Mr. WALLIN. We did this with considerable reluctance. These 200 users are our customers. So this was a move that was undertaken after a good deal of contemplation and reflection and, indeed, discussions with them. Now, they had the option, which many have elected, as a result of this curtailment, to be placed on a waiting list, so that when gas becomes available they could be served on what we called a firm yearround basis. In other words, we could serve them. They do have that option. I mentioned that several have elected to do that. Therefore, we are serving them. We are meeting their needs. That means that they are both an offpeak and peak customer, a firm year-round customer. We know, at this point in time, of no serious hardship that has been imposed on any of these customers as a result of this. This action was only permitted by our regulatory body after extended proceedings, during which time some of these customers, anticipating what might be the outcome, did install alternative equipment in an attempt to minimize or soften the effects of this curtailment. I think I will stick with my statement that the impact upon these customers and their business has been rather minimal. Mr. D'AMICO. Have you lost industries as a result? Mr. WALLIN. Did industry move out of our service territory? Mr. D'AMICO. Yes, sir. Mr. WALLIN. Well, I have no present knowledge that any industry left the territory as a result of this move. Mr. D'AMICO. Were there any layoffs as a result of this move? Mr. D'AMICO. Was there any changing of the shifts or time of the year in which different companies did their business? Mr. WALLIN. This is speculation on my part, but for those customers whose businesses were heavily concentrated during the off peak period, which is from May 1 through October 31 in our particular service territory, it is possible that they attempted to diversify somewhat that concentration pattern, if it was possible, to diffuse the volume of their business so that it would cover a longer time span, extend it over other months. I think if I were in that position I would attempt to do the same thing. I don't know that they did this, but you are asking me a hypothetical-and I suspect that some of them may have done that. Mr. D'AMICO. Mr. Wallin, if you should come up with any specific examples of that, would you be so kind as to send them to us? Mr. WALLIN. Yes, sir: I will. Mr. D'AMICO. Thank you. Mr. HOWARD. The gentleman from Ohio, Mr. Miller. Mr. MILLER. Thank you, Mr. Chairman. Mr. Wallin, I notice that you indicate that your company has committed about $40 million to exploring. And I am wondering how that compares with past performance with your company. Mr. WALLIN. Past performance in the sense of these kind of capital commitments for exploration? Mr. MILLER. That is correct. Mr. WALLIN. The company has had a supply exploration subsidiary since 1956. Capital commitments in any of those years, 1956 through 1970, as far as exploration ventures, was at a lesser level. But I think we have all heard testimony that the supply shortage, as we now know it today, is of rather recent vintage. To answer your question, this does represent an increased commitment which we believe is responsive to the increased need for exploration. We think it is in keeping with the need and the times, just as those expenditures in prior periods were more appropriate to that time frame. Mr. MILLER. We have heard a great deal about the tax structure and the possibility that companies would not be exploring because of it. You say you are spending more and have a larger capit 1 expenditure for exploring. Now, you have another point. Since July of 1971, you have purchased propane on a firm basis for injection into your distribution system. Is there available propane? Is there ample propane? Is the volume available to you so that you can have or come up with additional gas? Mr. WALLIN. To respond to your question really requires some technical knowledge, which I do not have. In order to maintain burner characteristics and the related heating level. what we call the B t.u. level-this is not a question of economics, but of the technical performance of the product. I understand that there are some limitations. I would be glad to supply you with further information on that, Congressman, but I would need some technical consultation to be able to give you the kind of answer you deserve. Mr. MILLER. Mr. Chairman, I would ask that this be included in the record. The main purpose of the question is to determine if you would have available additional propane; if so, this means he would have an additional gas supply. Thank you. Mr. HOWARD. Without objection, that will be made part of the record when it is received. Mr. Wallin, I wish to thank you very much for coming here, to take the time to testify before the subcommittee. We appreciate your testimony and we look forward to the additional information that you will be sending to the subcommittee as a result of Mr. Miller's question. Mr. WALLIN. Thank you, Mr. Chairman. We will be glad to comply and to help in any way we can. (The following was received for the record:) [From D. E. Wallin, Vice President in Charge of Marketing, Northern Illinois Gas Co.] NI-Gas has actively been searching for additional supplies of gas. All alternatives have been exp'ored and specific emphasis has been given to additional supplies of natural gas and the construction of a supplemental natural gas (SNG) plant. These two sources promise to provide the greatest overall benefits to our customers. NI-Gas, however, has also been actively seeking propane. In 1970, NI-Gas was able to contract for a firm supply of propane which provided the equivalent