Natural Gas

As concern over what is termed the U.S. "energy crisis" mounted during the year, the Federal Power Commission (FPC) took two actions to alleviate the situation. Both related to natural gas, a fuel accounting for about one-third of nationwide energy consumption and—largely because of its importance in space heating—a far greater share of residential energy use.

In recent years the consumption of natural gas has increased at an annual rate of around 7 percent, much faster than that of the other fossil fuels. There are indications that not enough natural gas will be available domestically to accommodate continued national increases in demand. Even now, in a number of utility areas around the country, distributors are beginning to refuse new gas hookups for certain classes of customers.

Although it is widely agreed that immense gas resources remain to be discovered in the United States, the ratio of U.S. proved reserves to annual production has fallen continuously over the last several decades. Until 1967, however, additions to reserves still were somewhat larger than production, so that the reserve total rose modestly each year. Since then reserves have been falling absolutely, even if one includes the reserve additions presently ascribed to the Alaskan North Slope. Reasons for this state of affairs are a subject of intense debate, but the inhibiting effect of governmentally regulated ceilings on the field price of gas has been singled out most often as the principal contributing factor if not the sole one. An RFF study published during the year (Regulation of the Natural Gas Producing Industry, based on seminar papers by legal and economic experts from industry, universities, and other research institutions) reflected that judgment by stating in a summary presentation:

FPC regulation of the maximum price that jurisdictional purchasers are allowed to pay producers of natural gas seems to have been at least partially responsible for the current unsatisfactory conditions existing in the natural gas producing and distributing industries. At current price levels, the quantity of gas demanded by consumers considerably exceeds that which producers are willing to supply. There is no evidence that large enough quantities of substitutes for natural gas produced in the forty-eight contiguous states (gas from coal or oil, Canadian imports by pipeline, or liquefied natural gas from Alaska or foreign countries) will be available in the next decade to substantially reduce the projected demand growth for natural gas, either at current or prospective equilibrium natural gas prices. Therefore, providing market conditions under which quantity of natural gas supplied is likely to increase to quantity demanded seems to be the only way to end the current problem.

An anomalous consequence of natural gas price regulation is the fact that this environmentally most desirable fuel has been priced below "dirtier" alternative fuels and has been channeled into what some regard as less-than-optimum uses (e.g., as an electric utility boiler fuel: in 1970, natural gas was priced 13 cents/million Btu below oil and 2 cents/million Btu below coal). Attempts to increase natural gas availability for U.S. users include the importation of Algerian liquefied natural gas (LNG) and efforts to obtain gas from coal. Both of these sources, however, are presently judged to result in prices far above those of controlled wellhead prices today.

During 1972, the FPC took the first major step towards changing its regulatory approach to natural gas pricing. Citing a "worsening of the gap between natural gas demand and supply," the commission adopted a new policy, which gives producers the option of selling supplies of natural gas in interstate markets at a level above prevailing area wellhead price ceilings. This rule covers only newly discovered reserves or those diverted from the intra-state market, which is not subject to FPC regulation. Although it retains the power to modify or disapprove prices so negotiated, the FPC clearly has instituted the new measure in order to encourage the search for new gas reserves and their subsequent development.

In November, the FPC sanctioned the first contract under the new rules. It provided for a wellhead price of around 26 cents/1,000 cubic feet—some 5 cents above the existing price ceilings for the producing area in question. It will perhaps take some years—and conceivably, additional policy encouragement—before one can tell whether the recent change has had the desired effect of eliciting substantial additions to domestic natural gas reserves.

Steps leading to the importation of the first significant quantities of imported liquefied natural gas (LNG) were taken during the year when the commission authorized the importation over a 25-year period of Algerian LNG in amounts rising to a daily volume of 1 cubic feet. The anticipated first full year of LNG deliveries on the U.S. East Coast is 1977. The gas would be shipped by the El Paso Natural Gas Company in nine tankers specially built for maintaining temperatures of -260F. The gas would be sold to three major pipelines and would represent between 10 to 20 percent of their total natural gas supplies. The imported gas will cost approximately 60 percent more than the East Coast delivered price of domestic gas. Three of the tankers will be built in U.S. shipyards with $76 million in Federal Maritime Administration construction cost subsidies. Another $64 million in these subsidies has been authorized for construction in domestic yards of three additional LNG tankers.

The FPC will require that pipelines charge their distributor-customers with the considerably higher cost of the imported gas rather than with the lower cost of their overall (domestic plus foreign) gas deliveries. The FPC rescinded an earlier ruling, which would have compelled local gas utilities to bill their ultimate customers on the high incremental-cost basis, but even the rule finally adopted introduces a novel element in pricing policy. It could, for example, prompt local public regulatory bodies to be much more sensitive to the availability of alternative gas supplies at lower cost. It could also prompt these bodies to do what the FPC was finally unwilling to do—force final customers to bear the full marginal cost of these incremental supplies.

In these and other ways that will undoubtedly surface in the future, the prospective introduction of LNG to the U.S energy scene promises to trigger entirely new issues and controversy. The environmental aspects of the terminal facilities needed for receiving and regasifying the LNG shipments were subjected throughout much of the year to critical scrutiny. And the prospect—coming to light at year's end—of possibly substantial LNG imports from the Soviet Union seems bound, in the wake of the Algerian agreements already reached, to raise the national security implications of increased external energy dependence for natural gas, just as has perennially been the case with oil.