Information on Contracts Between Natural Gas Producers and Pipeline Companies

GAO was requested to provide information on the issues related to natural gas contracts between producers and pipeline companies.

Recent studies about the provisions of existing natural gas contracts indicate that: (1) about 87 percent of the interstate gas to be decontrolled in 1985 is subject to deregulation clauses; (2) most of these deregulation clauses tie the new contract price to prices being paid other producers for a comparable quality and quantity of gas in a specified geographic area; (3) oil reference clauses which tie the price of the gas to a percentage of the energy equivalent price of a petroleum product are found in a small percentage of interstate contracts with deregulation provisions; (4) provisions which provide the buyer some recourse against prices established by deregulation clauses are found in a small percentage. The Natural Gas Policy Act of 1978 established a multitiered pricing structure for gas produced and sold under different geologic and contractual conditions and specified a deregulation schedule for certain categories of natural gas. However, there is considerable controversy over whether the pricing provisions of producer-pipeline contracts will escalate the price of decontrolled gas to noncompetitive levels. Given the characteristics of existing contracts and assuming that they will operate as written, there is the potential for a contract-induced fly-up of natural gas prices in 1985. Although numerous remedies have been proposed to deal with the potential dilemma contracts pose for the natural gas industry, GAO believes that there is no easy solution.