Analysis of the Impacts of the Projected Natural Gas Curtailments for the Winter 1975-76

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Analysis of the Impacts of the Projected Natural Gas Curtailments for the Winter

1975-76

November 1975

NTIS order #PB-250623



OFFICE OF TECHNOLOGY ASSESSMENT

CONGRESSIONAL BOARD

Representative

Senator Clifford

SENATE

Olin E. Teague, Texas, Chairman

P. Case, New Jersey, Vice Chairman

HOUSE

Edward M. Kennedy, Morris K. Udall,

MassachusettsArizona

Ernest F. Hollings, George E. Brown, Jr.,South Carolina California

Hubert H. Humphrey, Charles A. Mosher,Minnesota Ohio

Richard S. Schweiker, Marvin L. Esch,Pennsylvania Michigan

Ted Stevens, Marjorie S. Holt,Alaska Maryland

Emilio Q. Daddario, ex officio



Mr .

Mr.

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OFFICE OF TECHNOLOGY ASSESSMENT

DIRECTOR’S OFFICE

Emilio Q. Dad da rio, Director

Daniel V. De Simone, Dep uty Director

GAS CURTAILMENT STUDY GAS CURTAILMENT STUDYTASK FORCE

Jack O’Leary, Chairman

MITRE CorporationRichard Otterson

Brick Institute of America

Wyatt Walker

Continental Oil Co.Harry Thomas

U.S. Steel CorporationGeorge WatkinsEdison Electric Institute

Jeffrey DukeAmerican Paper Institute

E. Linwood TiptonMilk Industry Foundation

J. Hayden BoydMotor Vehicles ManufacturersAssociation

Richard C. PerryUnion Carbide CorporationBru ce MelaasCelanese CorporationWilliam W. Pr itskyThe Aluminum Association

Mr.

Mr .

Ms.

Dr .

Dr.

Mr.

Dr .

Dr .

Mr.

Mr.

REVIEW PANEL

Jack O’Leary, Chairman

MITRE CorporationLee White

Consumer Federation of AmericaJean FoxJoint Center for Political StudiesJack Gibbons

University of TennesseeThomas Cochran

Natural Resources Defense Council

William ThomasAmerican Bar Foundation

Robert SocolowPrinceton UniversityAlbert Fritsch

Center for Science in the PublicInterestJim Sullivan

National Council for PublicAssessment of TechnologyRaymond NeryNorth Carolina UtilitiesCommission

George E. Norman, Jr. Mrs. Sally BloomfieldBurlington Mills Ohio Public Utilities

Charles Reene Commission

Portland Cement Association

John Lawrence

Society of PlasticManufacturers

Robert ShupeBay State Gas Company

T. Michael HoganEast Ohio Gas CompanyR. C. Jaudes

LeClede Gas Compan y

Bill WoodSouthern California GasCompany

ENERGY PROGRAM STAFF

Lionel S. Johns, Program Manager

Alan T. Crane

T. Patrick Gaganidze

Ronald W. Larson

Lind a M. ParkerRichard E. Rowberg

Joanne M. Seder

. . .

Ill



The Honorable Jack BrooksChairman, Committee on

Government OperationsU.S. House of RepresentativesWash in gton , D. C. 20515 .

Dear Mr. Chairman:

On behalf of the Board of the Office of Technology

Assessment, we are pleased to forward a report:An Analysis of the Impacts of the Projected Natural

Gas Curtailments for the Winter 1975-76.

The report was prepared by the Office of TechnologyAssessment with the assistance of a task force of experts conversant with the problems facing the majorconsumers of natural gas and the gas uti l i t ies thisw in te r a s a r e su l t o f t he p ro jec t ed cu r t a i lm en t s . Inaddi t ion, i t was reviewed by a panel represent ing publ icagencies and interest groups and their comments incor-porated.

v



The Honorable Olin E. TeagueChairman of the BoardOffice of Technology AssessmentCongress of the United StatesWashington, D. C. 20515

Dear Mr. Chairman:

In response to the request of the Chairman of theHouse Committee on Government Operations, I am pleasedto subm i t a r epor t en t i t l ed : An Analysis of theImpacts of the Projected Natural Gas Curtailmentsfor the Winter 1975-76.

This report was prepared by the staff of the Officeof Technology Assessment with the assistance of atask force of experts conversant with the problemsfacing the major consumers of natural gas and the gasu t i l i t i e s t h i s w in te r a s a r e su l t o f t he fo recas tnatura l gas shor tage. In add i t ion , t he d ra f t r epor twas reviewed by a panel of representa t ives of publ icagencies and ins t i tu t ions and thei r comments incorporatedin the r epor t .

I t i s an t i c ipa ted tha t t h i s ana lys i s , w h ich iden t i f i e smajor impacts, determines important problem areas,

analyzes shor t - term opt ions for solut ion, and providesbackground data, wil l be of use to Congressionalcommittees concerned with the problems associated withthe projected natura l gas shor tage.

Sincerely,

EMILIO Q. D ADDA RIODirector

vii



PREFACE

On June 24, 1975, the Conservation, Energy, and Natural ResourcesSubcommittee of the House Committee on Government Operationsrequested from the Office of Technology Assessment (OTA) an analysis of the impacts of the projected natural gas shortage for this coming winter of 1975-76. At the time, OTA was performing a detailed assessment of thePlans and Programs of the Energy Research and Development Administra-tion. The study of the natural gas problem complemented the ERDA effortby providing input to staff on near-term energy problems as part of theoverall energy program of OTA. This report presents the results of thenatural gas study.

Natural gas curtailments have been a continuing and growingphenomenon since 1970. Projections published by the Federal Power

Commission for the winter period, November 1, 1975 to March 31, 1976,show that the supp ly of natural gas will be more than 18 percent below firm

contract requirements.1Expressed another way, this curtailment represents

about 40 percent of the estimated demand for natural gas by the industrialand electric utility sectors, in the interstate market, for this coming winter.

2

Therefore, if these projected curtailments are a true measure of thedefic iency facing the Nation th is winter , i t seems unlkely that , at a

m in im um , seve re cons t r a in t s on econom ic ac t iv i ty can be avo ided .

The objectives of this study are to determine the extent to which theseprojected curtailments reflect the actual situation and what the impacts andpotential danger points might be as a result of the natural gas shortage. In

this connection a list of important issues are presented which are intimatel y

related to the overall problem of natural gas shortages and n eed be add ressedin determinin g their solutions.

This study was carried out in two steps. In phase I, a task force composed

of representatives from the trade associations of the major industrialconsumers of natural gas and from the gas utilities was formed to providedata and information for the study. There were 13 industries representedwhich collectively consume over 75 percent of total natural gas use byindustry and electric utilities.

3There were four gas utilities represented

which were selected from different geographical regions of the country. Thetask force was chaired by Mr. Jack O’Leary, Director of Energy and

Environment of the MITRE Corporation. A meeting of this task force washeld on August 28 an d 29, 1975, and focused on the following:

Note: Footnotes appear on last page of this Report.

ix

I 1 - { , 1 ( ) - 7 -, - ?



q A n overall view of the impacts of the gas shortage.

q An analysis of interaction among the industries and between the

industries and gas utilities.

q The ways in which indust ry and the gas ut i l i t ies are a t tempt ing to d e a l

with the problems caused by the natural gas shortage.

Written analyses were also received from the task force members as well asfrom an additional 37 gas utilities. The latter were located in regions which

are projected to be hardest hit by the curtailments. In addition, theyrepresented a wide range in company size with varying degrees of resourcesat their disposal to deal with the shortage.

Phase II of the study consisted of a review of the draft repor t carried outby a panel of representatives of various p ublic institutions and pu blic interestgroups. This meeting was held on October 29, 1975, also chaired by Mr.

O’Leary. This panel was requested to judge the effectiveness of the report,whether it had fairly represented and analyzed the problems, and whetherthere were issues missing from the analyses that needed to be addressed.The modifications and additions resulting from the deliberations of thispanel are incorporated principally in the sections dealing with the issuesrelated to the gas shortages and with the options proposed for short-termrelief. Other comments are covered in the remainder of the report whereappropriate.

The panels expressed the opinion that this report presented a fair andaccurate forecast of the situation this coming winter. However, the reviewpanel was concerned that the limited scope of the study as set by theCommittee request, prevented a more complete discussion of severalimportant points concerned with the entire natural gas problem. For thisreason a list of issues which add ress those concerns is presented on p ages 19-20 to make interested parties aware of the principal issues raised by the

panel.OTA is indebted to Dr. James Stekert, presently with the Energy

Research and Development Administration, and Mr. James Jensen and Dr.Carl Swanson of Jensen Associates who served as consultants to OTA onthis study.

The OTA staff on this study are Dr. Richard E. Rowberg, gascurtailment project manager, Mr. Lionel S. Johns, Ms. Joanne M. Seder, andMs. Linda M. Parker.

While the resulting report contains input from many task force andpan el members, the findings shou ld not be constru ed to be the opinion of any

one individual. An effort has been made to present both sides of anycontroversial subject.

x



GLOSSARY

Firm Requirements—Volumes of gas whichmake up the contractual obligations of interstate pipelines for sale to direct con-sumers and to gas utilities for resale. Theserequirements are determined f rom anhistorical base p eriod, usu ally between 1968and 1973 and are ad justed each year for loadgrowth. The firm requirements do notreflect changes in the demand for naturalgas by the u ltimate customers w hich are notincorporated in contract changes. Theseinclude year-to-year variations in weatherand economic conditions, and immediateconversions to alternate fuels.

Curtailment—The difference between thevolume of gas the interstate pipelines willactually deliver to their customers (i.e., thesupply) and the firm requirements (i.e.,contractual obligations) of these pipelines.These are the values repor ted by the FederalPower Comm ission for the p eriod of April 1of one year to March 31 of the next and forthe heating season of Novem ber 1 to March31.

Shortfal l—The difference between the es-timated real demand of the ultimate con-sumers of natural gas delivered by in-terstate pipelines and the gas supplied by

those pipelines. Since this demand is lessthan the firm requirements (by about twotrillion cubic feet) the shortfall will becorrespondingly less than the curtailment.

Interrup tible N atural Gas—Volumes of gas soldto some ul t imate consumers under acontract which allows the supplier to cutoff the supply whenever the demand of thenon-interruptible customers exceeds acertain value (usually as a result of severecold weather). About 20 percent of the gaswhich is sold by interstate pipelines to gasutilities under firm requirements (i.e., non-interrup tible) is resold by th ese gas u tilitiesas interruptible gas. The deepening cur-tailments have manifested themselves inthis instance in the form of longer periodsduring which the gas utilities’ interruptiblecustomers are cutoff.

Supplemental Gas —Gas from sources otherthan the flowing or stored natural gasdelivered by interstate pipelines. Thesesources include imported liquefied naturalgas (LNG), synthetic natural gas (SNG)derived from liquid hydrocarbons, andpropane-air mixture injected into the gasutilities delivery system.

Alternate fuels (and energy )—Fuel oil (distillateand residual), coal, direct use of propane orbutane, and electricity used in place of natural gas.

Units—For gas volumes the following symbolsare used: Mcf, MMcf, Bcf, and Tcf forthousan d, m illion, billion, an d trillion cubicfeet respectively.

xi



CONTENTS

Page

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GLOSSARY . . . . . . . . . . q. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CHAPTER

I.

II.

III.

IV.

v.

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Description of the Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact Review and Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issues Related to the National Gas Problem . . . . . . . . . . . . . . .

Options for Dealing with Natural Gas Shortage

On an Interim Basis During 1975-76 . . . . . . . . . . . . . . . . . . . .

FOOTNOTE REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ix

xi

1

3

8

1 9

21

29

. . .

X111



1. Summary

On June 6, 1975, the Federal Power Commis-sion reported that over 18 percent, 1.3 trillion

cubic feet, of the country’s firm, interstatepipeline natural gas requirements will be cur-tailed during the winter period of November 1,1975, to March 31, 1976. The size of thiscurtailment, a 35 percent increase over lastwinter, raises the serious possibility that therewill be insufficient natural gas to fuel theNation’s economy this winter, and that theseshortages could extend into the residentialsector for the first time.

The situation is potentially very critical. If thewinter is not more than 5 percent colder thannormal, if the economy does not recover fasterthan projected, if natural gas supplies do not

deteriorate any further this winter, and if thepresently expected supplies of alternate fuelsand gas supplements remain available, thenatural gas shortage this coming winter, averag-ed over the country, may not constrain theNation’s economy. This set of conditions is veryfragile, however, and dependence on them,alone, without new Federal action, carriessubstantial risk this winter of increased un-employment and economic impacts. A lack of action can ha ve even greater consequen ces in th ewinter of 1976-77 with the continued declineanticipated from present production of existinggas supplies and continued recovery of the

economy from the recession levels of 1974-75.

THE SITUATION THIS WINTER

. If the conditions described in the aboveparagraph hold, the incremental supply-demand deficiency of natural gas thiswinter will be about 300 billion cubic feet,most of which will be absorbed by theindustrial and electric utility sectors.

q This volume is about 10 percent of this

winter’s estimated real demand by theseconsumers of natural gas in the interstatemarket. Taking account of past cur-tailments, 10 percent is probably as muchas most of these curtailed u sers can absorb

this winter, through ‘self-help’ measures

(alternate and supplemental fuels, stored

gas, conservation) and regional shifts inproduction, and still meet their projecteddemands for manufactured goods.

