The MacNeil/Lehrer Report; Natural Gas Shortage

ROBERT MscNEIL: Good evening. Yesterday Interior Secretary Cecil Andrus ordered an investigation of all the natural gas fields leased from the federal government in the Gulf of Mexico to find out if gas was held back from American consumers this winter. His action was based on an eleven-day study of five gas fields in the Gulf which showed that production there had declined sharply in the last two years-and is now substantially below the maximum efficient rate of production established initially by the producers themselves. At a press conference yesterday Andrus stressed that the thrust of the investigation is not one of finger pointing but one of fact finding. But he added if the Interior Department discovers that the gas companies were indeed withholding supplies at a time when schools and factories were closed for want of natural gas to heat them, he will land on them like a ton of bricks. Right now, he said, the preliminary study raises more questions than it answers, and we plan to examine some of those questions tonight. Jim?

JIM LEHRER: Robin, six people conducted that preliminary investigation and wrote the report for the Department of Interior. They were drawn from the staffs of the Federal Power Commission, the U.S. Geological Survey, a private consulting firm and the Senate Antitrust and Monopoly subcommittee. The man from the subcommittee was economist David Schwartz. He was the assistant chief economist for the Federal Power Commission for ten years before joining the committee. Dr. Schwartz, as Robin said, your job was to examine records concerning these five natural gas fields off the coast of Louisiana. In simple terms, what were your conclusions?

DAVID SCHWARTZ: Very simply, I concluded from the evidence in these five fields, of which four were studied in depth in the Gulf of Mexico, that we could have had substantial additional quantities of gas delivered this winter than actually were delivered, that there was in fact two platforms closed down which were very questionable as to the need for the closing of those...

LEHRER: A platform meaning a gas well, right?

SCHWARTZ: No, a platform in fact is a structure in which you may have a number of wells. In one platform there were seven gas completion wells; in another platform there were three gas completion, so there were ten gas well completions in all on these two platforms that were closed down -- one as long as nineteen months. Now, I`m saying that on the basis of two basic factors -- a very sharp decline, almost fifty percent in the East Cameron 271 field; secondly, declines in production in Grand Marsh Island 43 and South Marsh 48 and Tiger Shoal that in fact these four fields you have very marked declines over a two-year period that we studied -- January `75 to December `76, the twenty-four months -- that there were significant declines in production that I feel were not necessary. And secondly that there are very significant quantities of so-called "shut-in proved reserves" totaling almost one trillion cubic feet from which we could have had production.

LEHRER: It`s just sitting there and was capped...

SCHWARTZ: They`re without any wells whatsoever, that`s correct; they`re shut-in reserves totaling 982 billion cubic feet in 225 reservoirs in these five fields.

LEHRER: All right. The crucial question, of course, Dr. Schwartz, Do you think this gas was deliberately not produced?

SCHWARTZ: I think that obviously that is an argumentative point. I say that the gas physically could have been produced and wasn`t produced. Now, if you take the producers` choice, that is the private profit maximizer -- as a private profit maximizer, if I foresee deregulation and significantly higher prices, perhaps double what I now can get or if I see the possibility of the Federal Power Commission significantly increasing price I`m not going to liquidate my assets at a price which will give me a fair return and cover all my costs; I`m going to hold onto that in order to make economic rents and monopoly profits. And therein lies the problem with regard to non-production of the shut-in proved reserves and non-production from fields which could have produced, where wells had produced previously.

LEHRER: Do you think that`s what has happened in this particular case?

SCHWARTZ: Yes, I`m convinced that`s what`s happened in this particular case.

LEHRER: That they deliberately were not produced, either of the two kinds, because they were waiting for the price to go up?

SCHWARTZ: That`s correct.

LEHRER: Even during the emergency, when the emergency situation arose?

SCHWARTZ: That`s correct.

LEHRER: All right. Knowing how much gas was there, in this one area, at least, that we`re talking about, what effect would that have had on the shortage that we just went through?

