B-206147.OM, MAY 7, 1982

B-206147.OM: May 7, 1982

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EMD: THIS MEMORANDUM ANSWERS THE FOLLOWING QUESTION CONCERNING SECTION 108 OF THE NATURAL GAS POLICY ACT (NGPA): DOES THE FEDERAL ENERGY REGULATORY COMMISSION (FERC) HAVE AUTHORITY TO CONTINUE TO QUALIFY NATURAL GAS AS "STRIPPER WELL NATURAL GAS. " WHEN IT IS PRODUCED IN ASSOCIATION WITH OIL BEYOND THE DE MINIMIS AMOUNTS PROVIDED FOR IN FERC'S REGULATIONS? FERC DOES NOT HAVE AUTHORITY TO CONTINUE TO QUALIFY AS STRIPPER WELL NATURAL GAS. WHICH IS THE MAXIMUM EFFICIENT RATE OF FLOW FROM THE WELL. "NONASSOCIATED NATURAL GAS" IS DEFINED TO MEAN "NATURAL GAS WHICH IS NOT PRODUCED IN ASSOCIATION WITH CRUDE OIL.". A WELL WHICH PRODUCES UP TO 60 MCF A DAY IS MARGINAL AND UNECONOMIC TO OPERATE AT TRADITIONAL GAS PRICES.

B-206147.OM, MAY 7, 1982

SUBJECT: CONTINUED TREATMENT OF GAS PRODUCED WITH OIL AS STRIPPER WELL NATURAL GAS UNDER NATURAL GAS POLICY ACT (CODE 308526; FILE B-206147)

DIRECTOR, EMD:

THIS MEMORANDUM ANSWERS THE FOLLOWING QUESTION CONCERNING SECTION 108 OF THE NATURAL GAS POLICY ACT (NGPA): DOES THE FEDERAL ENERGY REGULATORY COMMISSION (FERC) HAVE AUTHORITY TO CONTINUE TO QUALIFY NATURAL GAS AS "STRIPPER WELL NATURAL GAS," WHEN IT IS PRODUCED IN ASSOCIATION WITH OIL BEYOND THE DE MINIMIS AMOUNTS PROVIDED FOR IN FERC'S REGULATIONS? BASED ON OUR ANALYSIS, FERC DOES NOT HAVE AUTHORITY TO CONTINUE TO QUALIFY AS STRIPPER WELL NATURAL GAS, NATURAL GAS PRODUCED WITH MORE THAN A DE MINIMIS AMOUNT OF OIL.

BACKGROUND

THE NGPA ESTABLISHED A NEW REGIME FOR NATURAL GAS PRICING. IT PROVIDES CEILING PRICES FOR VARIOUS CATEGORIES OF NATURAL GAS. SECTION 108 OF THE NGPA, 15 U.S.C. SEC. 3318 (SUPP. III, 1979), SETS THE CEILING PRICE FOR GAS PRODUCED FROM "STRIPPER" WELLS. SECTION 108(B)(1) DEFINES THE TERM "STRIPPER WELL NATURAL GAS" AS "NONASSOCIATED NATURAL GAS" PRODUCED DURING A SPECIFIC 90-DAY PERIOD, AT A DAILY AVERAGE RATE OF NOT MORE THAN 60 MCF, WHICH IS THE MAXIMUM EFFICIENT RATE OF FLOW FROM THE WELL. "NONASSOCIATED NATURAL GAS" IS DEFINED TO MEAN "NATURAL GAS WHICH IS NOT PRODUCED IN ASSOCIATION WITH CRUDE OIL." SECTION 108(B)(3)(C).

WE UNDERSTAND THAT FROM A GAS PRODUCTION STANDPOINT, A WELL WHICH PRODUCES UP TO 60 MCF A DAY IS MARGINAL AND UNECONOMIC TO OPERATE AT TRADITIONAL GAS PRICES. STRIPPER PRICING PROVIDES AN INCENTIVE TO PREVENT THE SHUT-IN OF SUCH MARGINAL WELLS.

FERC ADMINISTERS AND ENFORCES THE NGPA. APPROPRIATE STATE OR FEDERAL AGENCIES ("JURISDICTIONAL AGENCIES") DETERMINE WHICH NATURAL GAS QUALIFIES AS STRIPPER WELL NATURAL GAS. FERC HAS AUTHORITY TO REVIEW THEIR DETERMINATIONS.