. Even in this case, there will be manyinstances of severe dislocations in certainpar ts of the country (Mid and SouthAtlantic and East North Central) du e to thenon-uniformity of the gas shortages. Thelost production of goods in these regionswould h ave to be made up in other parts of the country, if impact on the nationaleconomy is to be minimized.

. In addition, in most of the country, nearlyall interruptible customers will be deniednatural gas for the entire winter.

MAJOR IMPACTS OF THISWINTER’S GAS SHORTAGE

• It is estimated that u nemployment in hardhit regions could range as high as 100,000people over periods ranging from 20 to 90days,

q The demand for alternate fuels—No. 2 andNo. 6 fuel oil, propane, and synthetic

natural gas feedstocks (naphtha) —willincrease imp orts and , therefore, be counterto the Nation’s goal of greater energyindependence.

• Solutions to the natu ral gas shortage aredifficult to separate from solutions for theNation’s total energy problems.

. The unavailability of natural gas for acritical process use or feedstock, even if arelatively small volume, can shut down anentire plant.

q Regional shortages can have nationwideconsequences if a manufacturer cannot getnatural gas for a key product needed b y amajor portion of an industry and alternatefuels either cannot be used or are notavailable.



q Fuel costs for curtailed customers whomu st use supp lemental and/ or alternatefuels (fuel oil, propane, synthetic naturalgas from naphtha, liquefied natural gas)will increase about $1.5 billion for this yearover last.

q Distribution and storage problems canprevent these customers from obtaining asteady supply of alternate fuels eventhough the fuels, themselves, ma y b e

available.

q Environmental effects will not be signifi-cant on the average, but in some regionsthe conversion to fuel oil or coal could h avesubstantial detrimental effects on local airquality.

q As demand increases because of economicrecovery, and existing natural gas suppliescontinue to d ecline, it is very p robable that

in the winter of 1976-77, there will besignificant economic disruption and, insome instances, insufficient gas to meet allfirm commercial and residential demandseven under normal weather conditions.

q Any measures to supplement natural gasfor this winter (1975-76), from gas ininventory, such as drawing down onreserve storage in greater volumes thanpresently anticipated will increase the

problem beginning in the summer of 1976.These above points focus on the immediate

problem. However, there are several issueswhich, although they are not directly related tot h e i m p a c t s t h i s c o m i n g w i n t e r , a r e ,nevertheless, very important and are intimatelyconnected with the entire natural gas problem.These issues cannot be ignored in dealing withthe problem, even in the short-term, and areexpressed in this report.

2



Il. Description of the Problem

AN OVERVIEW OF NATURALGAS CURTAILMENTS

In 1970, the supply of natural gas for theinterstate market, began to be curtailed.

4These

curtailments have subsequently increased towhere the current projections for the year April1975 to March 1976 total 2.9 trillion cubic feet(Tcf), or 19.4 percent of firm interstate naturalgas requirements.

1 For the heating season,November 1975 to March 1976, the curtailmentstotal 1.3 Tcf or 18 percent of the firm re-quirements. The si tuation will continue to

deteriorate as estimates for the following year(1976-77) project still greater supply deficien-cies. The curtailment levels are shown in Table 1for the years 1971-72 through 1975 -76. S

Table 1

Total Curtailment VolumesInterstate Pipelines$

CurtailmentYear (Trillion

(April 1 to March 31) cubic feet)

1971-72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.48

1972-73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.82

1973-74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.19

1974-75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 . 0 1

1975-76 (Projected].. ............. 2.92

The increase in curtailment volumes since 1971-72 forinterstate pipelines reporting to the Federal PowerCommission.

As straightforward as the above figures

app ear, the situation they reflect is complex andcare must be exercised in their interpretation.The curtailment volumes which are reported inFederal Power Comm ission Form 16 data and areshown in Table 1, are derived by relating theactual gas supplied that year by each of the

interstate pipelines to the pipelines’ firm re-quirements. T h e l a t t e r a r e c o n t r a c t u a lobligations determined from an historical baseperiod, typically 1968 to 1973, adjusted forchanging loads. The firm requirements are notdetermined from the actual demand for thecoming year. Therefore, it is possible that thecurtailment volumes could misrepresent theactual shortfall.

A portion (up to 20%) of a pipelines’ firmrequirements which are sold to the gas utilities,are resold by these gas utilities as interruptiblegas. In t e r rup t ib l e gas i s so ld w i th theunderstanding that the buyer could be cut off atanytime by the gas supplier. During thoseperiods for which gas delivery is halted, theconsumer m ust have h is own sup ply of alternatefuel (usually oil) to continue operation. Theadvantage of such contracts in most cases islower priced natural gas. When it was plentiful,these consumers usually needed to use alternatefuels only du ring short p eriods of unusu ally coldweather and were able to keep suff ic ientalternate fuel capability on han d. The increase incurtailments, however, has changed this picturedra stically. Since interrup tible customers are th efirst to be cut off when supplies drop belowdemand, these consumers are now being fully

curtailed for most of the cold weather month s, Inmany areas of the country this has been the casefor the last few years. As a resu lt, the quantity of a l ternate fuels required and the problemsassociated with delivery and storage havestrained some interruptible gas consumers tothe point where they have had great difficult y inmeeting all their energy needs.

EFFECTS OF INDUSTRYAND ELECTRIC UTILITIES

The allocation of natu ral gas to consum ers in aperiod of gas shortages is based on priority plansestablished by the various regulatory com-missions. Those schedu les which govern the ga su t i l i t i e s a re usua l ly se t up by the S ta t e

3

f) 1 -.{ , 1 ( ) - 7-, - :;



regulatory comm issions. These plans are similar,although not always identical, to the prioritysystem established for deliveries by interstatepipelines by the FPC (Table 2), al thoughexceptions to the FPC plan may be permittedunder extraordinary circumstances. b Further, agiven pipeline plan does not necessarily corre-spond to those schedules put into effect by thevarious gas utilities which purchase natural gas

from that pipeline. Although these variationsexist, the general result is the same, namely,

residential and small commercial consumersreceive priority over firm industrial and largecommercial consum ers and , finally, interru ptibleconsumers (Table 2). As a result, the primaryeffects of the curtai lment of f irm contractvolumes of natural gas will be in the industrialand electric utility sectors. For interruptiblecustomers, who will usually be curtailed beforefirm customers, the burden is spread amongst

large commercial, industrial, and electric utilityusers.

Table 2

Priority System Establishedby Federal Power Commission

(1) Residential, small commercial (less than 50 Mcf on a

peak day).

(2) Large commercial requirements (50 Mcf or more on a

peak day), firm industrial requirements for plant protection,feedstock and process needs, and pipeline customer storage

injection requirements.

(3) All industrial requirements not specified in (2), (4), (5),(6), (7), (8), or (9).

(4) Firm industrial requirements for boiler fuel use at less

than 3,000 Mcf per day, but more than 1,500 Mcf per day,

where alternate fuel capabilities can meet such requirements.

(5) Firm industrial requirements for large volume (3,000 Mcf

or more per day) boiler fuel use where alternate fuel capa-

bilities can meet such requirements.

(6) Interruptible requirements of more than 300 Mcf per day,but less than 1,500 Mcf per day, where alternate fuel capa-

bilities can meet such requirements.

(7) Interruptible requirements of intermediate volumes (from

1,500 Mcf per day through 3,000 Mcf per day), where alter-

nate fuel capabilities can meet such requirements.

(8) Interruptible requirements of more than 3,000 Mcf per

day, but less than 10,000 Mcf per day, where alternate fuel

capabilities can meet such requirements.

(9) Interruptible requirements of more than 10,000 Mcf per

day, where alternate fuel capabilities can meet such require-

ments.

The curtailment priority system established in FPC Order 467-B to be applied

to interstate pipeline companies under FPC jurisdiction. The high-priorityitems are the last to be curtailed in the event of a deficiency of natural gas

supplies.

4



The effect of the growing gas shortage on theindustrial and electric utilities as a result of thepriorities is ind icated in Table 3, which comparestotal industrial and electric utility consumptionof natural gas for the years 1970 through 1974 tototal energ y use for these sectors. T These figuresinclude both inter- and intra-state natural gas,and firm and interruptible contract volumes.Note that the contribution of natural gas to the

total energy supply of industry and electric

utilities rema ined essentially constant from 1970

to 1972 and then began to decline sharply in1973. This clearly shows the effect of thedecreas ing natura l gas suppl ies on thesecustomers. It indicates that significant conver-sion from natural gas to alternate fuels, primari-ly oil, has and is taking place. Based on thefigures in Table 3, over one trillion cubic feet of gas have been displaced by alternate fuels since

1972.

Table 3

Energy and Natural Gas Use

Industry and Electric Utility SectorsTotal United States

7

Natural Gas Energy—All SourcesTrillion Quadrillion Quadrillion

Year Cubic Feet BTU BTU

1970. . . . . . . . . . . . . . . . .13.8 14.0 36.5

1971 . . . . . . . . . . . . . . . . .14.1 14.5 37.2

1972 . . . . . . . . . . . . . . . . .14.7 15.0 39.1

1973. . . . . . . . . . . . q.... 14.4 14.7 41.2

1974. . . . . . . . . . . . . . . . .13.8 14.1 40.3

PercentNatural

Gas

38.4

38.0

38.4

35.7

34.0

Total natural gas consumption and total energy use by the industrial and electric utility sectors for the years 1970to1974. These figures include both interstate and intrastate natural gas. They demonstrate thedeciining contribution

of natural gas to the total energy supply for these sectors, nearly all of which has occurred in the interstate market,

NATIONAL DISTRIBUTION OFNATURAL GAS CURTAILMENTS

The gas supply problems in the interstatemarket are n o t u n i f o r m l y d i s t r i b u t e dthroughout the country nor, indeed, withinindividual states. The cause of this problem isthat the interstate pipelines are in differingsupply positions as shown in Table 4.

8This is a

result of the historic acquisition patterns by

pipelines of natural gas reserves. Some, such asM ich igan-Wisconsin P ipe l ine , C o ., havepurchased reserves sufficient to resul t inminim al cu rta ilm en ts. C o m p a nies l ik eTranscontinental Gas Pipeline Co., on the otherhand, have not developed natural gas supplies aslarge and, therefore, are curtailing heavily. Thenet result is those regions of the countr y

depending on pipelines in a poor supply positionare in mu ch worse shape to meet demands thanthose depending on pipelines in good supply

positions. A list of the states whose projectedcurtailment percentages for this winter are

5



Table 4

April 30, 1975 Report of Projected Firm Requirements and Curtailments

for Heating Season November 1975-March 19768

April 30, 1975 ReportHeating Season Nov. 1975-March 1976

Projected

FirmRequirements

] Deficiency

Alabama-Tennessee Natural Gas Company . . . . . . . . . . . .Algonquin Gas Transmission Company . . . . . . . . . . . . . . . .Arkansas-Louisiana Gas Company. . . . . . . . . . . . . . . . . . . .Bluefield Gas Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cities Service Gas Company. . . . . . . . . . . . . . . . . . . . . . . . .Colorado Interstate Gas Company. . . . . . . . . . . . . . . . . . . .Columbia Gas Transmission Corporation . . . . . . . . . . . . . .Commercial Pipeline Company, Inc. . . . . . . . . . . . . . . . . . .Consolidated Gas Supply Corporation . . . . . . . . . . . . . . . .East Tennessee Natural Gas Company. . . . . . . . . . . . . . . .Eastern Shore Natural Gas Company . . . . . . . . . . . . . . . . .El Paso Natural Gas Company. . . . . . . . . . . . . . . . . . . . . . .Florida Gas Transmission Company . . . . . . . . . . . . . . . . . .Grand Gas Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Granite State Gas Transmission, Inc. . . . . . . . . . . . . . . . . .

Great Lakes Gas Transmission Company. . . . . . . . . . . . . .Kansas-Nebraska Natural Gas Company . . . . . . . . . . . . . .Kentucky-West Virginia Gas Company . . . . . . . . . . . . . . . .Lawrenceburg Gas Transmission Corporation . . . . . . . . .Louisiana-Nevada Transit Company . . . . . . . . . . . . . . . . . .McCulloch Interstate Gas Corporation . . . . . . . . . . . . . . . .Michigan Wisconsin Pipe Line Company. . . . . . . . . . . . . . .Mid Louisiana Gas Company . . . . . . . . . . . . . . . . . . . . . . . .Midwestern Gas Transmission Company . . . . . . . . . . . . . .Mississippi River Transmission Corporation. . . . . . . . . . . .Montana-Dakota Utilities Company. . . . . . . . . . . . . . . . . . .National Fuel Gas Supply Corporation . . . . . . . . . . . . . . . .Natural Gas Pipeline Company of America . . . . . . . . . . . .North Penn Gas Company . . . . . . . . . . . . . . . . . . . . . . . . . .Northern Natural Gas Company. . . . . . . . . . . . . . . . . . . . . .Northwest Pipe Line Corporation . . . . . . . . . . . . . . . . . . . .Ohio River Pipeline Corporation . . . . . . . . . . . . . . . . . . . . .

