PRESIDENT'S MESSAGE

The BTU Situation in Tennessee

         Over the past 20 plus years, the only market for locally produced natural gas in the Fentress, Scott and Morgan County area has been Citizens Gas Utility District. 

          Neither the gas producers nor the utility management has been completely satisfied with this arrangement.  For the producers, the prices they received from their gas is substantially below posted market prices and their wells were often shut in by Citizens for a variety of reasons, without notice.

          The price paid by Citizens is NYMEX price for half the gas, and $4.00 for the other half, less a $.55 brokerage fee and 7% of the total for compression.  The net effect is that producers receive about $5 per mcf while the NYMEX price is usually $3 to $6 per mcf more.

          For the utility district, locally produced gas often meant liquids in the line, varying BTU levels, and wells that froze up in the winter when gas was needed the most.

          Both sides tolerated the problems because for producer's it was the only market they had.  For the utility district, it meant a less expensive source of gas for their customers. Citizens uses about 10 million mcf per day in the winter.  It is all a "heat load" with very little industry usage, so there is little gas needed in the summer months.

          Citizens Gas sells excess locally produced gas into the East Tennessee Natural Gas interstate pipeline near Deer Lodge and collects NYMEX price for this gas that it bought for substantially less.

            BTU (British thermal unit) The changing status of Btu is a new problem.  Gas in this area is usually in the 1250 plus Btu range while pipeline quality gas is in the 1000 Btu range. Until two years ago, local producers received a 20% premium price for their gas because of the high Btu, and higher heating value.

      When Citizens Gas sold the locally produced gas into the interstate pipeline, they too received a premium price for the higher Btu gas.

      That has changed.  Two years ago, Citizens simply quit paying the Btu premium to producers, yet Citizens continued to collect the premium price when excess gas was sold into the interstate pipeline.

      Now the federal government, through the agency FERC has decided that any gas with a Btu higher than 1100 is unsafe and should not be transported in interstate pipelines nor sold to customers. Producers and pipelines have about a year to comply withy these new Btu requirements.

      Citizens has, however, moved more quickly to purge high Btu gas from its system, citing insurance liability. Many producers have had their wells shut in by Citizens over the past six months for high Btu. Wells that have produced for 20 years are now producing with higher Btu values, according to Citizens and shut in with no advance notice or appeal process.

      Recently Citizens has sent two letters to the producers, first warning them of the government's mandate regarding the limit on high Btu gas.  Citizens not only informed the producers it would no longer accept high Btu gas, it counseled them to "check with their attorneys to determine the liability of providing free gas to landowners from the landowners own wells"

      The producers were aware of the government's mandates regarding high Btu gas, so they were not surprised by Citizens actions. They were, however, surprised with the speed in which Citizens moved to curtail any flow of high Btu into the Citizens system and on to their customers.  A factor which complicates the situation is that in some cases, lines that collected gas from local wells also served as transmission lines to Citizens customers.

      Producers, including the ones we are working with, are in the process of building or acquiring a pipeline that will take their gas directly to market. In the process, they will have to be able to strip the gas to meet the new Btu requirements. This will be expensive but it can be accomplished. Hopefully, within the next 6 months.