1962 Economic and Valution Symposium, Dallas, March 15–16, 1962


In this paper the term "in-place purchase" of natural gas shall mean the purchase of a developed natural gas productive property by a pipeline company for cash plus a series of installment payments. As such, in-place purchases are but one facet of the larger problem of obtaining a gas supply for interstate pipeline systems. This one facet represents a small but important part of obtaining gas supply, and a generally misunderstood part. This paper is designed to show what in-place purchases are, what in-place purchases are not, and the position of in-place purchases in the larger scheme which is our natural gas industry. This description will be oriented from the general point of view of the problem of obtaining gas supply for an interstate pipeline system, and the effect of the various solutions of this problem upon the parties involved. The paper emphasizes the practical experience gained from participating in the day-to-day gas buying market, as opposed to theories.*

First, what is the gas supply responsibility? Fig. 1 shows the reason for our interstate pipeline system. Gas reserves are concentrated in the Texas-Louisiana area, whereas markets are concentrated in the Northeastern, North Central and Pacific Coast States. The interstate gas pipeline industry has developed, in the large part during the last two decades, to provide a means of moving gas from the areas of concentrated reserves to the areas of concentrated markets as shown in Fig. 2. As shown in Fig. 3, which covers all gas marketed in the United States-intrastate as well as interstate-the gas industry is a sizeable industry; one with a rapid rate of growth; and one in which considerable future growth is expected. Note also that this is an industry of large numbers. For example, the 13 trillion cu ft of gas marketed in 1961 at an approximate average cost of 14 cents/Mcf in the field represents a dollar outlay of $1,820,000,-000. The reserves representing this annual sale, if a 20-year supply and the same unit cost is assumed, would represent a dollar value of $36,400,000,000. Consequently in discussing gas supply, we are at one place-in addition to the federal government-where it cannot be said that $1 billion is an impressively large number.

In this era of growth the obtaining of new gas supply is almost entirely for pipeline expansions. Not only are large quantities of gas required, as shown in Fig. 3, but the problem is complicated by competition, Federal Power Commission control of field prices, Natural Gas Act standards regarding the expansion of pipeline systems, and the large number of parties which must be satisfied in any practical solution to a gas supply problem.

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