Pacific Gas Transmission Company. . . . . . . . . . . . . . . . . . .Panhandle Eastern Pipeline Company . . . . . . . . . . . . . . . .South Georgia Natural Gas Company. . . . . . . . . . . . . . . . .Southern Natural Gas Company. . . . . . . . . . . . . . . . . . . . . .Tennessee Gas Pipeline Co ., . . . . . . . . . . . . . . . . . . . . . . . .

(Mcf)15,927,00092,702,000

235,401,0007 5 0 , 0 0 0

299,405,000203,024,000848,726,000

3 4 5 , 0 0 0

4 3 1 , 9 0 0 , 0 0 0

3 9 , 6 1 1 , 0 0 0

3 , 3 6 1 , 0 0 0

6 0 5 , 8 1 4 , 0 0 0

19,965,0002

2,356,000

37,063,00041,395,00011,887,000

2,299,000

2 ,363 ,000

5 , 0 3 6 , 0 0 0

5 0 5 , 0 2 2 , 0 0 0

15,461,000

150 ,900 ,000

131 ,693 ,000

2 5 , 8 5 2 , 0 0 0

139 ,612 ,000

5 2 6 , 6 1 6 , 0 0 0

17,499,000

3 9 2 , 9 4 4 , 0 0 0

2 1 5 , 8 2 2 , 0 0 0

5 , 6 4 9 , 0 0 0

130 ,765 ,0003 6 0 , 9 7 5 , 0 0 0

8 , 4 1 5 , 0 0 0

2 8 2 , 2 9 8 , 0 0 0

A Division of Tenneco, Inc. . . . . . . . . . . . . . . . . . . . . . . . 592,035,()()0Tennessee Natural Gas Lines, Inc. . . . . . . . . . . . . . . . . . . .Texas Eastern Transmission Corporation. . . . . . . . . . . . . .Texas Gas Pipe Line Corporation . . . . . . . . . . . . . . . . . . . .Texas Gas Transmission Corporation. . . . . . . . . . . . . . . . .Transcontinental Gas Pipe Line Corporation . . . . . . . . . . .Transwestern Pipeline Company . . . . . . . . . . . . . . . . . . . . .Trunkline Gas Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .United Gas Pipe Line Company . . . . . . . . . . . . . . . . . . . . .West Texas Gathering Company. . . . . . . . . . . . . . . . . . . . .Western Gas Interstate Company . . . . . . . . . . . . . . . . . . . .Western Transmission Corporation . . . . . . . . . . . . . . . . . . .

16,231,000501,370,000

1,484,000353,408,000496,700,000194 ,905 ,000

2 4 9 , 3 1 2 , 0 0 0

7 0 9 , 9 7 1 , 0 0 0

3 6 , 7 8 5 , 0 0 0

3 , 3 5 5 , 0 0 0

9 2 3 , 0 0 0

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 , 9 6 5 , 3 0 2 , 0 0 0

Net Curtailments4

1 Requirement volumes reported in the Apri I 30, 1975 Form 16’s have been adjusted

and volumes exchanged with others.

2 Reported all sales to Northwest Pipeline Corporation and no curtailments.

) Sales del Iveries were added to cu rta I Iments to obtain req u I rements.

4After elimination of pipeline-to-pipeline curtailments.

—Percent

Deficient

5,183,00014,711,00066,708,000

- o -81,423,00013,600,000

235,177,000- o -

18,979,00013,343,000

1,644,000148,568,000

- o -

- o -

–o-- o -- o -

642,000369,000

- o –

17,000,000

2 , 0 9 7 , 0 0 0

13,695,000

9 9 7 , 0 0 0

- o -

5 , 1 9 8 , 0 0 0

- o –

1 ,258 ,000

18,050,000

3 2 , 3 8 4 , 0 0 0

2 5 9 , 0 0 0

- o -8 5 , 6 4 6 , 0 0 0

2 7 , 0 0 0

- o -

70 ,139 ,000

- o -

117 ,491 ,000

- o -

4 4 , 9 8 7 , 0 0 0

180 ,426 ,000

4 3 , 5 7 2 , 0 0 0

120 ,483 ,000

3 2 0 , 1 8 2 , 0 0 0

- o -

- o –

- o –

1 ,674 ,238 ,000

1 ,326 ,733 ,000

32.5415.8728.34

-o–27.19

6.7027.71

- o -4.39

33.6948.9124.52 –o–

–o-

–o–- o -- o -

27.9315.62

3.3713.56

9.080.76- o -

3.72- o -7.194.59

15.004.58

–o– 23.73

0.32-o–

11.85- o -

23.43-o–

12.7336.3222.3648.3345.10 –o–

–o–-o–

18.67

to el Iminate volumes transported for others

Firm requirements and curtailment volumes of interstate pipeline companies reporting to the Federal Power

Commission for the heating season 1975-76. The firm requirements are determined from an historical base period

and do not necessarily reflect real demand for the coming heating season.

6



equal to or greater than the national figure isshown in Table 5.

8Again, these figures must be

interpreted with caution. For one thing, the firmrequirements may not reflect actual demand asdiscussed abov e. Another p otential pitfall is thatin some states a high percentage of the gas maybe used for purposes which are relatively easilyconvertible to alternate fuels, such as electricutility boiler fuel.

Table 5

Projected Curtailments-winter 1975-76°(Nov. 1, 1975-Mar. 31, 1976)

Firm Projected

Requirements Curtailment

State “ (MMCF) (MMCF) Percent

Arizona . . . . . . . . . . . 93,042 32,818 35

California . . . . . . . . 553,280 118,694 21

Delaware.. . . . . . . . 2,640 1,603 61

Indiana ........... 360,788 91,595 25

Kentucky . . . . . . . . . 131,359 22,946 17

Maryland :.. . . . . . 69,224 19,124 28

Nevada . . . . . . . . . . . 20,088 12,153 60

New Jersey ,....., 176,424 45,982 26

No rth Carolina . . 88,470 46,207 52Ohio. .............. 617,895 138,575 22Pen nsylv an ia . . . . 411,067 89,919 22

Ten nessee . . . . . . . 137,832 25,410 18

Virginia . . . . . . . . . . . 73,873 24,112 33

West Virgin ia . . . . 83,472 17,447 21

Firm requirements and curtailment volumes in millions ofcubic feet (MMcf) for the 1975-76 heating season for stateswhose percent curtailment equals or exceed the nationalaverage. The firm requirements are determined from anhistorical base period and do not necessarily reflect the actualdemand this winter. For this and other reasons given within thetext, these figures may not truly represent the level of difficultythese states will face this winter.

Therefore, a high curtailment percentage maynot be indicative of the degree of difficulty thatstates will face this winter. On the other hand alower curtailment percentage may be moreserious than implied simply because a highfraction of the industrial natural gas use is forprocesses and / or feedstock which can only beconverted to alternate fuels at great difficultyand expense or not at all. In this context, thepipelines themselves, in addit ion to havingdifferent curtailment percentages, also have awide variance in the percentage of customers inthe va rious p riorities. Therefore, a pipeline w itha lower percentage curtailment but a highpercentage of customers in priorities one andtwo (Table 4) could be worse off than the rawcurtailment volumes indicate.

Within the states, themselves, there areregions where the sup ply situation will be worsethan the state average. A case in point isPennsylvania, whose statewide curtailment thiswinter is p rojected at 23.5 percent. However, the

h a r d - h i t C o l u m b i a , T e x a s E a s t e r n , a n dTranscontinental interstate pipelines, whichfeed the heavily industrial southeastern portion

of the State, could cause local curtailments inexcess of 31 percent, while the northwesternportion may actually experience an increase of supply.

Therefo re , the actua l s it ua t ion in theseregions and within the various states cannot bedetermined solely from curtailment data. It isnecessary to investigate further by inquiringinto the situation by seeking specific informationfrom those people who w ill have to deal with theproblems. The following section describes theresults of this inquiry.

7



Ill. Impact Review and Assessment

DISCUSSION OF IMPACTS

Introduction

If the impacts of the natural gas shortage forthis coming winter were predicted solely fromthe magnitude of the projected curtailmentvolumes, one would conclude that widespread,long-term (greater than 30 days) plant closingsand production loss would result. This wouldcause increased unemployment and seriouslyth rea ten the N a t ion’ s r ecovery f rom theeconomic recession. Indeed, some statementshave been made to the effect that the projectedlevel of curtailments maybe sufficient to extendto commercial and residential customers, par-ticularly if the winter is more severe thannormal.

Upon examination of the situation from thepoint of view of those industries which are theprincipal consumers of natural gas, the bestestimates are that, the shortage of natural gaspresently forecast, would not constrain theability of these indu stries to satisfy the d emand sthey project for their manufactured goodsprovided:

1) The winter is no more than 5 percentcolder than normal;

2) Demand for goods d oes not increase fasterthan expected;

3) There is no unforeseen deterioration of present natural gas supplies;

4) Expected alternate fuel and supplementalgas supp lies are not reduced,

In certain regions of the country, problemswould be greater and some plant closings for

more than 30 days might occur unless action istaken. The gas utilities presented a similarassessment. Of the 37 providing responses,nearl y all estimated that they would be able tomeet the firm requirements (non-interruptible)of thei r cus tomers throughout the heat ingseason under the same set of conditions. On the

other hand, the interruptible customers of mostof these same utilities would be curtailed 100percent for period s ranging from 70 to 1.50 day s.

These utilities pointed out, although many of these customers were cut off in previouswinters, the curtailment p eriods would be longerthis year. In addition, temperature-dependent

interrup tible loads (those who are cur tailed on lyduring the coldest weather) may be cut off forextended periods.

The Situation This Winter

There are several reasons for these obser-vations.

q

q

q

q

q

Much of industry has planned ahead forincreasing shortages of natural gas andconsequently has instal led extensivealternative fuel capabilities.

Natural gas has been diverted away from

uses, such as power generation or thegeneration of steam and electricity withinindustrial plants, where conversion isrelatively less costly and easy. The use of gas for electric energy production hasdeclined by 7 percent since 1971 whileelectric energy generation has increased 15percent over the same period.

27

Many gas utilities, whose own supplies donot show up in the curtailment estimatespublished by the Federal Power Commis-s ion, have o b t a i n e d n a tu r a l g a ssupplements such as propane, importedliquefied natural gas (LNG), and syntheticnatural gas (SNG), The development of these supplies has been typical in mostareas outside the gas producing states. g

Several gas utilities and long-distanceinterstate transmission pipelines havedeveloped both underground gas storagefields and liquefied natural gas storagetanks. Natural gas storage increased bynearly 50 percent from 1967 to 1973although a 10 percent decline occurred in1974.2,7

The economic recession has reduced thedemand for natural gas by industry. It is

important to remember that industry andelectrical power generation in 1974 used49.5 percent of all natural gas delivered to

8



the interstate market to consumers in theUnited States.

The impact of these points can be seen moreclearly by estimatin g the expected natural gasconsumption in the interstate market, fromApril 1, 1975 to March 31, 1976 (FPC reportingyear), and comparing it to the projected in-terstate supplies. For the period April 1, 1975 toMarch 31, 1976, the projected supply is 12.1Tcf.

1The real demand for natural gas for that

period is not precisely known, but it can be

estimated to be about 13.1 Tcf. This representsabout a 2 percent increase over the April 1,1974—March 31, 1975 period (12.8 Tcf) whichexceeds the yearly rate of increase for any yearsince 1970.

7With this assumption, the shortfall

during the present FPC reporting year will beabout 1.0 Tcf. This is considerably less than theprojected curtailments of 2.9 Tcf demonstratingthat the firm contract requirements, on whichthe curtailment figure is based, greatly exceedthe actual d emand this year. It is this fact wh ichestablishes the difference between shortfall andcurtailments.

Because of the priority schedules discussedabove, most of this deficiency will have to beabsorbed by the industrial and electric utilitysectors. Some of it will be mad e up by continuingthe conversion to fuel oil. As seen in Table 3, theconsumption of gas by these sectors, in both theinterstate and intrastate market, decreased from1973 to 1974 by 0.55 Tcf or nearly 4 percent.Total energy used by these sectors, however,decreased by only 1.0 percent. If we assum e thatthe difference was a result of conversion toalternate fuel (primarily fuel oil) and that thisrate of conversion will continue into this year,users of an additional 0.4 Tcf will convert to fueloil for 1975-76. These are reasonable assump-

tions since a substantial por tion of the d ecline ing as co nsu m p tio n o v e r t h e la s t t w o y e a r soccurred in the electric utility sector, which hasbeen converting m any of their boilers to fuel oil.Further, one can expect that during this comingyear, many industrial boiler and direct heatfurnaces will be completing the sw itch to fuel oilinitiated last year. Althou gh th e figures in Table3 represent both the interstate and intrastatemarkets, the volumes converted from naturalgas to oil can be expected to occur almostcompletely in the interstate market as that iswhere the shortfal l occurs. Therefore, theincremental natural gas shortfall for the year

1975-76 will be about 0.6 Tcf, This is anincremental value since it also represents anincrease in th e deficiency over last year wh en, of

course, supply and consumption were in balance.About 0.3 Tcf of this shortfall will occur duringthe five winter months, taking into account thecolder weather. Some of this deficiency will falli n t o t h e i n t e r r u p t i b l e m a r k e t i n t h a t i t

represents the increase in the length of time,between th is year and last, that gas w ill be cut off from interruptible customers. The 300 billioncubic feet shortfall is also equal to the netincrease in projected winter curtailments asreported by the FPC (Table 5).

