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.

C. THE IMPACT OF GAS SHORTAGES

The most basic concern is its effect on the Nation's economy. Gas is needed for America's industrial technology. Gas is essential for many industrial processes in our advancing skills. Depriving industry of new additional gas volumes is highly detrimental to our economy. If gas gets in short supply, existing industries will be cut off. This will result in massive unemployment.

The following may indicate this concern.

The West Virginia Department of Commerce, in reporting to the West Virginia Legislature on July 17, 1972 concerning the problems of obtaining industry for West Virginia, said:

"Currently there is a crisis among gas utilities not only in the State of West Virginia but in the entire eastern United States concerning their ability to provide gas service to industrial customers. At the present time, there are absolutely no major companies dependent on natural gas who are able to locate in West Virginia and be supplied with the necessary quantities of natural gas their operations would require."

The loss of such industries to a state obviously is a loss in its potential economy and jobs. Nor is the loss prospective only since increasingly industries which are already located in a state and use natural gas are unable to obtain sufficient gas, with obvious adverse effects, again on the economy of the state and jobs.

In many instances, these industries are performing a function directly geared to high national priorities and the inadequacy of gas supply means that they will not be able to fulfill those priorities. The Calgon Corp., for instance, which purchases natural gas from Columbia Gas of Kentucky, uses it not only as a fuel but also as an ingredient at its granular activated carbon plant at Cattlesburg, Kentucky, where Calgon produces about 85% of the granulated activated carbon used in automobile pollution-control devices. Restriction of service to Calgon to which we have no alternative under present circumstances, will thus adversely effect not only Calgon and its immediate environs but broad national interest in improving the environment.

The Chamber of Commerce of the Uniontown, Pennsylvania area has expressed deep concern about the curtailment of natural gas service to new residential, commercial and industrial users. It has stated:

"Our program to attract new industries is inhibited by the fact that allocations of natural gas cannot be made to such prospective new employers. Also, our campaign to eliminate smoke emi sion from large bui dings, both public and private, is seriously weakened by the non-availability of natural gas to permit conversion of coal-fired burners to natural gas."

Insofar as as cannot provide its share of the Nation's growing demand for energy, it places an added burden on the other energy forms. If gas does not become available, we may compound the problems of the oil and coal industries.

D. WHAT IS BEING CONE?

The answer to this question breaks down in our thinking into three major headings:

(1) Encouraging a massive and accelerated explor:tory and development program for gas in the lower 48 states.

(2) Seeking immediate relief by obtaining gas from non-historic sources. (3) Working upon long-term solutions.

1. Domestic production in the lower 48 States

It should be made abundantly clear: This must how the highest priority. As Chart 1 shows, between now and 1990, production from new reserves must make the major contribution to total gas supply. One word of caution, however. In our view, there is over-optimism as to what domestic supplies can do. Heretofore, the gas industry has been ab'e to acquire new domestic reserves to replace the depletion of the older gas reservoirs. This is no longer the case and undiscovered domestic reserves can only optimistic illy hore to maintain present levels of supply. There is little, if any, possibility of domestic gas supplies ever agrin providing growth energy for the nation's requirements. The Federal Power Commission's Report #2 fully supports this conclusion. (Chart 1) Chart 3 hereto is a summary of the potential supply of natural gas in the United States made by the Potential Gas Committee. Of the estimate of 851 TCF from the lower 48 states, you will note that the "probable" new reserves

are shown to be 218 TCF which is considerably less than the 325 TCF needed by 1980 according to the FPC Report (See Chart 1). As to the "possible" and "speculative" potential, an increasing percentage of those potentials come from very deep wells on shore and in water depths offshore that pose great technical and operating problems. Finally, of the 851 TCF, 307 or over 30% is classified as "speculative".

The effort to obtain as much domestic production as possible must be made. Already, undue delays in getting on with this effort have been suffered. The offshore sale of about 85 leases in the Gulf of Mexico scheduled by the Department of Interior for last December was enjoined by a Court at the request of an environmental group. This sale is now tentatively rescheduled for this fall. This, in essence, means that one whole year has been lost in exploratory effort. At the best, we cannot expect any production from the leases to be auctioned this fall until the middle or end of 1974. More important, many more acres must be made available for exploration.

To keep all of the major interstate pipelines operating at present capacity between now and 1980, additional required reserves of 55-60 trillion cubic feet are required. This means that 36% of the estimated 152 TCF of potential undiscovered reserves in offshore Louisiana and Texas or about 42% of the same reserves excluding the "speculative" category must be discovered between now and 1980. To find this gas, at least 5.5 million acres of additional Federal offshore Louisiana and Texas acreage would have to be offered by the U.S. Government, assuming the historical offshore finding rate of 10 million cubic feet per acre is continued. This 5.5 million acre figure represents a substantial increase over recent offerings (5.7 million acres leased by the Federal Government from 1954 through 1971 offshore Louisiana and Texas).

In addition, the incentive for independent producers to invest in exploration activities is still not adequate. Adequate, firm prices; adequate depletion allowances are all part of the economic incentives needed. Capital needs are vast. For this reason, many pipelines such as the Columbia Gas System have become increasingly active in helping to finance exploratory efforts as well as to participate in the acquisition of leases and exploring for gas in the Outer Continental Shelf:

(a) Columbia Transmission has advanced approximately $39 million to four independent producers in connection with exploration for gas on offshore Southern Louisiana leases held by such producers.

