. This lack of competition, they say, controls where they drill wells more than the geology.

In a series of seven hearings across the state, RRC commissioners have been listening to producers, pipe operators and association members as part of a study on natural gas competition. The RRC is mandated to issue a report to the Texas Legislature by late 2006, which lawmakers may use for possible regulatory changes in the 2007 session.

At the heart of the controversy is the informal complaint process now used by the RRC. The system, set up 10 years ago, has handled only 92 gas gathering disputes between gatherers and producers, and producers are pressing for changes to make the process more equitable. The RRC estimates that 80% of the complaints are by independent producers against gatherers, and the rest are by end-users against transmission companies and local distribution companies. Nearly 60% file gas price complaints; 40% file grievances concerning access issues.

"The problem is simple and straightforward in many areas of Texas," said Alex Mills of the Texas Alliance of Energy Producers. "Natural gas pipelines -- both gathering and transmission lines -- operate without any effective competition...This means that the pipelines have what we call a monopoly or monopsony. Producers, and others, have no alternative means to move their gas or to get it processed and made ready for market. They have no market access -- only the monopoly pipeline has the market access. This prevents competitive markets from having a chance to work."

Midland, TX-based producer Clayton W. Williams Jr. said he can't afford to produce gas in Texas. Williams' company produces gas in Louisiana and transports it to the interstate market for consumers, but the CEO said he cannot do the same thing in Texas because the company cannot negotiate competitive prices with pipeline operators.

"The trouble with natural gas is there's competition when it comes online, but when it's later in the life of the field, there may not be any competition. Nobody can build a pipeline due to the economy."

Research by the West Texas Operations for University of Texas Lands indicates there has been an 8-14% increase in unquantified deductions from pipelines over the past several years. The hike is "pretty substantial" at $1.5-2.5 million a year, and the deductions "appear to be somewhat arbitrary," said executive director Steve Hartmann.

The current situation has many sellers but only one buyer, noted energy economist Karr Ingham. When a well is new and production is at its peak, there are several potential pipeline buyers. However, once a contract is in place and production slows, competition is no longer a factor. "Market circumstance has exercised undue power over the producer," said Ingham.

"In defense of pipelines, they don't believe they are monopolies only because they've never known anything else," said independent producer Gib Brown of H&L Operating Co. LLP. "They believe they invest a lot of capital when, in fact, it's peanuts when compared with that invested, and highly risked, by those who drill wells." Brown said, "great damage has already been done by a huge structural flaw in how our product is gathered and transported. The wild price gyrations, which are currently destroying the gas markets we will need in the future, have been caused, in large part, by the capital which has been sucked out of the upstream side by the midstream and downstream players.

"One might ask why it is that, with only 1,400 rigs running nationwide, there is a shortage of people, pipe, cement, frac sand, you name it, when in 1981 there was sufficient infrastructure to support 4,600 rigs," said Brown. "I submit that though we all believe today's activity is at a 'boom' level with 1,400 rigs running, activity would be, in fact, much higher if all producers had equal and fair access to all pipelines and end-user markets."

However, Crosstex, one of the top gatherers in Texas, said the RRC's current informal complaint system is workable -- if it's used. In its position paper to the commission, Crosstex stated "there are remedies and processes available to individuals that are not in a competitive position -- and those remedies and processes are effective...We do not suggest that there are no abuses -- and these should be addressed. But the laws and regulations in place are adequate, and they work -- if people will use them."

Bob Reis, general counsel of the Gas Processors Association (GPA), added it was "discouraging" that producers advocating stronger regulations "had failed to give the informal complaint process a try just one time..." It appeared, he said, that certain producers are unwilling to use the informal complaint process because of the cost, a lack of response by the RRC and fear of retribution retaliation or intimidation.

"GPA wishes to make it clear that our members do not condone any acts of retribution or retaliation or intimidation against any producer, large or small," said Reis. "If these fears of some producers are found by the commission to have validity, GPA will certainly work with the commission and producers to end such conduct." He said the GPA has come to the conclusion that many of the producers' concerns "are more perceived than real. The belief that some gas gathering fees are unreasonable and unjust is more likely a failure of proper communication between gatherer and producer, as well as a misunderstanding of the gatherer's own costs and concerns in making or continuing a particular gas well connection."

Three more RRC hearings are scheduled on gas competition this week -- Monday (Dec. 5) in Houston, Wednesday (Dec. 7) in Dallas and Thursday (Dec. 8) in Kilgore. For more information on the time and locations of the hearings, visit www.rrc.state.tx.us/divisions/gs/naturalgasstudy/workshops.html . For questions, contact RRC's Danny Bivens at (512) 475-1958.

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