SCHWARTZ: Now, we`re talking about five fields out of 220 fields in the offshore Gulf of Mexico, and I`m saying you had almost one trillion of shut-in proved reserves and the potential production from that one trillion shut-in. And you also had a decline in the East Cameron 271 field of approximately from 200 billion cubic feet of production at the beginning of 1975 to only 100 billion -- half of that -- at the. end of 1976; so you have a billion there in just the East Cameron 271 field of a decline...

LEHRER: What does that translate into in terms of...

SCHWARTZ: In terms of deliverability?

LEHRER: Right.

SCHWARTZ: I would say that we could have had somewhere between three hundred and four hundred billion cubic feet of gas produced from the shut- in and produced from those fields which in fact we did not get full production from.

LEHRER: In other words we did not have to go through the shortage that we went through as serious as it was.

SCHWARTZ: We would not have to have the severity of the shortage. But don`t forget, we only looked at five fields; I don`t know what was available in the other 198 fields in the Gulf.

LEHRER: Thank you, Doctor. Robin?

MaCNEIL: If the Interior Department should find, as Mr. Schwartz has charged, that gas companies were deliberately withholding supplies the companies would find themselves in trouble. For while a company can legally refuse to produce gas that lies beneath its own private land the gas fields mentioned in yesterday`s report are not privately owned; they`re leased from the federal government on a five-year basis, and those leases require producers to exercise "due diligence" in getting that gas out. Richard Palmer is senior vice president of Texaco, one of the major lease holders in the Gulf of Mexico. He`s in charge of producing operations in the western hemisphere and worldwide exploration. Mr. Palmer, let us go through some of the things that Dr. Schwartz has just charged. First of all, the sort of gross charge is that for monopoly and maximizing profit interests the oil companies -I assume including Texaco -- have been deliberately withholding production this winter.

RICHARD PALMER: Our viewpoint, Mr. MacNeil, obviously is that Texaco on its own part has not deliberately withheld any reserves, any production. We are in fact in a posture in the spe cific field which was investigated in this instance -- the Tiger Shoal field -- in a posture of delivering 150 percent of the contractual call on the gas that comes from that field and we have maintained that for some time. We are not withholding gas; in fact, we are endeavoring continually every day to augment our search for gas and for oil, the energy base of the United States, and we are continuing to spend a great deal of money every year to do just this.

MacNEIL: You say that that field has been producing 150 percent of its contractual obligation. The report nevertheless says, as quoted by Dr. Schwartz, that in the Tiger Shoal field production dropped significantly below its maximum efficiency rate.

PALMER: Now, let`s define "maximum efficiency rate." The MER as so defined is a measure of the amount of gas, in this case, that the combined wells of that field can produce without damage to the reservoir. And I think that`s a reasonable definition. The reservoirs in the Tiger Shoal field have been developed -- in fact have been sold -- to a gas transmission company in a contract which is to last for twenty years. That contract specifies certain deliverability requirements, and the terms of that contract and the deliverability requirements had been the subject of certification by the Federal Power Commission. In a nutshell, that regulatory agency not only defined what we were going to sell but in fact examined and authorized what we were going to sell.

MacNEIL: But did that rate of production to satisfy that contract in fact have you operating below maximum efficiency rate?

PALMER: Very likely did, because it was in fact a contract that was entered into freely with a gas transmission company who set the rate at which they wished to take the gas, recognizing that the reserves committed to that sale by Texaco were going to have to last them twenty years.

MacNEIL: Now, the other -- if you like, larger -- question raised by the report is why there are such "large quantities of non-producing reserves," and it also mentions in the Tiger Shoal fields five reservoirs and they give a figure of some 500 billion cubic feet of reserve to remain non- producing until 1981. Now, a householder going short of gas this winter might say, "H%. if they`ve got all that, why can`t we get some of it sooner? .

