Out along Interstate Highway 10 near Baton Rouge, La., Houston oilmen J. N. Warren and Allan C. King have found what they think is about 25 billion cubic feet of natural gas.
They have spent more than $5 million to survey the area, lease the mineral rights and drill 11 wells. Five of them will produce natural gas, they believe.
Those wells, however, are capped, awaiting the negotiation of rights-of-way, then construction of a 12-mile pipeline through the swamps to Baton Rouge, where a couple of industrial customers have said they will buy the gas.
One well is within 2,000 feet of a major interstate pipeline which carries natural gas under federal price regulation from the state in which it is produced to other states.
Warren and King say they would be happy to sell the gas their Goldking Production Co. found to that interstate pipeline on a regular basis. But not so long as the pipeline is regulated by the Federal Power Commission.
However, the emergency energy legislation enacted on President Carter's recommendation two weeks ago will permit them to sell their gas on a temporary basis to the interstate pipeline without having their reserves become forever a part of the federal system. As a result Warren and King are negotiating to sell gas from two of their wells to that pipeline (Texas Eastern in this case) until Aug. 1.
Goldking's five wells are expected to produce at a rate of 7 million cubic feet a day at their peak. The two wells which will sell temporarily to the interstate market can supply about 3 million cubic feet of gas each day.
The pipeline and the production company are negotiating the terms of their contract with the Federal Power Commission.
King and Warren's aversion to the Federal Power Commission is typical of the attitude of most oil and gas production and drilling companies. Not only do they say that the federal price too low to justify exploring for gas fields, but they add that the uncertainty of dealing with the federal agency is overwhelming.
Of course, while King and Warren may speak for much of the industry, an equally vocal group believes that federal regulation is necessary and that prices set by the FPC permit the industry to make at least a fair - and in some instances, a considerable - profit.
Ten years ago, most natural gas was discovered while companies were searching for oil and most of the gas was committed to the interstate market. Today hardly any of the newly discovered gas is.
There are no federal price controls on gas sold in state in which it is discovered. As a result, nearly all gas discovered today is sold to the interstate market - which has grown from nearly nothing to a huge consuming force.
The price of interstate gas depends upon the region, the size of the reserves and the amount of gas a producer can extract each day. But $2 a thousand cubic foot is the price most analysts, pipeline executives and producers mention.
On the basis of an order issued last summer by the Federal Power Commission, the price of natural gas found after Jan. 1, 1975, or transferred from intrastate to interstate sales, is now $1.44 per thousand cubic feet. But that order is being challenged in court.
"As far as we're concerned, the price is still 52 cents," Warren said. "If we were to get paid $1.44 and the courts rule against us, we'd have to refund the difference plus 9 per cent interest." That illustrates the uncertainties of selling gas to the federal market, he contends.
Warren and King are independent oil production Co., which searches for drills for and sells oil, and gas, and Goldrus Drilling Co. Goldrus is a contract drilling company which hires out its equipment and its men, sometimes to Goldking, sometimes to other oil companies.
King, 47, Warren, 54, look like the bankers who regularly pass through the doors of the downtown Houston bank building where Goldking and Goldrus have their headquarters in a ninth-floor suite of offices. They are independent businessmen who apparently like the big stakes and the big risks involved in exploring for oil and gas.
"Only 1 out of 10 wells the industry drills is successful," says Warren, a crusty, transplanted Mississippian. "And of the producing wells, only half pay for themselves." Out of every 100 wells, on the average, 5 have got to pay for themselves and for the cost of producing from them, as well as for all the losses on the other 95, Warren says.
Today, with most of the shallow, big-producing gas fields already discovered and often well on their way to depletion, exploration must be "deeper, more expensive and in a more adverse environment," Warren maintains.
Like most other independent gas and oil producers, Warren and King believe that federal price controls will hav to be removed to end gas short-ages in the East and Midwest.
"I'm not advocating release of natural gas under contract. Only newly found gas. So the consumer doesn't have to pay a higher price unless he gets more gas for it," Warren says.
"The gas is there," King maintains. But because it is in smaller pockets and at great depths - it costs about 10 times as much to skink a 19,000-foot well as a 6,000-foot well - producers need higher prices to go and look for it.
"We do not drill wells along interstate pipelines." Warren said. "We do not believe we can make a profit dealing with the federal government. Allan and I like to stay in business. We have to make a reasonable profit."
King and Warren say they never would have begun work on their Highway 10 project - with its 25 billion cubic feet of reserves and its production potential of 7 million cubic feet a day - if the only place they could sell it was the federal market at 52 cent per thousand cubic feet.
"The whole economics of our operation was based on getting roughly $2 per thousand cubic feet after we built and developed the wells," Warren said.
King conceded that at $1.44 the profits from the Highway 10 project would be more attractive, but still not attractive enough (and secure enough) to justify starting the project because of the high chance of finding nothing.
While most gas producers would agree with King, a sizeable number of critics of the FPC note that the $1.44 price is seven times what it was at the start of the decade. The FPC itself considers the cost of production and as well as what it considers the likelihood of failure, a reasonable return for producers in setting the ceiling rate.
Even though there is an interstate pipeline closer, "we knew we would have to build a pipeline across the interstate line to get to an intrastate line. We knew that before we started we couldn't afford to sell to the interstate market."
"What is bad about that?" Warren asks. His partner noted that the money they make in this successful project will have to cover not only the $5.6 million they have invested so far, and the costs of producing the gas, but also will have to cover the expense of other exploration that netted no gas or not enough to cover costs.
But Warren said his company is willing to sell gas to the interstate market on an emergency basis "to help out," but not at the federal ceiling price and - more importantly, he says - not without a guarantee that the gas will not become forever more a part of federal gas reserves.
When gas supplies got tight in the Midwest and East, the FPC devised a special 180-day emergency sales procedure under which gas from unrequlated reserves could be sold in the federal market temporarily without becoming part of interstate reserves. The courts said 180 days was too long.
Until emergency legislation was passed two weeks ago, the longest that gas could be sold on an emergency basis was 60 days, a time period so short that it was often uneconomical to lay the needed pipelines.
The new procedure permits emergency sales until Aug. 1. At the rate, it becomes worthwhile to lay some small pipelines on a temporary basis.
King said that one of the wells in the Highway 10 project is within 2,000 feet of an interstate line and can be completed within 10 days.
King also cautions that their estimate of 25 billion cubic feet of reserves could be off substantially. "You never know until you start producing," he said.
It could be as low as 8 billion cubic feet - which they say would mean that Goldking would lose money on the Highway 10 project even at $2 per thousand cubic feet. There is also a possibility that the reserves could be as high as 40 billion cubic feet.
Warren says there are small chunks of gas around like the Higheay 10 project that could help the country a little. But there is not a lot of it. And he denies vehemently that the gas is being "held off the (interstate) market."
The wells are shut-in, he agrees, but only until a pipeline cane be completed to Baton Rouge. The gas "will be on stream next winter. It's not being held off the market. We've got no way of getting it out. You cannot back up a truck to the wells."
"If somebody tells me that I am obligated to go broke to give them gas, then they and I have a different concept about life," Warren says.
Those people - like Pennsylvania Gov. Milton J. Shapp - who "think you can sell gas at 52 cents, let them take some of their money down here - there's nothing stopping them - and let them do it."