Take-or-Pay Exposure among Natural Gas Pipelines Drops

By Fears, Ronda | THE JOURNAL RECORD, February 2, 1990 | Go to article overview

Take-or-Pay Exposure among Natural Gas Pipelines Drops


Fears, Ronda, THE JOURNAL RECORD


Federal regulators cite a 77.6 percent decline in take-or-pay exposure among natural gas pipelines in refusing numerous requests to rehear the controversial open access transportation rule.

Producers especially are opposed to the Federal Energy Regulatory Commission Order 500-H, which allows pipelines to recoup some take-or-pay costs. The final order, which was approved in mid-December, extended the timeframe for pipelines to recover costs from the previous deadline of March 31, 1989, to Dec. 31.

While pipelines can recoup up to 50 percent of take-or-pay costs to their customers, producers have no mechanism to recover their losses.

Outstanding take-or-pay exposure to natural gas pipelines across the nation have been lessened 77.6 percent from $10.7 billion in 1986 to $2.4 billion as of March 31, 1989, Federal Energy Regulatory Commission says.

"These facts demonstrate that pipelines, producers and consumers have been sharing in the burden of resolving the take-or-pay problem," the commission asserts.

Producers, distributors and consumers disagree.

Associated Gas Distributors and the American Gas Association disputed the proposed rule, leading to five years of litigation.

Appellate courts ordered the Federal Energy Regulatory Commission to issue a final rule by Dec. 15 and explain why it had not used authority granted by the Natural Gas Act to abrogate contracts as a means to eliminate take-or-pay.

Federal Energy Regulatory Commission refused to invoke its authority on contracts even in the final order, insisting that it would be ineffective, inequitable and inconsistent with its attempt to foster a competitive gas market.

"In any event . . . pipelines are resolving take-or-pay through settlements," the commission said.

Producers argue they are getting the short end of the stick in settlements, especially since so many small producers cannot afford prolonged legal cases. Some say they are recovering pennies on the dollar in take-or-pay settlements.

The only reconsideration Federal Energy Regulatory Commission granted on Order 500-H was on the notice period before pipelines may apply take-or-pay credits to must-take gas. The commission extended the period from 30 days to 60 days.

The dispute is not likely over, though. Several indications have been made that the final order will be challenged in the courts. . .

- Energy analysts predict an overall 5 to 15 percent rise in natural gas prices for 1990 and that domestic drilling will lean toward natural gas.

There had been a marked inclination among the oil and gas industry toward natural gas drilling in mid-1989, perpetuated by talks of a new Clean Air Act, according to surveys by Petroleum Infomation.

The industry, however, by yearend indicated that 1990 drilling will continue to be weighted more heavily on oil. Producers say there has been no real sign of rising natural gas prices outside of the unusual cold blast in December, and many fear that natural gas futures trading will be detrimental to prices.

Monthly natural gas spot prices remained fairly constant through most of 1989, ranging from an estimated $1.48 to $1.78 per million British thermal unit. The range excludes highs set in January and December 1989.

Arnold E. Safer, president of the Energy Futures Group, predicts the 9.6 percent rise in January gas prices will contribute to an unprecedented surge in average first quarter prices. He forecasts a significant decline in second quarter, but still not to 1989 levels due to continued demand for storage.

Third and fourth quarter prices, Safer said, will rise 5 to 15 percent higher than last year's levels, "depending upon the magnitude of summer electric generation requirements."

Natural gas futures are targeted to begin trading in April, but Safer did not speculate what effect that will have on prices.

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