Why natural gas prices are rising
Offshore, Gulf of Mexico — Soaring natural gas prices at a time of excess supplies seem contradictory if not actually criminal - until you log a couple of days perched on an offshore production platform swaying in 365-foot-deep water 130 miles out in the Gulf of Mexico.
Consider ''West Cameron 639,'' a $10 million tower of steel and high technology put to work in 1973 by the Sun Company of Pennsylvania, the 10th largest oil company in the United States. Seismic surveys in the '60s convinced Sun it was worth spending $15.5 million to purchase drilling rights from the federal government for the 639 tract. Between 1973 and 1976, Sun spent another $ 28 million to drill 18 wells. These 10,000-foot strings of steel pipe reach down from the platform like immense tree roots, gathering natural gas from deep reservoirs up to two miles away in all directions.
By the time natural gas started flowing from 639 in 1976, Sun had spent $53.3 million before having any product to sell.
West Cameron 639 went into production at a good time for US consumers. When the cold 1976 winter closed in, demand began outdistancing natural gas supplies. So 639 climbed quickly to a steady production rate of over 90 million cubic feet per day, enough to supply over 200,000 homes.
Six years later, the situation has changed dramatically.
Today, instead of pumping 90 million cubic feet per day, 639 is delivering just 16 million cubic feet per day. Due to dwindling underground reserves, 639's maximum potential production has dropped to 65 million cubic feet. But 639 can deliver only a fraction of this potential because, with US demand driven down by switching to other fuels and the recession, the pipeline company purchasing the gas will accept only 16 million.
John Query, one of the two Sun senior production foremen who run 639, explains that the problem with a 16 million production ceiling is that ''our expenses are the same whether we're producing 16 million cubic feet a day or five times that much.'' The result at the national level: When demand drops, cost-per-cubic-foot of gas must rise to cover the costs of operating and upgrading the massive network of wells and pipelines needed to deliver natural gas. Allowing this network to deteriorate during the current recession would virtually guarantee supply shortages when economic recovery arrives.
Mr. Query says he's doing all he can to trim expenses. This includes closely monitoring the supplies on his platform to eliminate any costly extra helicopter flights for rushing parts out here, ''a very long way from the corner store.''
But cost cutting on operations can't make up for the fact that the Sun-operated onshore facility, which was built to gather 1.2 billion cubic feet of natural gas per day from 42 offshore platforms, today is limited to 700 million cubic feet. One effect of such a drastic cutback in deliveries is that 16 giant offshore drilling rigs sit ''stacked'' or idled in Sabine Pass, a Texas port that services many of the offshore platforms.
Bobby Wilburn, who operates a Teledyne offshore drilling rig, says four of his company's 11 rigs are stacked despite being available at less than half last year's average cost of $40,000 per day.
Even major oil companies like Sun don't have the spare cash to take advantage of today's bargain drilling costs. For Sun, 1982's slump in world oil prices and drop in natural gas demand has meant trimming back its drilling program from a planned 840 new wells for 1983 to perhaps only 715. Sun Exploration and Production Company vice-president Chad Bardone says he expects Sun's 1983 exploration and production budget to drop to $800 million from $1 billion in 1982 and $900 million in 1981. With the oil industry as a whole cutting spending , Mr. Bardone and others predict that the 1982 decline in the discovery of new oil and gas fields will continue during 1983.
Sun's budget cuts won't affect West Cameron 648, a new platform where a drilling crew recently began completion work on 14 wells after abandoning three produce from its 13 offshore platforms in the Gulf of Mexico. But Sun paid the government $22 million in 1979 for the West Cameron 648 lease. With so much invested in the platform already, Sun is completing the job in the hope that natural gas demand will recover enough to provide a market when its new supplies start flowing next summer.
The outlook is only slightly better from Sun's East High Island 327 platform. Production here is limited to 24 million cubic feet of natural gas per day, just a third of peak output. But this platform also produces oil at the rate of 700 barrels per day. While a crew was busy cleaning sand from one 7,200-foot well to improve oil recovery, Sun drilling technician Charles Lacombe explained that such ''workover'' operations pay off because ''We can sell every barrel of oil we produce and every barrel we produce is one less barrel of foreign oil this country needs to import.''
Sun production engineer Rick Stone points out that the situation with natural gas is very different. He blames government price controls for limiting the amount of natural gas produced domestically. He says it's worth spending $140, 000 for workover on an oil well or on a gas well that produces gas with this platform's highest government-set price of $3.02 per thousand cubic feet. But it is not worth making the same investment to boost production from some of 327's other 15 producing wells, he says, because gas from these wells has a government-set price ceiling of $1.65 per thousand.
Stone says what burns him most is that Sun workers watch their platform's sales meters constantly, adjusting a jungle-gym of valves to maintain gas flow at low daily limits. Meanwhile, he says, ''all these LNG (liquid natural gas) tankers coming in from Algeria are selling gas to the same pipelines that are curtailing us, and selling at three or four times the price we get.''
Sun drilling foreman Harold Campbell also finds frustrations offshore. After 19 years offshore and the past three days spent ''fishing'' for a tangle of wire and perforating equipment jammed in drilling pipe 10,000 feet underground, he knows the hard work involved in finding and producing oil and gas. Yet, he says, ''We've got people up north complaining even though their (natural) gas is cheaper than we're paying down here, and we're producing it.''
Tomorrow: A look at both sides of the gas-pricing controversym