1This is the

volume that most likely will either have to bemade up by some type of alternate fuel orotherwise go unfulfilled.

An example of this situation is provided by alarge gas utility in the East North Centr al region.Their curtailment projection for this year isabout 18 percent for firm industrial customers.For a base volume of 150 BCF for the year, thisrepresents a delivery of 122 BCF. The demand,however, is forecast to be 132 BCF due toeconomic conditions and some fuel switching.Therefore, the shortfall is about 8 percentwhich, as long as these conditions are stable ismanageable.

Regional and Industrial Variations

As indicated in Table 4, the distribution of gascurtailments among the various states is farfrom uniform. In particular, the Mid and SouthAtlantic States served by Transcontinental GasPipeline Corp. and Columbia Gas TransmissionCorp., and the East North Central States servedby Columbia and the Panhandle Eastern PipeLine, Co., will be curtailed m ore heavily than thenational average (see Table 4). The industrialgroups represented on the task force indicatedthat as a result, they anticipated plant closings

and unemployment in these regions,In addition, parts of Florida, Alabama, and

Mississippi served by United Gas Pipeline Co.face large curtailments. Here, however, thegrowth of curtailments has been of longerduration and the recent increase has not been asrapid as in the regions cited above permittingadjustments to have been made includingpu rchase of intrastate gas. How ever, Florida hashad a large increase in curtailments of interrup-tible gas that may cause problems and plantclosings if there are bottlenecks in the distribu-tion of alternative fuel supplies. In this connec-tion, similar logistics problems may exist in most

other areas of the country where there has beenan increase in the curtailment periods forinterruptible customers.

9



The impact of natural gas shortages onindustry will vary over the different regions of the country. The textile industry will haveseveral plants closed in the North Carolina-Virginia region unless a sufficient supply of propane and / or emergency deliveries of naturalgas can be obtained. The brick industry projectsun emp loyment of at least 3,500 by plant closingsin North Carolina. In addition to direct un-employment in these industries, a much largernumber of workers could be affected in somemanner due to ripple effects caused by certainplant closings. With regard to the brick andstructural clay industries, for instance, a total of 375,ooo workers could be affected to somedegree by plant closings in the North Carolina-Virginia area. The duration of these closings isun determined b ut it could be as long as the entireheating season of 1.50 days. The brick industryalso indicated that over 86 percent of their plantsthroughout the country will receive 50 percento r g r e a t e r curtailments, including bothinterruptible and firm gas. As a result, outputlimitations are foreseen, especially if the con-struction industry was to recover more rapidlythan expected from the recession. The cement

industry also expects production shortages tooccur due to natural gas curtailments in theMountain, West South Central, and Pacificregions where 67 percent of the natural gas usedby the entire industry is consumed. Arizona andNevada are States where curtailment percent-ages are particularly high and where cementmanufacturers are particularly vulnerable. Thesteel industry forecast plant closings of 2-4weeks in the Ohio-Pennsylvania-Maryland arearesulting in unemployment of 5,000-10,000,

However, they expect to be able to meet theirproduct demand by production from plants inother regions.

This latter situation is typical of most of theindustrial groups as reported in the task groupmeeting. The only representatives which felttheir industries would have a difficult timemeeting prod uction dema nd s were textile, brick,and cement. Even here, however, this dependedheavily on how rapidly the economy recovered,particularly the construction industry for thebrick and cement groups,

It is important to differentiate between plantclosings as a result of loss of natural gas andresulting from inventory selloff. Because of dep ressed economic conditions, it is p ossible that

inventory bu ildu p last summer m ay be sufficientto cause production to be shut down in someplants this winter in order to reduce the

inventory. Such plant closings which, of course,bring about job loss could be attributed to thenatural gas shortage when in fact this is not thecase.

The fertilizer ind ustry is especially d epend enton natural gas, both as a feedstock and processfuel. Because of its key role in the Nation’s foodindustry, the natural gas supply situation of thefertilizer industry deserves special attention.This coming year the industry expects thenatural gas shortfall will result in a reduction of

ammonia production of 200,000 to 300,000 tonsas compared to last year. This will result in a lossof 550,000 to 650,000 tons of ammonia below100 percent capacity. The potential effect of thisloss can be estimated by noting that one ton of ammonia is used to grow about eight tons of grain. Therefore, a loss of 600,000 tons of ammonia translates to 4.8 million tons of grainor about 2 percent of the total United Statesproduction in 1974. These figures should beregard ed w ith caution, however, as it is not clear,at present, whether the total ammonia produc-tion c ap a c it y w i ll a ct u a ll y be r e qu i r ed .Therefore, the impact of such losses wou ld h ave

to be judged in light of domestic crop demand,export demand, and other factors influencingcrop production. The ammonia loss, however,will continue to grow as natural gas suppliescontinue to decrease over the next few years.

The gas curtailments in the fertilizer industryhave thus far only affected process fuel and notfeedstock. The former is convertible to fuel oilbut only at great cost and technical difficulty.Conversion to al ternate feedstocks is alsotechnically possible but is not seriously con-templated at present. Indeed, the claim has beenmade that ammonia plants will be built incountries with plentiful natural gas supplies

rather than attempt to use other feedstocks suchas naphtha or gasified coal, 10 This is principallyan economic motivation.

The impact on the fertilizer industry will bethe g rea tes t i n the Middle Atlantic andSoutheast regions. In particular, the three-Statearea of North Carolina, Virginia, and SouthCarolina , served by Transcont inenta l GasPipeline, Co., which produ ced about 25 percentof all nitrogen fertilizer in the United States, willreceive the largest curtailments of any am mon iaprodu cing region.

Another view of the uneven distribution of

the imp acts of the curtailment is given by th e gasutilities. Piedm ont N atural Gas Co. in North a ndSouth Carolina indicates that all firm industrial

10



customers using 30 0 Mcf per day will becurtailed 100 percent for the duration of thewinter. A 40-percent curtailment will occur forthose using less than 300 Mcf per day, assumingthe winter is no more extreme than 5 percentcolder than normal. Therefore, unless thesecustomers can get alternate fuels they will not beable to operate. North Carolina Natural Gasreports that a total of 338 industrial and

commercial customers, both interruptible andnon-interruptible, will receive no gas this entirewinter. This represents all but 3 percent of theirtotal load outside of residential and smallcommercial (less than 50 Mcf per day) u sers. Theutility as a whole will receive only 32 percent of its contract entitlements. East Ohio Gas Co. of Cleveland, Ohio, has projected a curtailment of 15 to 35 percent of its customers in category 3

(FPC Order 467-B) which are made up of non-interruptible customers.

Although they are firm customers, theirclassification in category 3 supposedly indicatesthat they are able to use oil as an alternate fuelwithout extensive and costly modifications.How ever, this is not always so, and the p otentialfor some spot closings of plants exists. TheColumbia Gas Distribution Companies servingseven states in heavily affected regions all reportlarge curtailment percentages (greater than 60

percent) of their industrial customers, Further,commercial user curtailments ar e also p rojectedin these States. The most seriously affectedSta t e s a re O hio , P ennsy lvan ia , and WestVirginia, in terms of curtailed volumes. Nearlyall of the customers are firm so their continuousoperat ion throughout the ent i re winter i sdoubtful. Several other utilities have indicated

they w ill be able to serve all their firm customersby using supplemental gas such as LNG and/ orunderground s t o r a g e , S N G f r o m l i q u i dhydrocarbons, and propane-air mixtures forpeak shaving. If any of these supplies shouldbecome unavailable, however, firm customercurtailment will result.

The effect on employment of the gas cur-tailments will also fluctuate regionally. The total .impact is expected to be small, relative to thetotal employment; how ever, if weather is cold orindu strial prod uction surges this winter, it couldbe expected that during peak cold days, when

residential and commercial needs for spaceheating are high, additional plants would beforced to close. This un emp loyment w ould be fora short duration, perhaps 2 to 10 days at astretch, accumulatin g over a cold w inter to 15 to30 days. Based upon the estimates by the

industries on the task force, it can be assumedthat in the critically affected states, natural gasshortages would create unemp loyment of up to100,000. This u nem ploym ent will lastsomewhere between 20 to 90 working days .With the Nation’s economy operating belowcapacity, the lost productivity, for most in-dustries, can be made up in other parts of thecountry where sup plies of natural gas and other

forms of energy are su fficient. An exception m ayb e t h e c e m e n t industry which cannoteconomically transfer products beyond 175 to200 miles. Within the States, where unemploy-ment is created, it is possible that there w ill be ashort run, multiplier effect upon unemploymenton both supply and customer industries withinthe local area.

Increased Demand for Other Fuels

With the declining p rodu ction of crude oil andnatural gas liquids in the United States, thefalling production of natural gas increases the

demand for imported fuel. The alternative fuelsto natural gas are No. 2 and No. 6 fuel oil,propane, or, in special cases, butane. Thereapp ear to be ample supp lies of both crud e oil andpetroleum products on world markets

11, 12and,

depending upon Government regula t ions ,prop ane impor ts possibly could be increased thiscoming winter.

A critical point to n ote, however, is that w hileuse of fuel oil relieves the p roblems caused by thenatural gas shortage, it worsens the problem of reliance on imported fuel. This is obviouslycounter to the Nation’s stated goal of energ y

independence. For example, it will require 70

million barrels of oil to replace the 400 Bcf asestimated on p. 9 to be converted this year. Asimilar situation of increasing dependence onforeign sources will occur if there is a substantialincrease in the use of propane as a substitutesince, as will be discussed below, the only serioushope o f expand in g o u r p r o p a n e s u p p l y i s

through imports. Widespread use of syntheticnatural gas, based on liquid hydrocarbons, wouldalso worsen the Nation’s import posit ion.Therefore, the question of natural gas shortagesgoes beyond just this fuel to encompass theentire national fuel situation.

The other alternative fuels that could be usedto replace curtailed natural gas are coal andelectricity. However, electricity tends to beexpensive compared to regulated natural gas andrequires a substantial change in the equipmentor processes which use natural gas. Significant

11



costs are also required to change from naturalgas to coal. Electric utility boilers are potentialcandidates for conversion, although none havebeen to date. The problems are very severe and acomplete rebuilding is probably required.

13

Other candidates for coal conversion are thenumerous boilers used for industrial processsteam. Most of these, however, are packageboilers which cannot be converted to coal and,

therefore, must be rep laced if coal is to be used .In addition, there is considerable uncertaintyabout mining legislation and the ability to signlong-term contracts for coal. Coupled withsulfur emission regulations, industry finds itdifficult to spend substantial amounts of capitalin order to convert their fuel facilities to coalwh en sup ply, price, and air pollution regulationsare so uncertain. Despite these difficulties,however, conversion to coal in the cementindustry is now beginning to take place, and theelectrical power industry is also expanding itsuse of coal. These actions will eventually reducethe demand for natural gas.

Effects of Fuel Costs

As natural gas curtailments deepened, boththe electric power industry and manufacturinghave had to convert to alternate fuels. Naturalgas prices are below the price for alternativefuels on an equivalent heating value basis. Asusers switch to alternative fuels, their costsincrease. Some of the increased costs will beabsorbed by the industries themselves but it ismore likely that most of the cost increase will bepassed on to customers.

An estimate of the cost increase for this yearcompared to last year can be made by taking alook at the amount of alternate fuel needed andits costs. These range from about $2.oo per Mcf equivalent for fuel oil to about $4.oo for SNG.

14

The total cost increase for fuel alone for thiscoming winter over last can be estimated fromthe size of the natu ral gas shortfall as calculatedon pp. 8-9. This was 1.0 Tcf with an estimated0.4 Tcf being made up by fuel oil at about $2.ooper Mcf equivalent (Costs of $2.50 per Mcf equivalent are repor ted in the East Nor thCentral area for barge delivery of fuel oil.) andth e 0.6 Tcf incremental shortfall by SNG, LNG,

propane, additional No. 2 or No, 6 fuel oil, andenergy conservation. The prices of SNG, LNG,and propane range from about $2.50 to $4.oo perMcf equivalent. g Therefore, a conservativeaverage price for the fuel to replace the 0.6 Tcf component of the deficiency is $2.50 per Mcf.

The net increase in fuel price to make up theentire 1.0 Tcf will be about $1.5 billion. A p rice of $.72 per Mcf was used for the natural gas whichmust be replaced, this year, by alternate fuels,

2

Several of the gas utilities reported estimatesof increased fuel costs for their service area. Forexample, Southern California Gas Company hasestimated an increase in costs of $184 million tothe southern California economy over last yeardue to the added volumes of alternate fuels.Philadelphia Gas Works estimates additionalcosts of over $2o million this year due to theincreased amount of SNG, propane-air, andLNG it will require, Although no figures wereavailable from the industrial representatives,they all indicated that higher costs are resultingfrom the decline in natural gas supplies. Theseincreased costs are indicative of the ‘self-help’efforts industry has undertaken to avoid shut-ting down this winter because of the shortage of natural gas.