ALTHOUGH SECTION 108(B) OF THE NGPA DEFINES NONASSOCIATED GAS AS GAS PRODUCED WITHOUT OIL, GAS PRODUCED WITH MINIMAL AMOUNTS OF OIL CAN QUALIFY FOR STRIPPER WELL PRICES. THE SENATE AND HOUSE CONFERENCE REPORT FOR H.R. 5289, WHICH BECAME THE NGPA, STATE THAT UNDER SECTION 108 FERC MAY DEFINE NONASSOCIATED GAS TO ALLOW A DE MINIMIS AMOUNT OF OIL PRODUCTION. SEE H.R.REP. NO. 95-1752, AND S.REP. NO. 95-1125 AT 89 (1978):

"THE CONFEREES ALSO INTEND THAT THE COMMISSION SHALL HAVE AUTHORITY TO DEFINE WHAT CONSTITUTES NON-ASSOCIATED GAS. THE AGREEMENT CONTEMPLATES THAT THE COMMISSION COULD ALLOW A DE MINIMIS AMOUNT OF OIL TO BE PRODUCED WITHOUT DISQUALIFYING THE WELL AS A NATURAL GAS STRIPPER WELL. ***."

IN ACCORDANCE WITH THIS EXPRESSION OF CONGRESSIONAL INTENT, FERC'S IMPLEMENTING REGULATIONS DEFINE WHAT QUANTITY OF OIL IS CONSIDERED DE MINIMIS. THE REGULATIONS APPLY A SLIDING SCALE RATIO OF NATURAL GAS PRODUCTION TO CRUDE OIL PRODUCTION. 18 C.F.R. SEC. 271.803(B) (1981). AVERAGE DAILY CRUDE OIL PRODUCTION DURING A CONSECUTIVE 90-DAY PRODUCTION PERIOD IS ALLOWABLE ON THE FOLLOWING BASIS:

AVERAGE DAILY GAS BARRELS OF CRUDE

PRODUCTION OIL ALLOWABLE

1 50 MCF - 60 MCF 1

2 30 MCF - LESS 2

THAN 50 MCF

3 LESS THAN 30 MCF 3

EMD AUDITORS SAMPLED OIL PRODUCTION AT 146 WELLS AND FOUND THAT ABOUT 20 PERCENT OF THE WELLS WERE PRODUCING OIL BEYOND THE DE MINIMIS AMOUNTS IN THE FERC REGULATIONS. THE AVERAGE DAILY OIL PRODUCTION OVER A CONSECUTIVE 90-DAY PERIOD RANGED FROM 3.5 TO 40.7 BARRELS. THE AUDITORS FOUND THAT THE DIFFERENCE BETWEEN THE STRIPPER PRICE AND THE PRICE THAT WOULD HAVE BEEN PAID FOR GAS NO LONGER QUALIFYING FOR STRIPPER PRICES WAS A SIGNIFICANT DOLLAR AMOUNT. IF THE SAME PERCENTAGE OF EXCESS OIL PRODUCTION IN THE SAMPLE WAS APPLICABLE TO ALL THE WELLS OF THE PRODUCERS SURVEYED, THE DIFFERENCE WOULD BE SEVERAL MILLION DOLLARS.

OFFICIALS OF COMPANIES WHICH OPERATE THESE WELLS SAY THAT FERC REGULATIONS DO NOT DISQUALIFY THEM FROM COLLECTING SUCH PRICES. EMD AUDIT STAFF HAVE QUESTIONED FERC'S AUTHORITY TO CONTINUE STRIPPER WELL TREATMENT, WHEN GAS IS PRODUCED IN ASSOCIATION WITH MORE THAN A DE MINIMIS AMOUNT OF OIL. THEY BELIEVE THAT THE PRODUCERS' MAJOR INTEREST IN WELLS WITH AN EXCESS AMOUNT OF OIL IS FREQUENTLY IN OIL PRODUCTION. GAS PRODUCTION IS ONLY SECONDARY AND THE CONTINUED COLLECTION OF HIGH STRIPPER GAS PRICES IS A WINDFALL. STRIPPER PRICES ARE, THUS, NOT AN INCENTIVE TO KEEP MARGINAL WELLS OPEN.

