Some Considerations in the Pricing of Natural Gas
- Kenneth H. Hill (Eastman Dillon, Union Securities & Co.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- July 1960
- Document Type
- Journal Paper
- 17 - 18
- 1960. Original copyright American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc. Copyright has expired.
- 4.6 Natural Gas
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In his paper entitled "A Management Look at Natural Gas", W.B. Golush discusses the natural gas industry thoroughly and capably, pointing to the various problems which confront it. The purpose of this article is to offer some additional thoughts, concerning the natural gas producing industry, which relate to the Golush paper.
It should not be construed from anything said herein that wellhead regulation of producers' prices by the FPC is favored. Quite the contrary, for we agree with the author that "the prices paid for natural gas at the wellhead should be set by normal supply-demand relationships".
Transport Costs Restrict Gas Markets
The first point to be made relates to prices paid at the wellhead for natural gas as related to oil and other forms of energy, in particular, on a Btu basis. It is true that natural gas is sold at an average price at the wellhead of about 12/Mcf, or around one-fifth of the equivalent Btu price for crude oil at the wellhead. But, new contracts are now negotiated at 16 to 24/Mcf in Louisiana and Texas. However, the low average price for natural gas relative to its energy value is due mainly to transportation costs to distant markets which, on an energy basis, are roughly five-fold greater than for petroleum. This very great differential in transportation costs seems to be ignored by many recent commentators on the natural gas industry, who deplore the apparent fact that the producer is giving away his gas and that revenues from gas are not carrying their share of exploration. This, at best, is only partially true. For, if natural gas were sold at the wellhead at 55/Mcf, its approximate crude-oil Btu equivalent, it would lose nearly all its market because it would be used only for very local and special uses.
As proof of this, even in California the price of natural gas in the field is at most 35/Mcf, or two-thirds of its estimated Btu basis, and is tied to fuel oil-not crude. Yet these reserves are adjacent to tremendous markets supplied principally from West Texas, some 1,200 miles distant, where the wellhead price averages only 12 to 14/Mcf. New gas contracts in Southern Louisiana, now being made at 20 to 24/Mcf, are probably approaching a level which renders the gas barely competitive with other fuels in New York. So, if prices in the field were to approach an energy basis, the industry would lose such a large proportion of its demand that it would suffer a reduction rather than a gain in revenues.
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