Another problem that arises is that there may

be old or inefficient p lants wh ich h ave been ableto remain profitable only because of low costnatural gas, By being required to convert to amore expen sive fuel, it is possible that certain of these plants will become uneconomic. Thesemay well close, either because their competitorscontinue to receive a sup ply of cheap n atural gasor because the plant is, itself, only marginallyprofitable and the increased fuel cost in itself issufficient to make it unprofitable.

Environmental Effects

The environmental impact of the gas shortage

will not be large on the average. The principaleffect will be increased air pollution broughtabout by the burning of fuel oil and, in somecases, coal in place of natural gas. Althoughconversions of this type could account for up to400 Bcf of natural gas, the increase in fuel oil andcoal and, as a consequence, the increase inpollution levels, will be small compared to thetotal quanti t ies of oil and coal now used.However, in localized regions, there could benoticeable impacts as a resu lt of conversion of aplant or facility on the margin. In such a n

instance the air qu ality for that locale wou ld shiftfrom an acceptable to unacceptable quality. The

question then becomes one of whether this costis worth the benefits accrued by keepin g thatfacility operating. Such problems will occurwh erever fuel oil or coal is the alternate fuel andthey cannot be readily obtained with a sulfurcontent at or below the levels pr escribed by local

12



or State regulations. Although these instancesmay not be extensive this year, as natural gassup plies continu e to d ecrease, they will increasein number and environmental quality willbecome a major factor to d eal within the y ears tocome. This is most evident in the case of electricpower plants where conversion away fromnatural gas is being accelerated.

Direct use of propane will have no environ-

mental consequences beyond those of thenatural gas it may replace. The use of SNG andLNG will not add to air quality problems at thepoint of use, but there are significant health andsafety considerations wi th regard to LNGfacilities and environmental quality problemsassociated with SNG plants. These, too, willbecome increasingly importan t if imp orted LNGand SNG are relied upon to replace a growingp or tion o f t h e N a t io n ’s n a t u r a l g a s r e -quirements.

THE FRAGILE STRUCTURE

OF FUEL SUPPLY THISCOMING WINTER

Introduction

The system which is attempting to deal withthis winter’s natural gas shortages is quitefragile. The natural gas industry will probablynot be able to effectively deal with a rap id sur gein indu strial prod uction, or emergencies such assevere damage to gas production or transmissionfacilities, or a very cold winter. If any of theseoccur, additional plant shutdowns, if only for afew days, should be expected. The extent of theshutdow ns will depend up on the availability of alternate fuels, the length of the emergency, theportion of the winter in which it occurs, and thecoincidence of these events.

Availability of Alternative Fuelsand Supplemental Gas

There should be little problem obtaining oil forthose wh o can utilize it. Amp le amoun ts of crud eoil, No. 6 fuel oil, and N o. 2 heating oil app ear toexist both in the world m arket and in the UnitedStates, even though U.S. crude oil productionhas declined slightly from a year ago.

11 12 15

Problems may a rise where d istribution of fuel oilhas not been traditional in those areas that arealso heavily affected by natural gas shortages,such as Ohio and parts of Kentucky. Distribu-tion problems should be overcome, however,

especially for fuel oil, since, for the first half of 1975, No. 6 fuel oil consumption has been about7 percent less than for the sam e period in 1974.12

Some natural gas users are relying uponpropane ,

17or in some cases butane, as an

alternate fuel. As discussed below, there areapplications of natural gas where propane is theonly economically justified fuel with currenttechnology and fuel prices. Examples are milk

and food drying, textile finishing, paint drying,heat treating of metals, crop drying, and direct-fired food ba king ovens. In add ition, prop ane-airmixtures are used extensively by gas utilitiesduring periods of particularly high demandbrought about by very cold weather. Such peak shaving supplies are often installed to providefor immediate response to 3-day periods andoverall supplies are arranged for the needsexpected over the winter season.

To get an ind ication of the p otential contribu-t ion of propane to al leviate this winter’sestimated natural gas shortage, it is useful toexamine domestic production levels. p r o p a n eproduction in the U.S. in 1974 was 293,992,000

barrels, and this plus imports of 21,464,000

barrels provided a total supply of 315,456,000barre ls .

18In 1974, 19.1 trillion cubic feet of

natu ral gas was delivered to all consum ers in theUnited States. z On a heating value basis, thetotal propane supply is slightly more than 6percent of the natural gas delivered to con-sumers and slightly more than 14 percent of natural gas delivered to industry in 1974.

The 300 billion cubic feet incremental shortfallprojected for this coming winter is almost 26

percent of the equivalent Btu total propane

supply, i.e., United States production plusimports, in 1974. Most of this prop ane su pp ly isalready allocated to traditional markets, how-ever, such as residential, rural, peak shaving,chemical feedstock, and agriculture uses. About2.7 percent of the 1974 total U.S. propaneconsumption was used by gas utilities for peak shaving, Therefore, present d omestic sup plies of propane in excess of that already allocated areprobab ly not sufficient to make u p th e increasednatural gas deficiency for this winter.

An additional problem is that propane requiresspecial equipment for transportation to andstorage at the point of use. Normally, during a

cold winter, the propane pipelines, railcars, andtrucks become fully utilized and distribution isrationed. This occurred during the past winterwith the Dixie pipeline, which serves theSoutheast. If the propane distribution system is

13



stressed by cold weather and a significantincrease in industrial demand, the logisticssystem possibly might not be able to meet thedem and and some plant closings for 1 to 3 weekswould probably occur, even for these plantswhich are able to secure propane contracts.

Upon examination of the potential for in-creased propane this coming winter, it appearsthat some assistance is possible, although not

nearly enough to make up the shortfall. Propaneproduction in the United States has beendeclining since 1972 due to a combination of declining natural gas production (approximately67 percent of dom estic prop ane is extracted fromnatural gas streams), reducing refinery runs,and price controls. Further, propane imports in1974 were 5 million barrels less than 1973.

18

There are estimates that propane imports couldbe increased by as m uch as 5 m illion barrels thiscoming year, but this would just make up lastyear’s reduction and amounts to only about 6percent of the p rojected natu ral gas shortfall thiscoming winter.

19

Synthetic natural gas from liquid hydrocar-bons (p r im ar i ly naph tha ) i s a source o f supplemental natural gas for many gas utilities,prima rily along the Atlantic Coast. There ar e 10operational plants in the United States whichproduced 145 billion cubic feet of SNG in the1974-75 heating season. g The design capacity of these plants is 194 billion cubic feet whichindicates that, at most, about 50 billion cubic feetof SNG could be available to help offset thiscoming winter’s shortage. g It is also to be notedthat about 50 percent of the feedstock of theseplants is imported.

Interest has also been expressed in thevolumes of natural gas burned under electricutility boilers. In Texas , Louis iana , andOklahoma, 1.97 Tcf was used in 1974

20 of whichabout 30 percent is used during the heatingseason (600 Bcf). Up to 80 per cent of th is, or 480Bcf, can be replaced by fuel oil for varyingperiods of time. These utilities report that thepresent state of these boilers is such that onlyabout 30 to 60 Bcf can be replaced for periodslonger than 2 to 3 weeks before boiler corrosionbegins to appear. Beyond this period, theyindicate that cont inued operat ion of theseboilers carries the risk that some will be forcedout of operation, causing a certain amount of load shed ding. How ever, these boilers were builtor converted for dual fuel firing (oil and naturalgas) and they are d esigned to be able to burn fueloil longer than these 2 to 3 week periods.Therefore, modification to eliminate these

problems may not need to be significant andlarger volumes than the 30 to 60 Bcf presentlyclaimed could be available.

Critical Uses of Natural Gas

There are industrial applications for naturalgas or similar gaseous fuels, for w hich the u se of other fuels would be extremely difficult this

coming winter. They are applications in whichthe unique characteristics of gaseous fuels—chemical composition, precise temperaturecontrol, flame geometry, and / or burning—isessential for production. Specific examples ofsuch applications are:

q

q

q

q

q

q

q

q

Feedstocks for petrochemicals (e.g. am-monia).

Drying m ilk and food produ cts.

Direct-fired baking of food products.

Heat treating metals.

Removal of protruding fibers in textilemanufacture by singeing.

Annealing metal foil in a rolling mill.

Drying ink in a high-speed printing press.

Electric utility boiler ignition and flamestabilization.

Even if alternate fuels can be u sed for some of these processes, the cost of conversion will be asubstantial fraction of the total cost of thefac i l i t y .

l0In these app l i ca t ions indus t r i a l

customers are willing to p ay large premiu ms fornatural gas in order to minimize total fuel costs

and maintain their competitive position. Otheruses exist for which conversion is less costly andless difficult technically, but where continueduse of low-priced natu ral gas is necessary for theeconomic survival of the user. This occurs withusers who operate on a small profit marginwh ere increased fuel and capital costs associatedwith conversion to oil (or possibly electricity)could not be absorbed or wh ere the cost of gas issmall and the cost of conversion per Mcf of gasconsumed is large. A particular case in point isthe widespread use of natural gas to driveengines for pumping irrigation water in westTexas, New Mexico, and Arizona.

21The farmers

using such equipment were threatened withcurtailment by El Paso Natural Gas this year,because the engines were classified as converti-ble to alternate fuels by El Paso (hence F P Cpriority 3). Ind eed, they are convertible to d ieseloil, gasoline, or to electric motors. The cost of

14



doing so, however, along with the increasedenergy costs (in man y cases their natu ral gas wasgiven as rent by El Paso for using th eir land as apipeline right-of-way) was sufficiently large sothat many farmers testified that they wouldbecome hardp ressed finan cially and p ossibly pu tout of business.

From the standpoint of society, use of naturalgas for these special applications is sensiblebecause the cost of produ ction w ill be minimized

if natural gas is diverted from some other useswhere conversion to alternate fuels is much lessexpensive. Fortunately, many of these specialpurp ose uses generally d o not consume substan-t ial amounts of natural gas. They usuallyamount to less than 15 percent of the total gasused by a given industry, although some criticaluses such as feedstock uses of methane ornatural gas in firing many existing ethylenecracking furnaces, consume a much higherfraction of the na tural gas (over 50 percent) usedby that industry.

The danger for this coming winter is that if natu ral gas is completely cut off to a p lant wh ichhas a few critical uses such as those cited, theent i re p lant ma y be closed, even though asufficient su pp ly of fuel oil may be available for

the other uses in the plant. The problem canbecome even m ore acute if the curtailed p lant is amanufacturer of a critical part or if it is aprincipal customer of another industry. Thus,forward and reverse ripple effects could bringabout plant closings and loss of jobs for majorportions of entire industries. In this manner theregional problems described on page 9 couldeasily become national problems. For example, inDelaware City, Del., the Stauffer ChemicalCompany produced 50 percent of the carbondisulfide need s of the Un ited States. If this plantis shut d own by curtailment, it ma y be d ifficult tofind alternate carbon disulfide supplies. Metalfabrication plants in the East North Centralregion which manufacture critical metal partsfor automobile and railcar manufacturers arerelatively small-volume gas users themselves.Yet, if these plants were to be shut down formore than 2 to 3 weeks, the ind ustries depend ingon these parts might have to stop production,putting tens of thousands of people out of work.

The Federal Power Commission Order No.467-B, Curtailment Priority Scheme, was in-tended to ensure that high priority uses of gassuch as these, would be served even thoughpipelines curtailed their deliveries. However,when natural gas supplies were relatively

plentiful, industrial users, who have critical butsmall volume u ses of natural gas relative to theirtotal gas needs, often purchased gas underinterruptible contracts. Such contracts are in aPriority 3 or lower classification, even thoughthe critical end-uses would be in Priorit y 2 if thegas were bought under a firm contract. Forexample, a plant which used large volumes of natural gas for boiler fuel but only a smallamount of it for critical uses, might normally

have an interruptible contract and alternativefuel capabilities. For the critical use, propane-airwould be the standb y fuel while fuel oil wouldusually be the standby for the boilers. Becausegas was purchased under an interruptiblecontract the critical uses may not get gas, unlessproper propane storage and FEA allocations areobtained, it may not have sufficient propane tolast out a 100 percent natural gas curtailment forthe entire winter. In the heavily curtailedregions of the country, even firm contractcustomers are experiencing difficulties in ob-taining gas for their critical needs. The problemis even more acute here because these con-sumers have usually made no provisions forusing propane (i.e., storage and handlingfacilities).

There are a number of ways that industrieswh ich h ave a critical need for a gaseous fuel canat tempt to obta in suppl ies when they arecurtailed. They are:

q

q

q

Seek extraordinary relief from a curtail-ment from the Federal Power Comm ission.The result can bean or der from th e FederalPower Commission to a jurisdictionalpipeline to serve specific direct customersof the pipeline, or to deliver an equivalentamount to gas utilities in expectation thatthe gas will be delivered to the customersseeking extraordinary relief.

