continue to decline for an additional period 
without causing undue concern, resulting in a 
lower level of idle development capital for pro- 
ducers. However, individual companies already 
have felt the pressure of declining reserves, and it 
is doubtful that it would be in the National 
interest to allow much _ further reduction. 
Although the R/P ratio for oil is about 10 years, 
valid reasons exist for maintaining natural gas 
reserves at a level above 10 years. 
At some point the R/P must stop declining or 
the question of future ability to meet demand will 
cause concern to natural gas users and the financial 
community that provides funds for growth. When 
this point is reached, and certain companies feel 
that it has been, the National R/P ratio must be 
stabilized; with growing demand this implies a 
much greater rate of exploration and development 
than presently exists. Although conventional and 
perhaps completely new types of land sources will 
provide some supplies, it appears that the offshore 
areas will be of vital importance for several 
decades. 
Before the reserve ratio can be stabilized, 
incentives to production companies will have to 
increase. Two areas of FPC regulatory policy could 
be modified to provide part of this incentive. 
The maximum price a transmission company 
can pay for gas at the wellhead is FPC regulated. 
The FPC recognized the importance of incentives 
for discovery of new supplies by adopting a 
two-price system in the Permian area rate case and 
a multi-price system in South Louisiana, a location 
with great potential for offshore reserves. Al- 
though differences between offshore and onshore 
operations were mentioned in the South Louisiana 
rate opinion,’* the rates do not appear to reflect 
adequately the increased costs associated with 
offshore operations. As a result, the petroleum 
companies believe there is little financial incentive 
for them to search for offshore gas except in 
unusual circumstances. 
Recommendation: 
The Federal Power Commission should re-examine 
its differential price concept for natural gas pro- 
duction and make whatever adjustments are advis- 
able to reflect adequately the increased cost of 
offshore production. 
15 Federal Power Commission Opinion No. 546, Docket 
A.R. 61-2, Sept. 25, 1968. 
V-28 
Under current procedures a gas transmission 
company will receive permission to construct a 
new pipeline to a production area if it can prove to 
the FPC, that, among other things, sufficient re- 
serves are in the area. A circular problem is there- 
fore created. Transmission companies are unwilling 
to firmly commit themselves to the purchase of gas 
from undeveloped reserves, and producers are 
reluctant to make the considerable expenditures 
necessary to develop the reserves without prior 
assurance of buyers. Furthermore, producers are 
unwilling to have their proven reserves revealed to 
the FPC when such public disclosure would 
seriously hurt the companies in competition for 
offshore lease bids. 
This problem does not lend itself to a simple 
solution. The panel recommends that the FPC 
study every possible solution, including the accept- 
ance of sound business judgment as represented by 
suitable contractual commitments in substitution 
for geological evidence of reserves. The FPC also 
should examine its policies to determine the 
extent to which efforts to establish proven reserves 
results in disclosure adverse to a company and 
methods by which such impact, if any, can be 
legitimately minimized. 
2. Technology 
The natural gas industry is faced with increasing 
competitive pressure in the energy market from 
new, high-technology energy sources. This, com- 
bined with increasing cost of gas supply, should 
provide a strong incentive to the transmission 
companies to reduce pipeline costs through im- 
proved technology to prevent increasing costs to 
the ultimate consumer. Despite this incentive the 
gas transmission industry has an extremely low 
level of expenditures for research and develop- 
ment. 
The industry lacks confidence in the present 
accounting procedures approved by the FPC for 
R&D. It is believed that lack of clear-cut definition 
places expenditures for some R&D activities in a 
very high risk category and therefore these are 
held to a minimum. When research is successful 
and results in improvement to a specific pipeline 
project, it is clear that the transmission company 
can capitalize the cost. 
If research is not successful, or if of a general 
nature, the accounting treatment of the cost is not 