PALMER: If you regard the reserves in the Tiger Shoal field as a bank account, that bank account adds up to a certain number of cubic feet of gas in the reservoir. The gas transmission company is going to produce that set of reservoirs over a period of time -- in this case, twenty years. Their demand on that bank account is going to come at a certain pace, and at the end of the twenty-year period it is to be assumed that that bank account will be drawn down essentially to zero.

MacNEIL: When the contract ends.

PALMER: When the contract ends. At any one particular moment, where all of the reservoirs develop and all of the gas wells drilled and in a produceable state, the volume of production would be impossible for the pipeline to take because of capacity problems. The result: we would have an enormous economic waste with gas wells stacked, really, in an inoperable condition, in an environment in which obviously they would deteriorate. So there is a patterned development of these reservoirs that is geared to the take that the gas transmission company wishes; and that is why reservoirs stand idle over a period of time. They are recognized as being part of the bank account to be drawn on as the requirement evolves.

MacNEIL: I see. Dr. Schwartz, what do you say to that?

SCHWARTZ: I`m saying that I believe that what Mr. Palmer has done is gone into a very vague, general discussion of looking at a reservoir or a number of reservoirs in a field -- and we`ll look at Tiger Shoal in just one second -- in a very vacuous context. The truth of the matter is that Tiger Shoal is a very shallow field in which you could drill individual well caissons. You do not have to have a large production platform because you have a field that lies in twelve to twenty feet of water. In fact, you can get significant new gas supplies from these shut-in reserves that Texaco is holding. In fact, they reported to the Federal Power Commission shut-in reserves of 181 billion cubic feet at the end of 1974. Truthfully, by the end of 1976 the United States Geological Survey had indicated substantial additional quantities of shut-in reserves. These could very quickly be produced.

LEHRER: Is this what you`re talking about, this shallow-water rig right there?

SCHWARTZ: No, that rig is not .a shallow-water rig as far as I can see.

LEHRER: It certainly looks like it to me, Dr. Schwartz.

SCHWARTZ: Well, no.

LEHRER: But that`s basically a platform.

SCHWARTZ: It`s a platform, right. And I`m saying you can drill individual wells in shallow water and do not have to wait for setting up a major platform, which takes a long period of time, in order to drill your wells. The other thing about Mr. Palmer`s statement, not only with regard to the non-production but the shut-in capacity in these reservoirs, was the general problem of increasing MER`s over time. The so-called maximum efficient rate from the Tiger Shoal field has dropped from the beginning of `75 to the end of `76 sixty-nine percent. And in order to keep that production up you`ve got to drill wells; and that they have not done. Now, relative to the Federal Power Commission contract obviously the Commission could and should have set aside the private terms in order to get the full maximum production out of Tiger Shoal.

MacNEIL: Dr. Schwartz, let`s leave the FPC out of it for a second and just come back to Mr. Palmer on the points that you`ve raised. What about the point that it would be easier to drill more actual wells in the shallow waters, and the point that he claims that you have redefined your MER downwards -- your maximum efficiency rate?

PALMER: The maximum efficiency rates for wells in the federal domain -- or anywhere also, for that matter -- are a factor of the life of the reservoir itself. How long has this particular producing sand produced? Over time the maximum efficient rate is bound to fall because you are withdrawing from that reservoir the production that you anticipated you would receive, It`s a little bit like getting soda, I suppose, out of a Coke bottle. When you first open the Coke bottle you get a big fizz, and that`s a high MER; but then after a while you`ve got to shake the Coke bottle to get the gas out, and that`s a little bit like the reduction in the MER as the life of that reservoir extends over a period of time under production. The changing MER`s, to anybody involved in engineering work and reservoir engineering work, ought to be a very obvious characteristic of production and reservoir physics.

MacNEIL: Dr. Schwartz, you seem to be suggesting that there was something wrong about lowering the MER`s on these wells.