Seek extraordinary rel ief from Stateregulatory commissions which regulategas ut i l i ty companies not under FPC jurisdiction. Some distribution companieshave said that they will be able to supplylimited em ergency quan tities of natu ral gasto users for critical uses even though theformal administration of pipeline curtail-ment plans by the FPC would not entitlesuch users to gas.

Purchase prop ane, or in some cases butan e,as an alternative clean-burning gaseousfuel. The purchase of propane or butanemay require granting of an allocation bythe FEA. At present, this is uncertain

1 5



depending upon the outcome of legisla-tion

.22

Reduced Safety Margins

There is very little, if any, margin if abnormaloccurren ces were to affect gas supp lies and/ ordemand this winter. In particular, it is highlyprobable that indust r ia l output would beaffected if the Nation had a colder than normalwinter and / or a disaster or major accident closeddown gas production and/ or transmissionfacilities.

The effect of a severe winter is not preciselyknown, but it would increase hardship, theextent of which depends on a number of factors:

q The length and intensity of the cold spells.

q The portion of the winter in which theyoccur.

q The extent to which the specific gas utilityhas been able to prepare for a cold spell.

q The availability of prop ane, SNG, and/ or

stored gas.Most gas utilities polled have designed for a

winter which is normal or slightly (5 to 10percent in degree days) colder. Some, such as BayState Gas Co., have been able to prepare for a‘design’ winter (usually one year in 30) whichincreases their gas requirements about 20percent. On the other hand, South Jersey GasCo., is constrained to a n ormal w inter, if they areto meet all firm requirements, whereas in thepast they were able to prepare for winters 10percent colder than normal. On the average, itappears the economy will not be measurablyaffected if up to a 5 percent colder than normal

winter occurs, provided no other p roblems occurwhich would worsen the supply-demanddeficiency. Should a period of particularly coldweather occur early in the winter, however,there could be widespread unemployment andplant closings. The reason is that the gas utilitieswhich rely on storage to cover cold spells willhave to refill storage facilities to prepare forpossible cold p eriods later in the winter. This canbe done only by curtailing firm industrialcustomers. Since such an occurrence cannot beplanned for, the likelihood of plant closings isvery high for the periods needed to refill (2-4weeks). Therefore, the impact of a cold spell can

extend well beyond its duration. In this connec-tion, storage volumes held by most utilities arenecessarily lower than last year, decreasing theduration of abnormally cold weather that can betolerated.

Disasters which affect gas production wouldalso reduce supply below the levels needed tomaintain projected economic output. Thehu rricane that hit the Gulf Coast region last yearaffected the Tennessee Gas Pipeline Co., to adegree that produ ced 40 percent curtailments inthe East Tennessee area during most of thew i n t e r .

23T h e t o t a l c u r t a i l m e n t o n t h e

Tennessee gas system increased from 5 percentto 15 percent for the last 3 months of the 1974-

75 winter. A du plication this winter w ould causeplant closings, loss of prod uction, and u nemp loy-ment in those areas dependent on gas from thatpipeline. The duration and extent cannot bedetermined at this time, but the consensus of thepan el was that such a d isaster will be detrimentalto economic activity.

THE WINTER OF 1976-77

Introduction

One of the ma jor conclusions of the p anel was

that the natu ral gas shortage will be worse in thewinter of 1976-77 than it will be in the comingwinter (November 1975-March 1976). Fifteenmonths from now, economic activity is expectedby most to have considerably increased, as theeconomy continues i ts recovery from therecession. In addition, natural gas supplies,especially in the interstate pipelines, will con-tinue to decline. Consequently, the supply-demand deficit will be much greater in thewinter of 1976-77 than this coming winter.

Short-Term Natural Gas Supplies

Indication of the worsening situation is seenfrom short-term supply projections. Projectedannual deliveries of natural gas from existingreserves as of Decemb er 31, 1973, will decline byabout 1 trillion cubic feet per year (Table 6).

Over the past 4 years, production under newlong-term contracts each year has averagedabout 59o Bcf which is only 60 percent of thisexpected annual decline,

24Only when produc-

tion from all new sources is included (limited-term emergency, and long-term contracts) hasproduction from new sources over the last 3years equalled the decline in deliveries fromexisting reserves projected over the next 2 to 3

years.

Deliveries of gas un der emergency and limitedterm sales, however, have been considerablyredu ced by the expiration of these contracts and

16



Table6

Gas Supply and Deliverability SummaryVolumes Dedicated to Interstate Pipeline Companies As of Year End 1973

(Thousand Mcf at 14.73 Psia @ 60°F.)

ProducedGas SUpply

Projected Deliveriesand/or

12-31-73- Purchased 1974 1975 1976

A. Domestic Gas Supply

1.

2.

3.

Company Ownedand Long TermProducerContracts . . . . . . . . . . . . 129,979,335 13,094,261 12,593,463 12,014,629 10,687,841

WarrantyContracts . . . . . . . . . . . . 4,132,827 294,325 297,486 297,438 291,745

Emergency/Limited Term

Contracts . . . . . . . . . . . . 205,111 291,797 171,317 33,794

Total Domestic . . . . 134,317,273 13,680,383 13,062,266 12,345,861 10,979,586

B. Pipeline Imports

1. Canada . . . . . . . . . . . . . . 14,715,992 966,898 936,266 953,786 970,648

2. Mexico . . . . . . . . . . . . . . . 117,714 1,632 1,632 1,632 1,632

Total PipelineImports . . . . . . . . . . . . 14,833,706 968,530 937,898 955,418 972,280

C. LNG Imports1. Algeria . . . . . . . . . . . . . . . 8,665,747 44,788

Total AllSources . . . . . . . . . . . 157,809,890 14,648,913 14,000,164 13,301,279 11,996,654

SOURCE: Copied from the Federal Power Commission, “The Gas Supplies of Interstate Pipelines 1973”, p. 10.

they have n ot been replaced du e to court actionsand FPC decisions which have restr icted

emergency sales of gas.24

Therefore, the averageproduction from new long-term contracts is abetter measure of what can be expected in theway of new interstate supplies.

Total additions to reserves in the lower 48

States over the p ast 5 years have av eraged 9 Tcf per year while production has averaged 22 Tcf per year.

25If the 9 Tcf of added reserves are

produced over a period of 15 years, the averageannual production is approximately 600 Bcf.(The period to prod uce a natu ral gas field var ies.Many extend over the life of contracts lasting 20

years while others are produced more rapidly.The typical production period, however, is 15

years.) Even if all of the gas flowed to theinterstate market and none to the intrastatemarket, this is insufficient to overcome theprojected 1,000 Bcf annual decline in production

1977 1978

9,696,461

296,461

9,992,922

969,444

1,632

971,076

253,227

11,217,325

8,717,315

284,925

9,002,240

969,444

1,632

971,076

343,627

10,316,943

from existing reserves committed to the in-terstate pipelines.

Projected Situation for the 1976-77 Winter

With an expected increase in economic activityand the steadily deteriorating supply situation,there could be sizable constraints on the N ation’seconomic activity during the winter of 1976-77.

The consensus of the task force was th at d espitecontinuing ‘self-help’ on th e part of indu stry andthe gas utilities, manufacturing demand wouldprobably not be met even if normal weatherconditions were to prevail and no unforeseenevents in ter rupt suppl ies . The task grou p

expressed the view that the effects resulting

from continued conversion to alternate fuelswould probably be more than negated by theincreased demand for gas as the economyreaches n or m al lev els . C ou p l ed w it h t h e

17





IV. Issues Related to the Natural Gas Problem

This section p resents several issues wh ich thereview panel felt should be addressed in any

attempt to deal with the natural gas problem.The limited scope of the study as requested bythe Committee did not p ermit a detailed an alysisof these issues. Nevertheless, they should beconsidered in resolving the issues related tofuture U.S. gas supply and demand problems.

In this list, we have not included those issueswhich are presently under widespread discus-sion, such as changes in th e Natu ral Gas Act andpossible irregularities in natural gas production.The review panel indicated that these itemsbelong in any list of issues relevant to the n atura lgas question, however, we have given here th osepanel choices which may not have been con-

sidered in debate in Congress.

ISSUE 1

An examination of the worst-case situation,that could result from natural gas curtailmentsin the future, could define the limits of thepotential problems.

Summary

This report deals with the most probableimpacts this winter as determ ined from the data.However, as expressed in the report, this is ahighly fragile situation and more severe imp actscould occur. In addition, it is likely that insucceeding years the worst case for the 1975-76

winter may be the most probable case for thosewinters. Under these circumstances it would beuseful to estimate what the ‘worst-case’ situa-tion would be and what contingency plans forsuch cases exist on the part of the consumers,the gas u tilities, and the relevant State and localagencies.

ISSUE 2

Public perception of the energy problemappears to be a barrier in developing lastingsolutions.

Summary

A large portion of the public believes thatthere is no real energy problem. This isheightened by the m any symbols of apparentlywasteful natural gas consumption such asornamental gas lighting. Programs to eliminatethese symbols an d intensify Federal efforts suchas requirements on Federal contractors toreduce energy waste could be significant inawakening public perception of the problem.

ISSUE 3

The potential for State and local action inmanaging the natural gas shortage is often notfully considered.

Summary

If adequ ate consideration is not given to Stateand local actions and mechanisms for dealingwith the gas shortage, there is the distinctpossibility that Federal op tions will be developedwh ich red uce the flexibility of the Nation to d ealwith the p roblem. To this end there ap pears to beinadequate communication between Statesthemselves on the natural gas problem andattempts to manage i t . In al l the options

considered in chap ter V there is the potential fora large State role in determining the ways inwh ich that op tion can m ost effectively be app liedto the unique problems of the individual States.It appear s that in the p ast the State role has beencrucial to reducing the impact of gas and oilshortages.

ISSUE 4

Have contingency plans been sought withCanada and/or Mexico as a means for dealingwith emergencies?

Summary

Presently the United States imports about0.95 trillion cubic feet per year from Canada

19



which is used mostly in theThese imports are expected

Northern States. 2

to be phased outover the next few years. Presently no gas isimported from Mexico. However, both countrieshave the potential for delivery to the UnitedStates, and the possibil i ty that emergencydeliveries could be made may be worth explor-ing.

ISSUE 5

The long-term impacts of the immediate gasshortage and private and pu blic responses to itwill greatly affect the Nation’s economicstability over the next several years.

Summary

This report has attemp ted to point ou t some of these impacts, particularly with regard to theincreased use of imported fuel (oil and propane)as natu ral gas sup plies continu e to decline. Thereis a wide range of long-term impacts, includingincreased energy costs, environmental effects,transfer of manufacturing facilities, etc., whichcould not be adequately discussed due to thelimited scope of this study. Consideration of these impacts to the extent possible is desirable

in order to formulate policies which minimizeadverse effects.

ISSUE 6

The research and development activities of the natural gas industry, particularly in in-creasing end -use efficiency, are at sign ificantlylower levels than other energy sectors.

Summary

The natural gas ind ustry ap pears to be laggingin efforts to set up a strong energy researchprogram when compared to the electric powerindustry. Research and development expen-ditures on the part of the interstate pipelinecompanies and encouraged by the FPC areallowed as costs to be includ ed in th eir rates. Yet,in 1973, R&D expenditures on the part of theinterstate pipelines amounted to only 0.55

percent of their total revenues and only a smallfraction of this (probably less than .03 percent of t h e t o t a l ) w a s for end-use conservationprogram s. z” Finally, the gas industry h as not yetestablished a research organization similar to theElectric Power Research Institute. The gasindustry should be an important element in theNation’s total energy R&D structure.

20



V. Options for Dealing With Natural Gas Shortage

on an Interim Basis During 1975-76

INTRODUCTION

The long-term direction to be taken by theNation’s natural gas policy depends upon theway in which Congress amends the Natural GasAct. However, there are a number of legislativeand administrative options open to deal with thenatural gas shortage of the winter of 1975-76 on

an interim basis if necessary, in the eventCongress has not p assed legislation dealing withthe long-term problem. Most of these interimoptions w ill have longer term implications wh ichwill need to be identified, and some of them maybe relatively incompatible with certain formsthat amendments to the Natural Gas Act maytake.

Natural gas shortages have developed over anumber of years and even if new long-termlegislation were to be passed tomorrow, someimbalance between supply and demand wouldlikely persist for some period into the future.This implies that even after a long-term naturalgas policy is pu t in p lace, transitional pr oceduresstill will be desired to d eal with the period d uringwhich balance is being restored. Most of thesetransitional procedures are related to th e interimapproaches which the Congress could use to dealwith the natural gas shortage this winter. Thepurpose of this analysis is to focus on interimmeasures to deal with the coming winter. It willnot deal with the amendm ent of the Natural Gas

Act since the character of that amendment isunknown.

Although these options are principally Federalactions th e variou s States and localities can p layan important role since they are most experi-enced in dealing with their differing supply anddemand characteristics. Options concerned withconservation, fuel allocation procedures, andrestructuring of curtailment priorities may beparticularly appropriate in this context andutilization of their agencies in helping to carr y

out such measures may substantially enhancetheir effectiveness.

