Mobil Oil Corp., the nations's third largest petroleum company, could have commenced production of natural gas from an offshore field in the Gulf of Mexico in November 1975. But deliveries actually did not start until last September, or 10 months later. In the meantime, the interstate price of recently developed natural gas was increased by the Federal Power Commission.
Was it a case of a natural gas production withholding already discovered resources to take advantage of higher prices, as some members of Congress suggested last week? Or was it an example of bad federal government regulation, as Mobil contends?
The allegations that producers withhold natural gas from the market or provide inaccurate reporting of their known discoveries - seeking to show less gas than they have and thus to show dwindling supplies in the hope that federal price ceilings will be lifted - have been central to this nation's natural gas controversy for many years.
Last week, for example, Sen. Howard Metzenbaum (D-Ohio) asked the Interior Department to investigate whether producers are withholding supplies. He also accused producers of using the current shortage of gas for delivery in the pipeline system to win deregulation of gas prices, an accusation echoed separately by Tennessee Public Service Commission chairman Bob Clement.
A spokesman for the major and independent gas producers termed such charges "stale, inaccurate and irresponsible." In a letter to Interior Secretary Cecil D. Andrus, Natural Gas Suppy Committee executive vice president David H. Foster said, " Once again, those who have created and endorse the structure of price controls, which is the primary cause of the shortage of natural gas in the interstate market, are seeking to confuse the American public and delay the only realistic legislative solution to the problem."
White House Press Secretary Jody Powell said President Carter intends to order an investgation within the next 10 days into whether shortages are real or contrived. He said current government information, based on industry reports, provides no data "to support the contention that there is a major withholding of natural gas . . . That is whey we are making our own determination. I repeat our determination to arrive at our own independent assessment."
Staff members of the House Commerce Subcommittee on Oversight and investigations, headed by Rep. John E. Moss (D-Calif.), already have launched a similar investigation and they are seeking to study depth five or six case histories of what could be interpreted as producer withholding.
The example of Grand ise 95 Field, operated by Mobil off Louisiana, already has been investigatd. A report from the Moss subcommittee last year, including dissents by two congressmen from Texas, provided evidence of the complex issues involved but no definitive answers that could end the controversy.
Moss concluded that Mobil acted "contrary to the public interest" by not delivering gas from the outer-continental-shelf field during last winter and last summer, which could have replenished shortage fields in preparation for the current cold spell. He said the company stands to make extra profits from the delay.
Mobil denied the Moss allegations and blamed the Federal Power Commission for the delay. The regulatory agency asked for extensive additional material when a certificate to begin delivery as sought by Mobil and attempted to "rewrite our contract" in an unprecedented and unlawful way, the company replied.
Rep. W.S. (Bill) Stuckey Jr. (D-Ga.) said both the company and the commission were to blame. "The FPC showed that their procedural mechanism was both unreliable and inefficient when they neglected to expedite consideration of Mobil's certification. On the other hand, Mobil, although genuinely interested in protecting their legal rights over some vital issues under litigation, did not act responsible in seeking to expedite production from Grand Isle, 95," he said.
Two lawyers for the FPC were quoted at public hearings on the issue as agreeing there was evidence of "intentional withholding" of gas production by Mobil.
The Grand Isle field in questions is composed of four leases 42 miles of Louisiana. Starting in 1972, Mobil and Gulf Oil Corp. jointly acquired leases for the federal fields, and Mobil subsequently developed the offshore tract after drilling a "wildcat" well and discovering a natural gas reservoir late that year. The companies paid $60 million for the lease.
At least 350 billion cubic feet of gas are under the four tracts in question, a field Mobil will draw on for up to 20 years. In March 1975, Mobil singed a contract with Trunkline Gas Co., an interstate pipeline, under which the pipeline advanced $30 million to Mobil to pay for costs of exploration adn development (all costs but the lease) in exchange for future sales of gas.
The contract included provisions reservings 25 per cent of the gas for a Mobil refinery and included a 10-year time span compared with 20 years in many previous gas sales agreements.
Mobil came to the FPC soon after the contract ws signed, seeking an agency certificate to sell gas to Trunkline and noting that the interstate pipeline had suffered a severe curtailment the previous winter and could benefit from supplies hooked up in November 1975. The contract price was 80 cents per thousand cubic feet, but Mobil agreed to accept the then-prevailing FPC ceiling of 52 cents a thousand cubic feet.
In the months that followed, Mobil and the FPC could not reach agreement on the contract. Not until last May was the dispute ended when Mobil agreed to extend the life of its contract with Trunkline to 15 years. Connecting lines were built and gas started flowing through the pipeline last Sept. 2. From two platforms, Mobil and Gulf have been producing 209 million cubic feet a day. A third platform is expected to be put in use Monday or Tuesday, a Mobil spokesman said Last week.
After gradual increases this month and next, daily output will be an estimated 276 million cubic feet by April, he added.
Moss and several colleagues on his committee said Mobil's refusal to accept any FPC certificate in 1975 was unreasonable, especially because federal leases were involved. In addition, they noted that development costs (which added up ultimately to $37 million) were supplied in advance by the pipeline firm and its consumers. Resources that could have been used in the winter of 1975-1976 were denied two pipelines then in short supply - Trunkine and Texas Eastern - Moss added.
Mobil sells its 55 per cent share of the gas to Trunkline, while Gulf sells to Texas Eastern. Among regions served by two pipelines are the hard-pressed Midwest and Northeast states. Columbia Gas Transmission Corp., major pipeline supplies to metropoltian Washington, is a Trunkline customer.
Mobil's manager for natural gas, J. E. Earnest, agreed with Moss that some 60 to 70 million cubic feet per day of gas could have gone to consumer starting in November 1975 because the initial offshore platform production facilities were ready. But he rejected the charge that Mobil witheld the gas.