of about four million therms in 1971. This firm contract expires in 1973. NI-Gas has been seeking other sources of propane. Our experience indicates that propane for long-term utility use is not readily avai'able. Present supplies of propane appear to be dedicated to existing markets and we see no indication of increased propane production. As a result of our extensive negotiations for new gas supplies, we feel there is a possibility that we may be able to obtain, on a seven year contract, approximately 5,000 barrels of propane per day which is the equivalent of approximately 19 million cubic feet of natural gas per day. While we are continuing our search for additional supplies of propane, we see no signs to indicate that propane will significantly affect the present imbalance between natural gas supply and demand. Mr. MILLER. Mr. Chairman, may I ask one more question? How many meters do you represent? How many customers do you have? Mr. WALLIN. 1,200,000 customers. Mr. MILLER. Thank you. Mr. HOWARD. Thank you, Mr. Wallin. Our final witness for today, Mr. S. Orlofsky, senior vice president of Columbia Gas System Service Corp. Mr. Orlofsky, I wish to welcome you before the subcommittee this afternoon. We thank you for your patience. You were scheduled for this morning along with the others. Would you please introduce the gentleman who is accompaning you? STATEMENT BY S. ORLOFSKY, SENIOR VICE PRESIDENT, COLUMBIA GAS SYSTEM SERVICE CORP.; ACCOMPANIED BY R. A. ROSAN, SENIOR VICE PRESIDENT AND COUNSEL, COLUMBIA GAS SYSTEM SERVICE CORP. Mr. ORLOFSKY. Mr. Chairman, we welcome the opportunity to testify at your most important hearings. The gentleman to my right, Richard A. Rosan, is a senior vice president and counsel with the Columbia Gas System Service Corp. I would just like to briefly give you my background. My background is engineering and construction. Within the last year and a half I have had the responsibility to acquire new gas supplies for the Columbia Gas System. There are certain matters, particularly in the regulatory area, that I may have to confer on with Mr. Rosan. We have introduced our testimony. I don't propose to read the statement. I would prefer to take the time to specifically concentrate on certain critical gas supply problem areas. Mr. HOWARD. First, without objection, your prepared statement, will be made a part of the record at this point. (The statement referred follows:) STATEMENT OF S. ORLOFSKY, SENIOR VICE PRESIDENT OF COLUMBIA GAS SYSTEM SERVICE CORP.1 I am a Senior Vice President and Director of Columbia Gas System Service Corporation and I am the President and a Director of three subsidiaries of the parent corporation primarily engaged in and charged with obtaining gas supply for the Columbia Gas System. I am also an officer of another subsidiary of the Columbia Gas System, charged with finding the necessary coal supply and the supervision of research and development efforts looking toward a supply of gas from a process of coal gasification. This Nation is faced with a severe energy crisis with increasing shortages of all forms of energy. Recent experiences of power shortages are merely one measure of the problem. Projections indicate that by 1985, one-half of the oil require 1 Attached as app. A is a detailed description of the Columbia Gas System and its seven State and District of Columbia service areas. ments of the Nation will have to be imported. Natural gas currently supplies about one-third of the Nation's energy; gas supplies about 50% of the energy used for residential domestic purposes. A. THERE IS A SEVERE SHORTAGE OF NATURAL GAS Despite the claims of a few vocal and generally uninformed critics of the gas industry and its data, there is an actual shortage of gas supply today. The supply situation is deteriorating and is much more serious and critical than generally recognized. Forty million homes (about 150 million people) depend on natural gas for very essential services-warmth, hot water and cooking. Equally important, some essential industrial processes depend upon an adequate supply of gas. Thus, many jobs are dependent upon gas for industry. On top of this, gas is needed to help reduce air pollution. There is an unprecedented and unsatisfied demand by industry for gas so as to meet clean air standards. What is the basis for the statement that the situation is critical? (1) For several years, many pipelines have not been able to make additional gas available despite repeated requests for added supply. During the past year, and for the years immediately ahead, several pipeline suppliers have not been able to fulfill their contractual commitments because of the falloff in their gas supplies. See Appendix B for a list of pipelines restricting sales and curtailing below contractual commitments. Appendix B indicates the widespread distribution of shortages throughout the nation. In the case of our System, curtailments below contractual commitments from 3 of the System's 5 non-affiliated pipeline suppliers is estimated at 25 Billion Cubic Feet for the 12 months ended April, 1973 and 35 Billion Cubic Feet for the next 12 months. (2) Because of gas shortages, utility commissions of most states in which the System sells gas at retail, either directly or through wholesale customers, have issued orders restricting new loads. Because of the current critical gas supply situation, the System is taking all necessary steps to impose complete restrictions, including residential 2 (3) As of January 1, 1972, proven reserves in the lower 48 states were 247.4 Trillion Cubic Feet (TCF); this was down from an estimate of 289.3 TCF as of January 1, 1968. Despite lower proven reserves, production increased from 