Wellhead Price Controls and the NGPA
The Natural Gas Policy Act (NGPA) introduced a series of wellhead price controls that fundamentally shaped the commerce of the natural gas industry. By establishing specific price ceilings, the act regulated how gas was sold and produced across various categories, ensuring a structured approach to pricing during a critical period of energy regulation.
Key Facts
- The NGPA Title 1 outlines specific ceiling prices for different categories of natural gas.
- Stripper wells account for approximately 8.2% of total United States natural gas production.
- A stripper well is generally defined as producing less than 60 Mcf per day over a 90-day interval.
- Enhanced recovery techniques can allow a well to maintain its stripper well status even if production exceeds the standard limit.
The Framework of NGPA Title 1
Title 1 of the NGPA serves as the regulatory backbone for wellhead pricing. It establishes a complex system of ceilings designed to balance market needs with production incentives. These controls are divided into several specific sections to address different production environments and contractual obligations.
Price Ceiling Categories
The act defines ceiling prices based on the origin and destination of the gas, as well as the cost of production. The primary sections include:
- General Rules: Section 101 covers inflation adjustments and general price ceiling rules.
- New Production: Sections 102 and 103 set ceilings for new natural gas, including those from the Outer Continental Shelf and new onshore production wells.
- Commerce and Contracts: Sections 104, 105, and 106 regulate sales dedicated to interstate commerce, existing intrastate contracts, and rollover contracts.
- Specialized Gas Types: Sections 107, 108, and 109 provide ceiling prices for high-cost gas, stripper well gas, and other specific categories.
- Costs and Taxes: Section 110 addresses the treatment of state severance taxes (taxes imposed by a state on the extraction of non-renewable resources) and other production-related costs.
Focus on Stripper Well Natural Gas
Under Section 108, the NGPA provides specific pricing for stripper wells. These are wells that are marginally productive, meaning they produce gas at a very low rate. Despite their low individual output, they represent a significant portion of the national supply, contributing roughly 8.2% of U.S. natural gas production.
Defining the Stripper Well
To qualify as a stripper well under the NGPA, a well must typically produce less than 60 Mcf (60,000 cubic feet) per day during any 90-day interval. However, the act provides a critical exemption for wells utilizing enhanced recovery—techniques used to increase the amount of gas extracted from a reservoir.
If nonassociated natural gas (gas produced from geological zones different from those containing oil) exceeds the 60 Mcf threshold due to the application of recognized enhanced recovery techniques, the well may still qualify for the stripper well ceiling price.
| Section | Focus Area | Primary Application |
|---|---|---|
| 101 | General Rules | Inflation adjustments and general ceilings |
| 102-103 | New Production | Onshore and Outer Continental Shelf wells |
| 104-106 | Sales & Contracts | Interstate, intrastate, and rollover contracts |
| 107-109 | Special Categories | High-cost, stripper well, and other gas types |
| 110 | Costs | State severance taxes and production costs |
Frequently Asked Questions
What is a stripper well?
A stripper well is a marginally productive gas well. According to the NGPA, it is generally defined as a well producing less than 60 Mcf (60,000 cubic feet) per day over a 90-day period.
How much of U.S. gas production comes from stripper wells?
Stripper well production accounts for approximately 8.2% of the total natural gas production in the United States.
Can a well still be a stripper well if it produces more than 60 Mcf per day?
Yes, provided the increase in production is the result of recognized enhanced recovery techniques applied to nonassociated natural gas.
What are state severance taxes in the context of the NGPA?
State severance taxes are taxes levied by the state on the extraction of natural resources. Section 110 of the NGPA outlines how these taxes and other production costs are treated within the price control framework.
What is the purpose of the ceiling prices in Title 1?
The ceiling prices are designed to regulate the commerce of the natural gas industry by setting maximum allowable prices for different types of production and sales contracts.