"It is obviously to our benefit to generate revenue as quickly as possible. The advance payments which Trunkline advaned to Mobil under the terms of our contract went for exploration and deveopment expenditures which will have to be repaid. But Mobil also invested about $33 million in lease bonuses, and those were not covered by any advance payments. In view of this large capital investment, Mobil has no incentive to withhold production," Earnest wrote to Moss last Sept. 22.
In an Oct. 12 reply, Moss said "there was no justification" for Mobil to obtain FPC certification based on a 10-year contract, "given the substantial quantity of reserves involved. The public is entitled to an assured supply and price for at least 20 years, especially for gas on public lands."
The California Democrat, long an industry foe and an opponent of ending price ceilings, also said Mobil's statement about generating revenue "as quickly as possible" was not supported. But not delivering gas for eight months at the old FPC ceiling of 53 cents a thousand cubic feet, Mobil now will sell at higher prices approved last July by the regulatory agency. "And Mobil's share of this additional revenue will more than offset the interest payments on the $33 million Mobil has invested in lease bonuses in this field to date," he wrote Earnest.
Under last year's FPC decision - being challenged by consumer groups and Moss - interstate gas now can be sold $1.44 a thousand cubic feet; the price is increasing by one cent every four months and will be $1.45 f thousand cubic feet after April 1, for example. Because there is a great deal of gas being sold under contract at lower prices, the average price today for natural gas is about $1 a thousand cubic feet compared with prices in the unregulated, intrastate markets of more than $2. All figures are for producers' prices at the wellhead.
Because Mobil's drilling began before Jan. 1, 1975, the price it can charge for some of the offshore Louisiana gas apparently will be 93 cents a thousand cubic feet.
Reps. James M. Collins (R-Tex.) and Robert Krueger (D-Tex.) took strong exception to the Moss attack on Mobil, "especially that conclusion which specifies that Mobil intentionally withheld gas from the interstate market."
They said Mobil moved so quickly in developing the natural gas field that they were ready for production ahead of all but one other tract aquired in the 1972 lease. This "illustrates an example of a company that is striving earnestly and in good faith to produce gas for the interstate market," the Texans stated.
No problems developed until the FPC got Mobil's application, Collins and Krueger contended. They said the agency did not indicate in any way to Mobil there questions about the Mobil contract. Morever, all the controversial provisions - 10-year term, 25 per cent reservation of gas for Mobil, depth limitations - had been accepted by the FPC in earlier contracts.
It was no until June 1975, they said, that it became apparent that the FPC was reconsidering policy on these issues. Subsequently, FPC offered temporary certificates to Mobil including reservations on the controversial provisions, which the oil company rejected. The final sticking point was the 10-year term, to which Mobil remained committed.
"What we find here is the ever prevalent morass of bureaucratic 'red tape', changing rules in the middle of the game and failure to act with dispatch," said Collins and Krueger of the FPC. "It is this and other similar fact situations that have made us call for less government regulation."
Stuckey concluded that Trunkline Gas Pipeline Co., and consumers ended up as apparent losers in the Grand Isle 95 controversy. "As to Mobil, it seems to me that profit incentives should not be blinders to the exclusion of public welfare. A reduction in supply could adversely affect agricultural production industrial output and its concomitant unemployment, and more importantly, public health. Such a disregard is inexcusable."
But the FPC also demonstrated "bureaucratic ineptitude . . . the inability of the FPC to make a timely determination that would result in increased natural gas production and delivery demonstrations a total insensitivity for the public health and welfare," he concluded.
No party to the Grand Isle 95 dispute has accepted blame to date, but the case shows some of the problems involved in adding already discovered gas reserved to the national market. In addition, the Grand Isle 95 example raises questions about accurate reporting of those discovered reserves.
Although Oil and Gas Journal reported on Oct. 28, 1974, that a big supply had been struck in the offshore drilling, the American Gas Association reports during late 1974 excluded the discovered natural gas from its estimates of the nation's reserve at that time. Moss subcommittee staff members said Mobil was listing the field's reserves at 398 billion cubic feet.
The question of proved reserves of natural gas is important because the FPC determines cost for few new gas in part on productivity of drilling. If discovered resources are under-reported, the productivity factor would be distorted.
In a current case before the U.S. Court of Appeals, where the FPC's action last year approving higher rates is being challenged, participants in the legal challenge assert that, at least since 1969, gas industry reserves data have been understand. The FPC itself has concluded that gas industry data for recent years are "unreliable." Among parties to the lawsuit, which seeks to declare the FPC rate increase illegal, are Sen. Hubert H. Humphrey (D-Minn.), the American Public Gas Association, Consumer Federation of America, the State of Minnesota, the U.S. Conference of Mayors, and public service commissions in New Jersey and Wisconsin.
According to the American Gas Association, which compiles the industry figures on which government has relied, discovered and proved natural gas desposits in the lower 48 states have declined every year since 1967. Production of gas has exceeded new discoveries over the same time span, except for 1975, when there were more discoveries and production fell. In any event, the current consumption will deplete currently discovered sources of natural gas within 12 years, according to industry estimates.
But there remain large quantities of natural gas still to be discovered, according to most government and private studies. The consensus of five studies in recent years is that there are about 600 trillion cubic feet of gas underground or under water. Added to proved reserves (already discovered) that could mean more than 40 years of natural gas supplies. And, if new technology permits discovery or creation of other natural or synthetic gas supplies would last longer.
The five studies estimating undiscovered natural gas resources were complied by the National Academy of Survey, Institute of Gas Technology and the Potential Gas Committee of the Colorado School of Mines. The USGS estimates was in a range of 322 trillion cubic feet to 655 trillion cubic feet, both the highest and lowest estimates in the five reports.