The interim options which can have some

practical impact on the shortage during thewinter of 1975-76 can be grouped into fourbroad categories. They are:

1. Options which increase gas supply;

2. Options which reduce the demand for gas;

3. Options which redistribute the available

gas within the United States in order toreduce severe regional shortages; and

4. Options which lessen the impact of theshortages on users.

A number of options which would appear,initially at least, to fall into one of these fourcategories may not be practical options for thewinter of 1975-76, since they require sufficient-ly long lead times for imp lementation and hencecannot reasonably be expected to be effectiveduring this period of time. This is particularly

true of many of the proposals for increasing thesupply of gas such as additional import of

liquefied n atural gas by ta nker or th e installationof liquid hydrocarbon based, synthetic naturalgas facilities. These options are best dealt withinthe context of the longer term n atural gas p olicy.

There are few short- term options whichattempt to increase the total supp ly of gas whichdo not deal with alleged irregularities in naturalgas production. One such action—an accelera-tion of the certificate approval process by theFederal Power Commission to connect offshoregas reserves—is already a part of the FederalPower Commission’s existing jurisdiction underlaw and needs n o legislation for its imp lementa-tion. There are, however, other options (which

are classified in th e category of red istribution of available gas) which would have a secondaryeffect of increasing gas production for thewinter since in some cases geographicall y

scattered p ockets of surp lus have developed andmore may be created. These surpluses might bedrawn on for some increased production if suchsurplus gas could be effectively distributed,

A second group of options—those designed toreduce the demand for gas—could respond tolegislative and administrative initiatives. Thesewould include mandatory limitations on theutilization of natural gas whether in specifiedapplications, such as boiler fuel or in installations

having dual fuel capability, or more generallimitations such as strong measures devoted tothe conservation of gas.

The third group of options are designed tomore effectively distribute the available gas.

21



They can be further subdivided into thoseoptions which alter distribution by means of price and those that do so by administrativeallocation. That natural gas shortages in theinterstate market are not uniformly distributedwas documented in Chapter II. In the intrastatemarket, shortages which appeared for a timewithin the p ast 2 years now seem to have becomeshort-term surp luses. As a result some prop osalsfor reallocation of gas to eliminate shortages

tend to look to the intrastate market to providesome relief. This is true for both price-orientedoptions and those which feature administrativeallocation. The latter also tends to look on thoseinterstate pipelines whose supply position isbetter than average.

Among the price-oriented options are thosewhich would permit e i ther the in ters ta tepipelines or indust r ia l users to enter theintrastate market and compete freely for in-trastate supplies on a price basis. The reinstate-ment of 180-day limited term sales to interstatepipelines is one such proposal. Another, whichthe FPC has proposed is rulemaking RM 75-25which would permit industrial users in certaincategories to buy intrastate gas free of pricecontrol and have it transported to facilities byway of interstate pipelines,

Reallocation schemes which depend uponadministrative intervention rather than the useof price include the institution of pipeline topipeline allocation procedures, short- termpreemption of intrastate gas supplies for theinterstate market, or suggestions for substantialmodification to national curtailment priorityschedules.

The fourth category of options are thosewhich are designed to lessen the impact of the

shortage on users. Among suggestions in thiscategory are improvements in availability of alternative fuel—especially propane which hasbeen under FEA allocation procedures. Theseprocedures have provided disincentives for theimportation of propane. Another group of options would include approahces providingeither capital or tax incentives to speed theconversion of existing gas-using facilities toalternative fuels. Other proposals are designedto provide temporary relief from environmentalrestrictions to increase the flexibility of usingalternative fuels.

These four categories appear to include theprincipal options which are available to reducethe shortage and/ or its imp acts for the comingwinter, although the list is not meant to beexhaustive. Each of these options is discussed inthe following text. A description of the option is

given, its relative effectiveness in dealing withthe shortage is discussed, and its usefulness atvarious depths of shortage is indicated. Finally,the effect each option may have on potentiallong-term solutions is outlined.

CONSERVATION

Description

The goal of this option is to encourage by th emost effective means p ossible, the reduction of natural gas consumption by residential, com-mercial, and industrial consumers.

Discussion

The potential of energy conservation inreducing the gap between supply and demand of natural gas is quite large. For example, the totalvolume of natural gas used by residential andcommercial consumers during the winter of 1974-75 was about 4.5 trillion cubic feet. z A 10

percent reduction would yield 45o billion cubic

feet which would exceed this coming winter’sprojected incremental shortfall. Although thenonuniformity of the gas shortage may notpermit full use of a volume this size if it wereavailable, there w ould still be significant imp acton reducing the shortfall.

Conservation can be effective within all timeframes. It can have short-term effects throughcutbacks in gas consumption by action such asreduction in thermostat settings, relatively easyhousekeeping measures, and elimination of ornamental gas lighting. It can have an impactwithin the next 12 months by such things asincreased insulation in existing structures and

pipes transmitting hot gases and fluids andsealing up heat leaks in buildings. It can havelonger term impacts through such actions asutilization of more efficient gas consumingequipment and industrial processes, andrecovery of waste heat from gas fired furnaces.

In t h e im m e d ia te fu t u r e t h e p r in cip a lemphasis will probably have to be measures tocurtail gas consum ption, particularly in the highpriority residential and commercial uses, ratherthan measu res to increase energy efficiency. Thedifficulty here is in convincing these consumersto curtail their use. One method demonstratedto overcome this difficulty has been by usingeconomic penalties to restrict gas consumption.Another method has been through collectiveaction on the part of a community in order tohave enou gh gas to m aintain jobs. An example of the latter occurred in Danville, Va., in 1974-75.

2 2



These actions appear to be useful for short runemergencies but they will become less effectiveas curtailments deepen a s there is a limit on howmuch a person is able to cut back.

The most lasting conservation p rograms seemto be based on more efficient uses of energy,since virtually no economic or social pressureexists to return to less efficient practices. Tobring this about, particularly in the residentialsector, will probably require a series of incen-tives dealing with economic and institutional

factors. An effective program in this contextrequires a clear understanding of exist inginstitutional, jurisdictional, economic, and otherbarriers, however, it is possible that somemeasures, such as tax incentives for insulation,could have a significant effect for the winter of 1976-77.

In the ind ustrial area, capital or tax incentivescan be useful in accelerating the installation of more efficient equ ipment, h eat recovery d evices,and other fuel-saving measures. There is apotential pitfall, however, in that decisions mayhave to made as to whether particular equip-ment changes made under this plan are primarilyfor conservation or to replace old equipment.Since a num ber of motives can be p resent for anyequipment change or modification, care shouldbe taken to see that such a program is notabused.

Conservation is one of the few options whichcan be effective even if curtailment levels d eepenover the next several years since most otheroptions depend on redistribution of gas. As gassupply decreases less is available for redistribu-tion.

Finally, conservation ap pears to be compatiblewith any of the ap proaches to long-term chang esin the Natural Gas Act. In any event, conserva-tion was judged by many members of bothpan els to be one of the more p romising options indealing with both the short- and long-term gasshortage.

180-DAY EMERGENCY SALESOF NATURAL GAS

Description

This al ternative would allow interstatepipelines to purchase natural gas on theintrastate market, either from prod ucers direct-

ly or from intrastate pipelines. The purchasewould be limited to 180 days with automaticabandonment of the sale and transportation of gas at the end of the period.

Discussion

This option, in any of a number of variations,appears to be one of the more favored m ethodsof dealing with this winter’s emergency. Onesuch variation is to allow th e parties involved toset the price and allow the pipeline to pass-through the price to the ultimate purchaser.Another variat ion which is receiving con-siderable attention is to set a ceiling price whichwould correspond in some manner to prevailingintrastate prices.

Currently, there is gas available from in-trastate markets an d it is expected to be availablethis coming winter. The qu antities are uncertainbut some of the more optimistic estimates arethat 1 billion cubic feet per d ay m aybe available.This volum e is about 50 percen t of the 300 billioncubic feet incremental gas shortage estimatedfor this winter. Surplus natural gas in theintrastate market could be sufficient to helpalleviate the most serious shortages. For exam-ple, Transcontinental Gas Pipe Line Companyestimates its curtailments have increased by300-400 million cubic feet per day for theforthcoming winter. Thus, if gas estimated to be

available from the intrastate market weredirected to this pipeline, many of the problemswhich are likely to occur on the Transco systemcould be solved. Analysis of FPC data shows th atabout 1 billion cubic feet per day of natural gaswas purchased by interstate pipelines fromintrastate markets during the winter of 1973-74,w h e n 180-d a y e m er g en cy p u r ch a se s w er eallowed. In this connection a recent U.S.Supreme Court action (October 14, 1975) hasleft unchanged a lower court decision whichdenies the FPC the power to grant 180-dayemergency purchase at essentially unregulatedprices. In effect, the courts state that this is

deregulation which is beyond the presentauthority of the Commission.

Emergency purchases and transportation for180 days could also be structured to allow gasutilities to trade with one another. This can bequite useful in stimulating short-term distribu-tion of natur al gas to areas n eeding it m ost. Sucharrangements would be useful in providing ameans to take advantage of weather diversityamong various areas. Contracts between gasutilities must be made on very short noticebecause the availability of excess gas is uncer-tain.

If curtailments were to deepen, the 180-day

purchase option would become relatively lesseffective if the total volum e of excess gas is fixed.Und er the variation wh ich d oes not set a ceilingon p rices, the cost of the excess gas w ill pr obably

2 3



rise in som e relation to th e d iminishing su pp ly. If the price is fixed, it would seem that otherincentives to move the excess gas would have tobe applied. If the shortage deepened, producersmay be increasingly less inclined to sell excessgas under a ceiling price (in hopes of futurechanges in these prices) and the incentives mayhave to be strengthened.

The ultimate consumer of gas under this planwould see some increase in the price of naturalgas although not to the full extent of the

intrastate prices since these wou ld be rolled intothe lower-priced flowing ga s. It is qu ite possiblethat the fuel costs to the consumer purchasinggas in this manner, even at intrastate prices of $2.00 per Mcf, wou ld be less than if the user hadto purchase equivalent amounts of SNG, LNG,and/ or propan e to make up for gas deficiencies.This would depend on the prices of thesesupp lements to a given buyer and the transpor-tation and distribution costs of the emergencyintrastate gas.

Finally, emergency sales for the case where aceiling price is not set are compatible with a long-term solution that tends toward deregulation,

since it is limited d eregulation. In ad dition, theywou ld not necessarily prov e harmful, because of their limited d uration, if legislation d ealing w iththe long-term problem tightens or extendsregulation over the natural gas industry. For thecase that price ceilings are set as a provision foremergency sales, a natu ral transition for legisla-tion maintaining or extending regulation isprovided. -

DIRECT PURCHASENATURAL GAS

Description

This options permits the direct

OF

purchase of natu ral g-as by the utlimate consum er from gasproducers at prices comparable to those paid fornew, intrastate gas. The pipelines and gasutilities would serve only as common carriersand not pu rchase the gas themselves.

Discussion

On August 28, 1975, in Order No. 533, th eFederal Power Commission issued a policy

statement which encouraged a modified form of direct purchase. These purchase arrangementsare to be certified by th e Comm ission wh o wou ldnot reexamine the contract price set by the

24

par t ies but would determine whether theultimate use of the natural gas was of a highpriority. In addition, the volumes of gas pur-chased under this order could not exceed theamount curtailed. The Commission also statedthat gas utilities could not act as agents for agroup of purchasers such as small commercialand/ or residential consumers.

The Task Force felt that the direct purchaseplan was an option that could have a positiveimpact in relieving some of this winters gas

shortage. Several reservations were expressed,however, as to the plan as it now exists. Theprimar y d ifficulty seems to be th e limitations onwh o could p urchase th e gas. Because high initialcosts might be required, only the largest userscould effectively take advantage of this option.Further, the exclusion of gas utilities wouldprobably remove altogether most of the smallindustrial customers from taking advantage of this plan. There is the possibility, however, of the emergence of brokers entering the intrastatemarket for direct purchase of natural gas onbehalf of a number of these small customers.This assumes that restr ict ions would not

prohibit such activities and that the brokerscould be regulated in the same manner as otherdirect pu rchasers. Another d ifficulty is potentialdelays in approving certification of these con-tracts. The Com mission has expressed the belief that th ey will be able to exped ite these matters ina timely fashion.

With regard to deepening levels of curtail-ment, the effectiveness will be similar to that of the 180-day purchase plan.

Since the volumes to be pu rchased d irectly areunlikely to be large, this policy is unlikely toinfluence significantly any of the long-termsolutions to the natural gas shortage. Issues of equity may be raised depending upon theprocesses that obtain the volume of gas thatbecomes available after new natural gas legisla-tion is passed, but, because, FPC Order No. 533limits the purchase contract to 2 years, anyinequity will be short lived.

Even with these possibilities, it is likely thatOrder No. 533 will have some positive benefitalthough the extent to which it will help thiswinter is unknown. If those companies whichface plant shutdowns are most active in pursuinggas, which one would expect them to be, and th eFPC expedites their applications, then some

plant shutdowns are likely to be avoided. In thiscontext, direct purchase may serve as aneffective means of allocating emergency gas forcritical uses.