DISCUSSION

IN THE PREAMBLE TO ITS REGULATIONS, FERC RECOGNIZES THAT IT HAS NO AUTHORITY TO ALLOW MORE THAN A DE MINIMIS AMOUNT OF OIL PRODUCTION FOR STRIPPER WELL QUALIFICATION. FN1 MOREOVER, WHEN GAS FROM A WELL NO LONGER FITS THE DEFINITION OF "STRIPPER WELL NATURAL GAS," THE NGPA AUTHORIZES THE CONTINUED COLLECTION OF THESE PRICES IN ONLY ONE INSTANCE. SECTION 108(B)(2) ALLOWS NONASSOCIATED GAS TO CONTINUE TO QUALIFY WHEN THE AVERAGE DAILY PRODUCTION RATE EXCEEDS 60 MCF DUE TO ENHANCED RECOVERY TECHNIQUES. NEITHER THE STATUTORY LANGUAGE NOR THE CONFERENCE REPORT SUGGESTS ANY SIMILAR EXCEPTION OR ALTERNATIVE TO DISQUALIFICATION WHEN A STRIPPER WELL PRODUCES MORE THAN A DE MINIMIS AMOUNT OF OIL.

FERC REGULATIONS DO NOT PROVIDE A SPECIFIC PROCEDURE FOR THE DISQUALIFICATION OF GAS WHICH EXCEEDS THE DE MINIMIS LEVELS OF CRUDE OIL SET OUT IN 18 C.F.R. SEC. 271.803(B). BY CONTRAST, THE REGULATIONS (18 C.F.R. SEC. 271.805(A)) DO PROVIDE THAT STRIPPER WELL OPERATORS AND THEIR PURCHASERS MUST GIVE NOTICE IF NATURAL GAS PRODUCTION EXCEEDS THE AVERAGE 60 MCF LIMIT FOR STRIPPER WELL QUALIFICATION. THE COMMISSION ANTICIPATED THAT IF CRUDE OIL PRODUCTION EXCEEDED THE DE MINIMIS AMOUNT, GAS PRODUCTION WOULD LIKEWISE INCREASE AND RESULT IN THE DISQUALIFICATION OF WELLS BECAUSE THE GAS EXCEEDED THE 60 MCF LIMITATION. IN REJECTING SUGGESTIONS THAT THE REGULATIONS ALSO REQUIRE WRITTEN NOTICE IF THE AMOUNT OF CRUDE OIL PRODUCTION EXCEEDED THE DE MINIMIS AMOUNTS, THE COMMISSION CITED "THE PRACTICAL DIFFICULTIES INHERENT IN MONITORING OIL PRODUCTION AND THE ADMINISTRATIVE BURDEN IT WOULD IMPOSE." IF OIL PRODUCTION SHOULD EXCEED THE DE MINIMIS AMOUNT PERMITTED, BUT GAS PRODUCTION REMAINED THE SAME, THE COMMISSION STATED IT WOULD "UNDERTAKE WHATEVER MEASURES WE DEEM APPROPRIATE TO RESOLVE THE MATTER." 44 FED.REG. 49660 (AUGUST 24, 1979).

WE FIND NO BASIS IN THE STATUTORY LANGUAGE OR LEGISLATIVE HISTORY FOR ANY "APPROPRIATE MEASURE" OTHER THAN DISQUALIFICATION FOR NATURAL GAS PRODUCED WITH MORE THAN THE DE MINIMIS AMOUNTS OF OIL PERMITTED BY ITS REGULATIONS. AS NOTED PREVIOUSLY, IN ONLY ONE INSTANCE HAS CONGRESS PROVIDED FOR NATURAL GAS WHICH NO LONGER FITS THE STATUTORY DEFINITION OF STRIPPER WELL NATURAL GAS TO CONTINUE TO QUALIFY FOR STRIPPER GAS PRICES. THIS EXCEPTION CONCERNS GAS PRODUCED IN EXCESS OF A 60 MCF AVERAGE DAILY RATE DUE TO ENHANCED RECOVERY TECHNIQUES.