SCHWARTZ: There`s evidence that is indicated in the report that in two reservoirs in Tiger Shoal in fact the MER`s increased by drilling two wells in one reservoir by twenty-some percent; in another reservoir one well increased production by twenty-six per cent. Now, Mr. Palmer has left the impression that MER`s are always on the decline. In fact, in these two reservoirs by drilling additional wells the company itself redefined its MER`s upward, not downward; so that in fact it`s the characteristics of the reservoirs given the number of wells drilled. And he is presupposing just one pattern of constant decline. I contend the evidence is clear in the report that in two reservoirs we had significant increases in production because new wells were drilled, and that is what Mr. Palmer and Texaco is not doing in the Tiger Shoal field.

MacNEIL: So we could move on, could I summarize this -- am I right in thinking you`re saying, "Yes, we could get more gas out of those fields faster but our present contracts are of a certain limited rate of production." Dr. Schwartz is saying, "You should get it out faster, and the FPC and the government should make you because the country needs it." Is that what it comes down to?

SCHWARTZ: Yes, I believe that`s exactly it. It`s the private companies` purview as to how to maximize their profits versus the social requirement of adequate gas supplies for full employment and in order to heat homes and take care of schools and factories.

MacNEIL: All right. Thank you. Jim?

LEHRER: Let`s talk for a minute, gentlemen, about information. We`ve heard a lot that anybody who wants to find out exactly how much natural gas there is at these various places - - the kind of information is limited. Where, for instance, Dr. Schwartz, did you people get your information in this investigation? Did`you have trouble finding accurate information?

SCHWARTZ: Well, let me put it this way: we found contradictory information. The producers obviously provide their reserve estimates in these reservoirs to the United States Geological Survey. We found that in one field, the Vermilion 250 field, that the producers were providing information which was substantially different than the independent reserve estimates made by the United States Geological Survey. But in addition to that the same producers were providing information to the Federal Power Commission on reserves in Vermilion 250 which is entirely different than they provided to the Federal Power Commission or found by the United States Geological Survey; so there`s a great deal of contradictory information and therefore there is the need to have one government agency make proved reserve estimates. This has been a problem that has existed from 1969 forward, when in one of the area rate cases involving the southern Louisiana field they found a very marked difference between what the producers said they had in southern Louisiana, which was twenty-four trillion cubic feet off-shore, and what the Federal Power Commission staff found as thirty-four trillion cubic feet. And this persistent difference of reserve estimates producers reporting to the American Gas Association versus what is found by Congressional committees or found by the United States Geological Survey has persisted over time.

LEHRER: Mr. Palmer, what do you think of the idea of one federal agency putting together all this information?

PALMER: We would favor it; it would take a great burden off our back, and I`ll tell you why. Every time we have had a request from a federal agency for a reserve number we have had a slightly different definition as to what it was that they really required. We`ve taken time to examine those differences in definition and they are of minor but significant importance in the numbers that are finally published by us or supplied by us. Unfortunately, people who do not understand reserves and who do not understand the procedures by which reserves are estimated then compare these numbers and immediately, of course, find discrepancies. And they do not distinguish the source of the discrepancy since they are not aware of the difference in definition.

LEHRER: Dr. Schwartz obviously is one of those, right?

PALMER: He`s been party to it.

LEHRER: I see.

SCHWARTZ: Let me put it this way: it`s been no party because...

PALMER: (Laughing.)

SCHWARTZ: ...the producers themselves provide varying definitions on their own and there`s no uniformity even among the producers as to what is proved reserves and what are probable reserves.

But more importantly, you can`t explain away ten trillion cubic feet of difference between the staff estimate and the producer estimates in the Gulf.

LEHRER: Mr. Palmer?

PARLMER: I suppose my proper answer to that is where the expertise lies.

LEHRER: Are you saying...

PARLMER: Maybe our public would appreciate a little bit the dilemma that`s involved in reserve estimating. This is not counting cans on shelves; this is not a grocery exercise in inventory.