MANDATORY PIPELINE-TO-PIPELINE ALLOCATION

Description

This would provide legislat ion to grantauth ority to the Federal Governm ent to instructpipelines with adequate supplies of natural gasto deliver that gas to pipelines where seriousand potentially disruptive shortages appearimminent.

Discussion

It is presently envisioned that pipeline-to-pipeline allocation will primarily cope withshortages in the interstate market by d rawing ono ther supp lie s ded ica ted to the in t e rs t at emarket. This can be done without joining themajor issue of preemp ting intrastate gas supp liesfor interstate use. Where interstate pipelineshave some potential surplus delivery capacitygoing into the winter, allocating their gas todef ic it p ipel ines in shor tage area s co u ldredistribute the total supply over this winterwithout causing any serious hardships on any

other legitimate customers. However, to theextent that most pipelines will be in somecurtailment this winter, the principal effect of such an authorization would be to permit theGovernment to authorize deeper curtailmentson pipelines where curtailments were not inhigh-priority categories in order to protect thehigh-priority customers of another pipeline.This raises complex issues since the pipeline thathas been able to protect some of its lower-priority customers through its own effortswould now have to deny those customers gas inorder to provide it to a more severely affectedpipeline. In addition, it should be noted thatthese transfers could increase the depletion rateof fields supplying the stronger pipelines as thel a t t e r a t t e m p t t o m a k e u p n a t u r a l g a stransferred to weaker pipelines. This will affectfuture years by d ecreasing sup plies faster than isnow expected, making the situation even moresevere for the winter of 1976-77. Therefore ,while the effectiveness of this option wouldprobably remain constant in the short-term if the curtailment deepened, it is likely to dropsharply and even become negative beyond thiswinter.

Pipeline-to-pipeline allocation has been highlycontroversial. Those who favor the ultimateFederal system of end-use controls for energy

sources tend to favor pipeline-to-pipeline alloca-tion to make su re the shortages are concentratedin low-priority customers and that h igh-priority

customers are protected by Federal regulationregardless of the accident of which pipelinesystem they are served by. On the other hand, ahigh percentage of the private industrial seg-ment op poses pipeline allocation on the groun dsthat it strikes at some of the fundamental issuesof Government control in the private sector of the economy.

A variation of this proposal concerns gas onFederal lands, primarily offshore. Presently theFederal Government takes a 16-2/3 percentroyalty in cash payments.

However, thepossibility exists of taking the royalty “in kind”and allocating this gas to those pipelines ingreatest need. This minimizes some of the issuesraised above since now the Federal Governmentis dealing with its own gas and would not beallocatin g gas owned by the pipel ine . Onedifficulty would be that such moves might tendto act as a d isincentive for offshore exp loration if the companies perceived th e prod uct value of thegas greater than the cash value of the royalty.

The extent to which mandator y allocations arecompatible with various forms a new natur al gasact could take depends on the extent of newsupplies generated by that act. If they were not

forthcoming, it may be necessary to retainmandatory allocation to manage a short supplyof gas, regardless of whether it was deregu latedor regulation extended into the intrastatemarket, until demand and supply come intobalance,

MODIFY CURTAILMENT PRIORITIES

Description

This establishes a set of curtailment prioritieswhich will b etter protect critical uses of natu ral

gas than presently exists. The Federal PowerCommission now has the authority to setcurtailment priorities. This proposed remedycould presumably be accomplished now by FPCaction without the necessity of emergencylegislation.

Discussion

T he a rgum ent fo r r ev i s ing cur t a i lm en tpriorities to better protect uses of natural gaswhich cannot be converted to alternate fuels iscommonly voiced by those who have beenthreatened by loss of gas. This has been arguedextensively in Federal Power Commission

curtailment hearings and has been expressed bythe industry representatives to the panel. Oneproblem with suggested mod ifications of curtail-

25



ment p rograms is that they are usually proposedby adv ocates of a particular ind ustry w hich viewthe recommended change as one which wouldprotect them. Since elevation of one use intopr io r i ty s t a tus can on ly be ach ieved bydowngrading some other use, however, it isextremely difficult to get common agreement asto how to improv e curtailment p riorities in a justand equitable manner. Curtailment prioritiesdesigned initially to deal with large v olume, lowpriority uses of natural gas are increasinglybeing applied to small volume, higher priorityuses with the result that administration is morecomplex.

The issues raised in establishing curtailmentpriorities are perh aps some of the m ost complexin the entire natural gas situation. In deter-mining who gets a limited supply of natural gasyou often ha ve adv anced conflicting eviden ce tosupport a claim that one use is superior toanother. Two of the important issues that mustbe dealt with are as follows:

1.

2.

What factors are to be used in determiningpriorities? Some of th ese includ e the valueof the manufactured product (e.g., am-

monia, goods for national defense), theimmediate impact of a cutoff in gas (e.g.,the size of the job loss), the feasibility of conversion to an alternate fuel (e.g., thecost), and the technical efficiency of the useof gas.

What are the long-term impacts of reserv-ing gas for a particular u se? Some of theseinclud e the effect a conversion will have onthe use of other fuels (particularly im-ports), whether or not allowing a particularuse will inhibit the most effective conser-vation options

27, and whether eventual

conversion has just been postponed to a

point where it will be even more difficultand have even greater impacts.

The resolution of these issues is beyond thescope of this report. It is important that they beconsidered, however, so as not to create moreproblems than are solved in making a choice of curtailment priorities.

I t would appear a t th is t ime that someimprovement in curtailment priorities for thehigh-priority customers wou ld be va luable. This,by itself, wou ld help for only a limited period of time since curtailment levels have been steadilydeep ening. Such a ctions, how ever, if carried outin an effective manner could have long-termbenefits even if sup plies continu e to d ecrease asnatural gas would be increasingly reserved forthose pu rposes for which it is best suited. As far

26

as new natural gas legislation is concerned, thesame comments made in regard to the man-datory allocation apply here. One exceptionwou ld be if deregu lation were accompan ied by acomplete freeing-up of how gas is distributed. Inthis case the price mechanism would probablyset the priorities.

PREEMPTION OF INTRASTATE GAS

Description

This would provide legislation to auth orizethe Federal Governm ent to exert authority overintrastate gas currently being sold in theintrastate market, and order its delivery todeficit interstate pipelines.

Discussion

The ability of the intrastate market, which isnot regula ted by the FPC, to outbid theinterstate pipelines for natural gas has tended toconcentrate the shortage in the interstatem arke t . T h i s has been one o f t he m a jo r

identifiable results of current Federal regulation.Of particular interest in this context is the

very large volume of natural gas burned underelectric utility boilers in the intrastate market,wh ich w as d iscussed in Chap ter III, p. 13. It w asnoted there that a fraction of this gas whichcould be reliably counted on this winter, if preemption were to occur , depends on theclaimed technical problems of these boilers, It isalso necessary to assure oil availability which is aproblem that would extend beyond this year. If all the boilers with du al-fuel capability could bemodified to burn oil this entire winter andassum ing no change in efficiency, the 480 billion

cubic feet is equivalent to 85 million barrels of fuel oil. For the winter 1976-77 it is probable thatthe corrosion problems of many more boilerscould be cleared up so that they may be able tooperate on oil the entire winter. A criticalconsideration here may not be the time factorbut the availability of sufficient generatingcapacity for units to be taken out of service forconversion. It could be expected, however, thatpreemption of natural gas from utility boilerscould be more effective in 1976-77 than for thiscoming winter. Finally, if it is true that over thelong-term, use of natural gas in a boiler is aninferior use of this fuel, then mechanisms totransfer this gas would assist in reservingnatural gas solely for critical uses.

Preempting intrastate gas to solve thiswinter ’s problems might prove to be ad-



ministratively highly complex. Although thereare a limited number of interstate pipelineswhose curtailment practices are subject to FPCregulation, there are far more sellers of in-trastate gas—in many cases to geographicallyadjacent pu rchasers—and it wou ld require that alarger administrative machinery be put in placeto accomplish such intrastate preemption.

A serious qu estion that must be answered by a

preemption scheme is compensation to the userwho loses the gas. This could be determinedrather directly if preemption was for a limitedduration, but the calculation would be quitecomplex if it were permanent. In addition, thereis the question of the price paid for thepreempted gas by the new consumer. If it isallowed to rise to new gas prices (interstate orintrastate), large windfall profits would accrueto the seller. If it is not allowed to increase overthe level paid the preempted customer, thenmechanisms would have to be established toensure that the gas is not held back from themarket. The question of existing contracts is

deep ly connected w ith this price question. In thiscontext, if the preemption is set to last only thelength of the emergency, the question of howthe original contract should be reinstated mustbe answered.

Preemption would likely have the largestenvironmental impact of any of the short-termmeasures. Air p ollution will increase as m ore oilis used in place of natural gas and the potentialmagnitude of this conversion is greater than anyother type for the next few winters.

With regard to potential forms of a newnatural gas act, preemption would have muchthe same impacts as mandatory allocation andredefinition of priority schedu les. Since preemp -tion would place the intrastate market in theregulatory framework, it would tend to be morecompatible with a long-term solution whichextended price regulation in this market.

CAPITAL OR TAXINCENTIVES FOR CONVERSION

Description

This measure wou ld provid e financial assist-ance to users faced with the necessity to convertto alternative fuels and/or who d esire to installconservation equipment. Tax incentives orcapital might be made available on favorableterms.

Discussion

Conversion to alternate fuels in many in -stances requires considerable capital and in -s ta l la t ion t ime . The principal limitation oneffectiveness appears to be the time needed forinstallation, although capital availabilit y is aserious, but not limiting restraint. If this is thecase, the effectiveness of this option would likely

be greater for periods a fter this winter. Ind eed if

curtailments increase, the incentive for carryingout conversion grows, and this option could havesubstantial long-term b e n e f i t s by r a p i d l y

accelerating this measure. It is important t.consider the effects of conversions financedunder this plan. Exchanging one scarce fuel foranother may not be the most effective way tocarry out this option.

This approach seems to be compatible withany of the long-term methods of solvin g th enatural gas problem and, as a result, might beconsidered as transitional procedures to be putinto effect in any long-term amendment to theNatural Gas Act.

TEMPORARY STAY OFENVIRONMENTAL RESTRICTIONS

Description

High -sulfur coal and high -sulfur oil are morefreely available than some of the lower-sulfurfuels. Customers whose natural gas supplies arecurtailed might find it easier to convert if theyhad the ability to use higher-sulfur fuels on anemergency basis when gas was curtailed.

Discussion

Most of the users w ho could bu rn coal can alsoburn heavy low-sulfur fuel oil, to some extent.Unless the local logistics of refineries, distribu-tion systems, and pipelines has not developed asupply capabi l i ty in a par t icular region,therefore, it is unlikely that elimination of theenvironmental restrictions will have a ver y

significant effect on the number of users whowould have to shut down altogether. It would,however, have a significant price effect. Forexample, high-sulfur oil is much cheaper than

low-sulfur fuel oil for those users who have toconvert from natu ral gas and ar e able to use coal.The principal impact with this options,

however, is the effect on air quality. It is quiteimportant to carefully evaluate the tradeoff of increasing air pollution with the benefits of

2 7



being able to use a wider ra nge of alternate fuelsbefore environmental controls are adequatelydeveloped.

The effectiveness of this option as it relates tothe d epth of curtailment is p rimarily depend enton th e potential for conversion to alternate fuelswhich may not meet local environmentalstandards. As shortages grow, the need forconversion will increase, and if high-sulfur fuelcan be u sed it w ill be less difficult to coun ter theeffects of curtailment.

IMPROVE PROPANE, LNG,AND SNG SUPPLIES

Description

T h is op t io n i n vo lv es r em o va l o f th o sebarriers which hin der the d evelopmen t of fuelsupplies which can directly substi tute fornatural gas.

Discussion

The potential for dealing with the projectedshortfall this winter by alternate gaseous fuels islimited due to the time required to secure thesupplies and build the facilities to handle orproduce them. The most likely candidate ispropane, which was discussed in some detail in

Chapter III. The task force expressed the viewthat the use of propane much beyond thatalready schedu led this year is un likely du e to thelack of onsite storage and transportat ionfacilities. While SNG and LNG have a longer-term p otential, they will not be able to add mu chthis year over that already online. However,plants producing SNG from naptha have a 1-to3-year lead time and could have substantialimpact in the winters following this one.

The principal d ifficulty with all these sourcesis that they depend primarily on imported fuel.In addition, the costs of SNG plants and LNGterminals are high which is also quite importantwith r egard to SNG and LNG facilities. Conver-sion of liquid hydrocarbons to SNG involvessome waste in that the conversion efficiency isabout 80 to 90 percent. Therefore, the value of SNG must be weighed against the value of theliquid hydrocarbon feedstock, including thelosses, as an additional factor in determiningwhether to proceed with an expanded SNGprogram of this type. Finally, the costs of thesealternatives are quite high, $2.50 to $4.oo p er

Mcf equivalent, which will add substantially toindustrial energy costs.

The use of these fuels is expected to increaseover the next several years as natural gassup plies decline. Their effectiveness in prov idingrelief to the natural gas shortages will depend onthe ability to overcome the p roblems outlined inthe previous paragraph.

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Documents

Analysis of the Impacts of the Projected Natural Gas Curtailments for the Winter 1975-76