Non-Price Provisions in Long-Term Natural Gas Contracts.

In this article, authors argue that the principal non-price provisions in wellhead contracts provide vital functions in allocating risks and reducing the costs of transactions between producers and pipelines in such a way that some degree of rigidity in gas markets is inevitable with or without price controls. However, authors argue that the incidence of these provisions in existing contracts signed during the 1970s, and thus the magnitude of current market rigidities, are the direct result of pent-up excess gas demand stemming from the earlier era of field price regulation. This hypothesis has significant implications for the design of public policy by highlighting the importance of distinguishing that portion of current contractual rigidities which is endemic to field markets from rigidities rooted in the legacy of field price regulation. The article analyzes the sources of transactions costs and risks inherent in the functioning of natural gas wellhead markets. The mutual benefits to natural gas producers and pipelines of a transactional arrangement which provides for a long-run stream of stable revenue are readily discerned.