Society of Petroleum Engineers 6200 North Central Expressway Dallas, Texas 75206

THIS PAPER IS SUBJECT TO CORRECTION

American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.

Abstract

The price of natural gas at the wellhead affects the profitability and eventually the ability of producers to supply natural gas at a rate which is at least equal to its depletion from consumption. The fundamental problem in natural gas economics is setting gas problem in natural gas economics is setting gas prices which stimulate new gas reserves, prices which stimulate new gas reserves, while maintaining a minimum contribution to inflation and other consumer costs.

In this paper two statistical models are used to evaluate the effect of several gas pricing formulas on past reserve additions and pricing formulas on past reserve additions and future reserve additions. Included in the pricing formulas considered are the FPC pricing formulas considered are the FPC proposed price increase in gas price to $1.42 per proposed price increase in gas price to $1.42 per MCF, tieing gas prices to inflation rates, and setting gas prices equal to the price of oil on a BTU basis.

Results of this study indicate that FPC pricing formulas between 1961 and 1975 pricing formulas between 1961 and 1975 reduced new reserve additions over 50 percent over what they would have been without regulation. Future pricing would never have been necessary if gas formulas, even with an increase in the new wellhead price of gas to around $1.42, will not overcome current deficiencies in gas reserves, and may even retard new additions to reserves if old pricing formulas are reinstated.

Introduction

Beginning with wellhead price controls imposed on the gas industry in the early sixties, controversy has surrounded the pricing formula for setting wellhead gas prices. Consumer groups argue that the price is too high, regardless of what gas prices may be. Industry on the other hand has suffered a form of "regulatory lag," where actual wellhead prices lag behind the cost of finding and producing gas. With insufficient incentives new additions to reserves have been less than they would had prices been set in a manner consistent with prices been set in a manner consistent with gas industry economics.

In this paper we are concerned with evaluating the effect of past pricing formulas on reserve additions, and, more importantly, estimating gains in new reserves between now and 1980 from instituting practicing more practical pricing formulas. pricing formulas.

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