This is better described as trying to determine the amount of fluid, say, in a sponge. Now, we`ve got a sponge in front of us, it`s got myriads of holes and we can`t touch the sponge excepting by a well bore which is miles long; and we`re going to try to estimate the amount of fluid in that sponge. Now multiply the sponge millions of times and that`s a reservoir. To do this accurately in the canson-the-shelf analogy is virtually impossible, and that`s why they`re called reserve estimates. We have discovered from long practice that initial estimates must be modified over time in response to the way that sponge reacts to being squeezed, if you like. Some sponges are hard and they don`t react very well to squeezing; other sponges will give up a lot of the fluid almost immediately. And that`s a reservoir response, in laymen`s terms, and I think it`s a pretty good analogy and I do think that it explains one of the reasons that reserve estimates as made by experts are going to vary, because we are dealing with different levels of information, different levels of experience in handling the reservoir itself.

LEHRER: Mr. Palmer, another question on this information question. Do you and the other oil companies or the other producers have any basic objection to this information -- all information about our gas reserves -- being out in the public domain?

PALMER: It`s in the public domain.

SCHWARTZ: That isn`t true. You would not give your so-called proved reserve estimates to the public which you file with the United States Geological Survey on a confidential proprietory basis.

PALMER: We feel that there is in fact information in our reserve estimates which is of competitive nature and must remain so.

SCHWARTZ: You trade this reserve information with your competitors offshore and you provide them with information and they provide you with information. The only one it`s kept confidential from is the public. So at this point I`m saying that what you really have is a rather exclusive view of "proprietary."

PALMER: I would be horrified if I knew the reserves of my competitors in any detail. I can make an estimate of the reserves of my competitors just like I make an estimate of my own, but I don`t see all of their information and they don`t see all of mine. This is a competitive business, as you well know, and that competitive edge is important to maintain a viable, ambitious, growing, vital industry in the United States, which I think it is.

SCHWARTZ: Certainly it`s a vital industry, and my concern is that its vitality be kept going for the public interest and not the private interest.

MacNEIL: Can I in conclusion ask you -- first of all you, Dr. Schwartz.-- ever since the `73 oil embargo the country has been pretty skeptical, or at least the oil and gas industry have faced a skeptical public; yesterday`s report probably will increase their skepticism -- certainly won`t lessen it at all. What should, do you believe, the gas and oil industry do to relieve that skepticism in the public mind?

SCHWARTZ: Certainly they should provide a full explanation as to why we have these very sharp declines in maximum efficient rates of production from individual reservoirs and maximum production rates from individual wells. Secondly I think we have to have the full information why we cannot bring on the so-called proved reserves which are shut-in on order to provide significant quantities of supply that are required for the summer storage as well as next winter`s needs. We cannot go through the same type of trauma we went through this winter with massive unemployment, with great fears as to whether or not adequate supplies of gas would be available for residential needs and basic needs in terms of hospital care and schools and things of that nature -- the so called human needs. I think the industry has got to accelerate deliveries, it can accelerate deliveries and it`s got to shy away from its profit maximizing approach and realize that an eighteen percent rate of return, which is permitted by the Federal Power Commission, plus covering all costs -- dry hole, leasehold and all the rest -- is more than an adequate rate of return.

MacNEIL: Let`s give Mr. Palmer a chance to respond. Do the oil companies recognize this problem with public skepticism, and what do you think they should do about it?

PALMER: We do recognize the problem with public skepticism; and I think one of Mr. Schwartz` just-stated premises that somehow we`re getting an eighteen percent rate of return on our investment seems to be a bit out of kilter with what we`re experiencing in the industry.

MacNEIL: You have thirty seconds. What are you going to do about it?

PALMER: We`re going to do, I think, what any public-spirited firm must do, and that is to continue to invest heavily in trying to keep this country as independent of a foreign-based energy sup ply as we possibly can. And with that goes the need for a government energy policy.

MacNEIL: I think we have to leave it there; thank you very much. Thank you, Dr. Schwartz. Good night, Jim. And thank you, Mr. Palmer. Jim Lehrer and I will be back on Monday evening. I`m Robert MacNeil. Good night.