(b) The System is negotiating an agreement with Energy Ventures, Inc., a newly formed company, the purpose of which is to make available a sufficient amount of capital for the acquisition of leases in Southern Louisiana and Texas and to explore and develop such leases.

(c) In order to be in a position to move the gas from offshore areas into its transmission system and to enhance its ability to acquire new reserves offshore, the System and Tennessee Gas Pipeline Company have completed a 74 mile, 36 inch pipeline into the Gulf, connecting with the terminus of certain existing offshore facilities of Tennessee. The total facilities with an estimated capacity of almost a billion cubic feet a day will be operated as a coordinated system for gathering and transporting gas. Columbia's investment in this line was approximately $34 Million.

(d) In the Appalachian Area, Columbia is making extensive efforts to stimulate exploration for gas in the deeper horizons of that area. As part of this program, the FPC has been requested to increase the area price to 50 cents so as to make such drilling more attractive. Currently, Columbia is drilling one well of its own down to the deeper horizons and has agreed in principle with Humble Oil and Refining Company for a major deen exploration program on several hundred thousand acres held by the System in West Virginia.

(e) Other gas companies are making similar efforts and commitments to find and develop domestic reserves. Their efforts and ours are unlikely to resolve the gas shortage unless problems beyond the power of the industry to correct are corrected; namely, added economic incentives must be provided producers that en

The above petition was filed on Jan. 28, 1972 and on June 19, 1972 (4% months later) the Commission noticed the filing, soliciting comments by July 10, 1972. Twenty-one intervenors did comment, 15 of whom (including the New York Public Service Commission) affirmatively support the proposal and none of the remaining six intervenors oppose it. We are awaiting a Commission decision.

courage them to take the substantial financial risks involved in exploration and development.

The underpricing is evident from the fact that on an equivalent therm basis, natural gas sells for substantially less than any competing fuel throughout the System's service area and its price level has also been far more stable than the national price level as measured by objective price indices.

Further evidence of underpricing is the fact that intra-state prices for natural gas are substantially higher than what producers may charge under FPC regulation with the predictable result that much of the gas that would be available for inter-state markets, if gas were not underpriced, is being sold in the intra-state markets.

What is needed is more enlightened producer regulation geared to the need for an adequate supply, and thus to the competitive value of natural gas. The Federal Power Commission is, we believe, trying to resolve the problem of underpricing gas, but it has made more motion than progress and it is severely limited in what it can do in this regard by the cumbersomeness of its decisional process wherein it is subject to almost the whim of intervenors for endless litigation.'

Legislation is accordingly needed to enable natural gas to be priced in equilibrium with the general economy of the Nation. Such legislation is pending before the Congress in H.R. 2513 and S. 2467, referred to generally as "Sanctity of Contract" legislation. This legislation has widespread support and hearings are completed before the House Commerce and Senate Commerce Committees but the Bill has not yet been reported out of either Committee for reasons which we do not understand. We submit that it is "must" legislation.

2. Nonhistoric sources of gas

In the years 1972 through 1975, existing domestic reserves cannot be sufficiently augmented domestically to maintain the existing level of supply. Also the present situation of not being able to take any new loads such as new homes, and possibly some industrial load, is placing a serious handicap on the American economy. The quickest way of augmenting the nation's gas supply is through reforming naphtha or other feedstock into pipeline quality gas. Providing that feedstock can be made available, plants of this type can be constructed and on the line in a period of two to three years.

For example, starting in early 1971, under an accelerated program, the System contracted for a feedstock supply from Canada, had a reforming plant designed and is presently constructing that plant in Green Springs, Ohio. This plant is scheduled to go onstream in the latter part of 1973 and will have a design capacity of about 250 million feet of gas per day. However, it is not certain yet whether this supply of gas will be available. The export of certain parts of the feedstock have to be approved by the Province of Alberta and the Canadian National Energy Board. The supplier of the feedstock must get a Presidential Permit from the Department of State in conjunction with building the pipeline to transport the feedstock to Ohio. Permits from the Corps of Engineers for several river crossings have yet to be obtained. In some cases, because of compliance with the National Environmental Policy Act, these permits may be held up from three to four months. Finally, the System must obtain authorization from the Federal Power Commission to sell the synthetic gas to the System's interstate transmission company. The currently estimated price of the gas is $1.12 per Million BTU's. This can increase depending upon the future posted price of crude in Edmonton, Alberta. The Staff of the FPC has recommended against this proposal in its brief to the Examiner. All other parties to the proceeding including the Public Service Commission of the State of New York have supported the project. Unless this synthetic gas comes onstream in the fall of 1973, the System will be so short of gas that it will be required to make severe curtailments during the winter of 1974-1975.

The System is moving ahead with this project despite the lack of approval by the FPC and the indicated opposition by the FPC Staff. We have already

The number of exploratory natural gas wells drilled declined from 14,942 in 1955 to 7,693 in 1970, The Permian Basin proceeding, instituted in 1961, was not completed for nearly 7 years. A second laver of proceedings is now in process.

The southern Louisiana area rate proceeding, also instituted in 1961, was decided in early 1969, but at that time it was clear that the prices arrived at were inadequate and the Commission initiated AR69-1 to determine a new price. It took 2 years for the Commission to fix a new price which is now subject to litigation. The price of 26 cents is already wholly inadequate.