18.4 TCF in 1967 to 22.1 TCF in 1971. This meant that the industry was pulling harder on its existing reserves. In the long run, however, as proven reserves go down the production fields become depleted and the deliverability of gas from these reserves declines. This is illustrated in the FPC Staff Report No. 2 issued in February, 1972 (See Chart 1, hereto, from p. 3 of such Report). It projects that annual production from existing proven reserves will decline as follows: Obviously if the existing level of production in 1972 of 23 TCF is to be sustained, significant new domestic reserves must be added. (4) To illustrate the problem of declining deliverability and the needed exploration and development effort for new domestic reserves, the experience of the System's pipeline from the Southwest is fairly representative: Chart 2 hereto indicates that the daily design capacity of the System's pipeline from Southern Louisiana is 2,195 Billion Cubic Feet per day. The Chart indicates that the existing reserves dedicated to that line will not enable it to operate at capacity commencing with November 1, 1973. If no new reserves are 2 Ohio, Pennsylvania, New York, and Virginia; orders in restriction proceedings are expected in West Virginia and Kentucky. 3 The system obtained 80 percent of its natural gas supplies from the Southwest in 1971. Of this total, approximately half was purchased from major pipeline companies which delivered the gas to the system's service area. The balance of Southwest gas is purchased from producers. In the Southwest and most of this is transported by the system's pipeline system from southern Louisiana to the market area. The remaining 11 percent is from Appalachian production. 83-450 O 72-33 acquired in Southern Louisiana by November 1, 1979 the line could operate only at about 55% of capacity. At the bottom of the Chart, you will note the new reserves required to keep it operating at capacity. 795 Billion Cubic Feet are required in 1972 and an additional 555 Billion Cubic Feet are required in 1973 or approximately 1.4 Trillion Cubic Feet in the next 18 months if the line is to continue to operate at capacity. Under present conditions, this cannot be realized. It also appears from the Chart that between now and 1979 an aggregate of 4.5 Trillion Cubic Feet of new reserves from Southern Louisiana must be acquired. The other pipelines originating in the Southwest are faced with comparable problems. We estimate that an aggregate of 55-60 TCF of new reserves must be acquired prior to 1980 if the lines originating from the Southwest are to operate at capacity. CONCLUSIONS 1. There is a nationwide shortage of gas. To date it has impinged primarily on satisfying new loads. Thus, industries (existing and new) seeking additional gas supply are finding it difficult, if not impossible, in most parts of the nation to obtain additional gas. 2. There have been curtailments below existing levels of supply from the Southwest. This will accelerate in the years immediately ahead. Absence the actions discussed below, the shortages existing now will become more severe and could result in severe dislocations of the American economy. B. THE CAUSES OF THE SHORTAGE There have been many inter-reacting forces, such as unrealistically low prices decreed by government regulation and the correspondingly greater demand created by a price distortion between gas and competing sources of energy. In brief, we would list the following causes: 1. Uncertainty. Since the Phillips decision in 1954, the production end of the gas business has existed virtually in a state of uncertainty as to what prices it would receive for gas at the well-head. That uncertainty exists up to this very moment. This uncertainty results from governmental regulation and the delays in getting answers from regulators. 2. Inadequate Field Prices.-Field prices have been under-priced both in terms of value and current cost of exploring for new reserves. Insofar as there have been any prices fixed by the Federal Power Commission they have been too low. The attempt to apply utility regulatory policies of actual costs plus a fixed return on investment to producer prices has failed; it has failed to give adequate economic incentives. 3. Threat of Price Roll-back.-The fact that the Commission has rolled back contract prices previously certificated has resulted in the flight of capital and technical personnel from domestic gas production to foreign countries. 4. Lack of Policy and Delays.-Fragmented government policy-making wherein over 60 separate agencies have some responsibilities re oil and gas. Recently, efforts at obtaining supplemental supplies have encountered (i) indecision at the Federal level as to long run policies re importation of feedstocks and LNG, (ii) delays and opposition at the regulatory level and (iii) the delays and obstructions resulting from efforts of environmentalists to halt all efforts at off-shore leasing sales, construction of LNG terminals, etc. 5. Lack of Concern.-Probably as important as any reason for the shortages, the failure of many influential and essential parties-the Administration, Congress, Regulatory Agencies and the public-to realize the nation is confronted with an energy crisis and to give the problem of energy a much higher priority in the scale of national goals. Confronted with the crisis, we still see efforts to do away with depletion allowances; to reduce tax depreciation allowances—all at a time when vast amounts of capital must be invested to secure an adequate supply of energy. Between 1940 and 1970 the percentage of gas used in supplying the Nation's greatly expanding energy needs has gone from 11.4 percent to 32.5 percent. |