Application of Exploration and Production Cost Trends to Determination of Fair-Market Gas Prices

Abstract

Abstract The purpose of this paper is to outline a method of determining fair-market prices for gas sold in interstate commerce. The Supreme Court of the United States, in the Phillips Decision of 1954, held that a producer who sells gas in interstate commerce is subject to regulation by the Federal Power Commission. The Federal Power Commission was, in effect, ordered to regulate gas prices paid to gas producers. It has been interpreted by the courts that under utility-type regulation it is necessary to consider the cost of service of producing gas in determining a just and reasonable price. Neither the Federal Power Commission nor the gas producers have been able to establish fair and reasonable prices in any instance based on this concept. One important reason for such failure can be attributed to the impossible task of allocating costs between oil and gas on a realistic basis. A more practical approach to this problem would be to use as a starting point prices established in a competitive market prior to regulation, adjusted for increases in costs since that time. The average weighted increase in the costs of exploration and production over the past 10 years amounts to approximately 108 percent. The application of this weighted increase in costs to prices established in 1948 can be used to determine prices for current years as a point of departure for the purpose of establishing specific prices. Points of departure determined by this method indicate a price of 17.7 cents/Mcf in 1957, 19 cents/Mcf in 1958 and approximately 21 cents/Mfc in 1959 for South Louisiana. Specific prices for this area could be determined by such modifying factors as reserves, deliverability, location, quality and pressure of the gas. Introduction Technical journals and magazines periodically have carried articles on the increasing costs of both exploration and production. As a rule, these studies are expressed in terms of cost per barrel of oil found and of oil produced. This is only natural because, after all, we have all grown up under an oil economy where a barrel of oil was the basic measuring unit. Traditionally, where gas and oil were produced together, most of the income and all of the costs have been related to a barrel of oil - gas was only a by-product or a fire hazard; it was flared or sold at give-away prices.