J. Howard Marshall — natural gas visionary
Much has been made recently of the need for America to take every possible step to increase the nation’s energy security. Turn on any cable news show and you’ll hear talking heads espousing an “all of the above approach” to energy policy — meaning we should pursue every option available including offshore drilling, renewables and traditional energy sources like coal, oil and natural gas.
The energy source du jour seems to be natural gas. Living right in the heart of the Marcellus shale, Pennsylvanians know all too well how important natural gas will be to America’s energy future. One Pennsylvanian in particular saw the writing on the wall nearly 50 years ago.
In 1961, Philadelphia native J. Howard Marshall II had a tough sell ahead if his new company, Union Texas Petroleum, was going to survive. Formed from the acquisition of two fledgling companies by Union of Louisiana — Anderson-Prichard Oil Co. and Texas Natural Gasoline Co. — and with Marshall as its new CEO, Union Texas faced dire financial circumstances — a debt of $30 million ($220 million in 2010 dollars) to be exact. What came next made matters even more difficult.
A decision by the U.S. Supreme Court in 1954 gave the Federal Power Commission authority to regulate not just pipeline transmission rates but natural gas prices at the wellhead under the Natural Gas Act of 1938. Responding to the escalating cost of gas, the FPC intervened in existing contracts and also demanded retroactive reimbursements for the difference between the initial contract price and subsequent increases.
To save his company, Marshall negotiated a compromise with Texas Gas Transmission Co. He got it by promising 10 years guaranteed delivery of 2 trillion cubic feet to the pipeline company — a $325 million deal then, worth about $1.3 billion today — from existing well fields.
But he was able to include in the deal a release by the pipeline company against future development of natural gas. Marshall spent months pushing a simple message: There was no way that his company could afford to invest in future gas development at current prices.
Marshall also sarcastically noted the failure of the FPC and its successor, the Federal Energy Regulatory Commission, to accept this “application of elementary economics,” leading to the severe gas shortages in the 1970s.
It was in the midst of the winter of 1976-77, with hundreds of thousands thrown out of work and schools closed due to natural gas shortages, that a recently inaugurated Jimmy Carter gave the nation his version of a fireside chat. He asked Americans to conserve energy, told them that shortages of natural gas and oil were permanent and outlined his plan to create a Department of Energy that would promote coal, solar and renewable energy to meet our future energy needs.
In today’s tough times, many compare President Obama to Carter, in part in memory of that fireside chat and also because of his push for renewable energy.
The one thing that Carter got started, though, and from which the Obama administration might learn something useful, was deregulation of natural gas prices. Carter didn’t do everything he should have, by any means. But the Natural Gas Policy Act passed in 1978 began to lift gas price controls.
Later, the FERC under President Reagan scrapped Carter’s phased deregulation. This led to competition among producers and a Democrat Congress, finally showing some of Marshall’s “elementary economic” sense, supporting complete deregulation of natural gas prices at the wellhead.
The resultâ¢ Well, critics would claim it’s produced higher prices. But the nation does have all the natural gas that it needs at prices it can afford.
With markets and not government setting prices, investment has produced dramatic new finds, such as the 30-year supply of energy in the Marcellus shale alone.
Thanks to such discoveries, the U.S. Energy Information Administration puts recoverable U.S. natural gas reserves at 2.6 quadrillion cubic feet. In fact, reserves are so abundant that environmentalists and policymakers look to it as a bridge to a totally clean energy future.
An oil and gas man, J. Howard Marshall II, who died in 1995, proved to have a clearer vision of the future than any of the bureaucrats with whom he had to negotiate a natural gas contract. He also proved once again that the real expertise lies with the people who invest and build, not government overseers, and that government does best in economics by promoting competition and does least when it tries to dictate prices or results.
Perhaps opponents of natural gas just need a little history lesson and we’ll be well on our way to an America that enjoys immense (and clean) energy security.
Barrie Gibbs is president of Gibbs Group Holding Inc. of Pittsburgh. He previously served on the Pennsylvania State Chamber Board of Directors and the Pennsylvania Business Council Board of Directors.