Operators frequently have problems getting natural gas out of the ground, and technology jumps in to help with solutions. Unfortunately, technology has no answer for the problems of getting the gas from the wellhead to markets.

When the United States deregulated the gas market, the rule grandfathered in existing price structures for pipelines and promised producers equity and fair play would prevail. Pipelines got around the grandfathered contracts by selling pipeline divisions to other companies that could legally raise prices, by as much as three times in some cases.

A pipeline is a powerful force. Gas producers must produce into pipelines, and the only pipeline in the area can exert a lot of control. Contracts can control production from an area, and the existence of a pipeline can determine what areas can support exploration programs.
At the state level, the Texas Alliance of Energy Producers “has endorsed a policy designed to curb the abuses of monopolistic intrastate natural gas pipelines against independent producers in Texas,” according to the organization’s NewsLine newsletter.

Texas law and gas contracts, the organization says, demand fair dealing with prices set in good faith with reasonable terms and accurate measurement of volumes.

A Texas Supreme Court decision found that contract manipulation for price on one party’s part is bad faith. “We believe that pipelines, through their monopoly powers, force producers to sign unreasonable contracts in violation of the Texas Business and Commerce Code,” said the Alliance.

The organization has asked the state attorney general to investigate those practices, claiming they have harmed gas producers, royalty owners and the state by setting artificially low take prices for collected gas.

The organization also plans to introduce legislation that would stop the state pipeline abuses that, it estimates, have costs producers, royalty owners, consumers and the state some US $2.5 billion in overcharges and lost revenues, according to Frank King, chairman of the Alliance.

That’s just a local example, but the potential for abuse on a much grander scale exists at every level. Russia realizes the power offered by gas pipelines. That’s a prime reason the government owns 51% of Gazprom.

Gazprom is the only company that can legally export gas from Russia. It owns most of the gas lines in Russia and it owns most of that nation’s producing gas fields.

From one point of view, Gazprom may be abusing its monopoly power, although few have the temerity to come right out and say it. From Gazprom’s point of view, it makes good, sound, legal business decisions.

It’s no secret the gas monopoly is trying to buy the pipeline systems in the Ukraine, Belarus and Georgia, which would give it even more control over gas shipments to Europe.

US authorities worry that Russian or Gazprom control of the Georgian system would allow it to expand into Turkey, adjust gas quantities and short-circuit production from giant Shah Deniz gas field offshore Azerbaijan over the new Southern Caucasus’s gas line to Erzerum, Turkey, indirectly affecting potential production from Azerbaijan.

At the Sakhalin II project on Sakhalin Island, the only major project in Russia with no Russian company involvement, Gazprom planned to exchange a half interest in its Zapolyarnoye gas field in Siberia for a one-fourth interest in Sakhalin II. Then Shell announced that the cost of the project had doubled to $20 billion and liquefied natural gas production would be delayed for about 6 months until the summer of 2008.

At that point Gazprom said those factors obviously lowered the value of the project and it would think about its decision. About 6 months later, the Shell-led project came under intense environmental scrutiny by government agencies that threatened to close the project down or introduce long delays to production, another factor that could lower the project value.

TNK-BP and Russia Petroleum have sparred with Gazprom for several years on their proposal to develop the 73-Tcf Kovykta field in Irkutsk and export the gas for sale to China.
Both groups had plans for the field, with TNK-BP planning development for export by 2013 and Gazprom focusing on a 2015 date.

Some of the technical roadblocks involved with transportation kept TNK-BP from fulfilling its part of the licensing requirement to distribute gas locally in 2006. It is ready to distribute and will offer gas to customers and used that as mitigating evidence to prevent Gazprom from expropriating the field as it did with Northgas in Beregovoe field.

TNK-BP maintained it wouldn’t give the field to Gazprom without a fight. Finally, in November, TNK-BP and Gazprom formed a joint venture in the field in which Gazprom’s Sibur Holding unit will handle the processing of the gas with a 51% ownership of that operation, according to Bloomberg News. That could, in turn lead to a pact in which TNK-BP will develop the $18 billion field and turn the transportation business over to Gazprom and the gas marketing business for China over to Gazprom subsidiary Gazexport.

Both companies and the Russian government know, just as independent producers in Texas know, that control of gas transportation is big business and a powerful lever, and the rewards for using that lever are enticing.

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