FINALLY, WE ARE AWARE THAT THE FORMER FERC GENERAL COUNSEL HAS OPINED THAT -

"*** A WELL WHICH SATISFIES THE DEFINITION OF NON-ASSOCIATED NATURAL GAS SET OUT IN SEC. 271.803(B) WILL CONTINUE TO QUALIFY AS A STRIPPER WELL EVEN THOUGH OIL PRODUCTION SUBSEQUENTLY INCREASES ABOVE THE LIMITS SET OUT IN THE REGULATION. ***"

FN2 THIS OPINION RELIES ON THE WORDING OF 18 C.F.R. SEC. 271.803(B) WHICH SPECIFIES THE DE MINIMIS AMOUNTS OF OIL "PER PRODUCTION PERIOD UPON WHICH THE DETERMINATION IS BASED," AND APPARENTLY TAKES THE VIEW THAT THE DE MINIMIS LIMITS APPLY ONLY DURING THIS INITIAL PRODUCTION PERIOD. THE OPINION ALSO REFERS TO THE COMMISSION'S DECISION NOT TO MONITOR OIL PRODUCTION AFFIRMATIVELY, I.E., NOT TO REQUIRE NOTICE IF DE MINIMIS AMOUNTS ARE EXCEEDED.

WE DISAGREE WITH THE GENERAL COUNSEL'S OPINION AND RATIONALE. FIRST, IT IS EVIDENT FROM THE BASIC STATUTORY AND REGULATORY FRAMEWORK THAT STRIPPER WELL STATUS IS A CONTINUING STATUS THAT CAN BE LOST IF THE CONDITIONS FOR QUALIFICATION ARE NO LONGER MET. FOR EXAMPLE, WITH RESPECT TO EXCESS GAS PRODUCTION, THE COMMISSION RECOGNIZED THIS IN ADOPTING THE "CONTINUING QUALIFICATION" SECTION OF ITS REGULATIONS (18 C.F.R. SEC. 271.805) AND REJECTING THE APPROACH OF "ONCE A STRIPPER, ALWAYS A STRIPPER." FED.REG. AT 49660. THUS, THE DE MINIMIS LIMITS OF OIL PRODUCTION ALSO CONTINUE TO APPLY AFTER THE INITIAL PRODUCTION PERIOD.

SECOND, THE COMMISSION'S FAILURE TO ADOPT A NOTICE REQUIREMENT WHEN OIL PRODUCTION EXCEEDS THE DE MINIMIS LIMITS IN NO WAY MEANS THAT THESE LIMITS ARE NOT RELEVANT AFTER THE INITIAL PRODUCTION PERIOD OR THAT DISQUALIFICATION DOES NOT RESULT WHEN THE LIMITS ARE EXCEEDED. DISCUSSED PREVIOUSLY, THE COMMISSION MERELY CONCLUDED (ALTHOUGH PERHAPS UNWISELY, IN VIEW OF THE EMD AUDIT FINDINGS) THAT AFFIRMATIVE MONITORING OF COMPLIANCE WITH THE DE MINIMIS LIMITS WOULD BE IMPRACTICAL AND UNNECESSARY.

FN1 THE PREAMBLE STATES IN THIS REGARD, 44 FED.REG. AT 49657 (AUGUST 24, 1979):

"*** WE ARE MINDFUL THAT CONGRESS PROVIDED IN SECTION 108(B)(3)(C) OF THE NGPA THAT NONASSOCIATED NATURAL GAS MEANS NATURAL GAS WHICH IS NOT PRODUCED IN ASSOCIATION WITH CRUDE OIL. WHILE THE ABOVE-CITED STATEMENT OF MANAGERS AND OTHER LEGISLATIVE HISTORY MAKES IT CLEAR THAT CONGRESS INTENDED A MINIMAL AMOUNT OF CRUDE OIL PRODUCTION TO BE PERMITTED, WE FEEL CONSTRAINED TO KEEP CRUDE OIL ALLOWANCES TO A DE MINIMIS STANDARD. ACCORDINGLY, WE BELIEVE THAT THE DEFINITION AS IT STANDS IS REASONABLE AND PRESCRIBES LIMITS CONTEMPLATED BY CONGRESS."

FN2 LETTER DATED OCTOBER 27, 1980, FROM ROBERT R. NORDHAUS TO G. W. KREIG, MANAGER, ACCOUNTING AND REGULATORY CONTROLS, MOBIL OIL CORPORATION. THIS LETTER STATES THAT "THE VIEWS EXPRESSED HERE ARE MINE, AS GENERAL COUNSEL, AND DO NOT BIND THE COMMISSION." FERC'S GENERAL COUNSEL'S OFFICE STILL ADHERES TO THE VIEWS CONTAINED IN MR. NORDHAUS' LETTER.