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operations are also subject to various conservation laws and regulations. These
regulations govern the size of drilling and spacing units or proration units,
the density of wells that may be drilled in natural gas and oil properties and
the unitization or pooling of natural gas and oil properties. In this regard,
some states (including Louisiana) allow the forced pooling or integration of tracts
to facilitate exploration while other states (including Texas) rely primarily
or exclusively on voluntary pooling of lands and leases. In areas where pooling
is primarily or exclusively voluntary, it may be more difficult to form units
and therefore more difficult to develop a project if the operator owns less than
100% of the leasehold. In addition, state conservation laws establish maximum
rates of production from natural gas and oil wells, generally prohibit the venting
or flaring of natural gas and impose specified requirements regarding the ratability
of production. The effect of these regulations may limit the amount of natural
gas and oil we can produce from our wells and may limit the number of wells or
the locations at which we can drill. The regulatory burden on the natural gas
and oil industry increases our costs of doing business and, consequently, affects
our profitability. Because these laws and regulations are frequently expanded,
amended and reinterpreted, we are unable to predict the future cost or impact
of complying with such regulations. Regulation of Sales
and Transportation of Natural Gas Federal legislation
and regulatory controls have historically affected the price of natural gas we
produce and the manner in which our production is transported and marketed. Under
the Natural Gas Act of 1938 (“NGA”), the Federal Energy Regulatory Commission
(“FERC”) regulates the interstate transportation and the sale in interstate commerce
for resale of natural gas. Effective January 1, 1993, the Natural Gas Wellhead
Decontrol Act (the “Decontrol Act”) deregulated natural gas prices for all “first
sales” of natural gas, including all of our sales of our own production. As a
result, all of our domestically produced natural gas may now be sold at market
prices, subject to the terms of any private contracts that may be in effect. The
FERC’s jurisdiction over interstate natural gas transportation, however, was not
affected by the Decontrol Act. Under the NGA, facilities
used in the production or gathering of natural gas are exempt from the FERC’s
jurisdiction. We own certain natural gas pipelines that we believe satisfy the
FERC’s criteria for establishing that these are all gathering facilities not subject
to FERC jurisdiction under the NGA. State regulation of gathering facilities generally
includes various safety, environmental, and in some circumstances, nondiscriminatory
take requirements but does not generally entail rate regulation. Although
we therefore do not own or operate any pipelines or facilities that are directly
regulated by the FERC, its regulations of third-party pipelines and facilities
could indirectly affect our ability to market our production. Beginning in the
1980s the FERC initiated a series of major restructuring orders that required
pipelines, among other things, to perform open access transportation, “unbundle”
their sales and transportation functions, and allow shippers to release their
pipeline capacity to other shippers. As a result of these changes, sellers and
buyers of natural gas have gained direct access to the particular pipeline services
they need and are better able to conduct business with a larger number of counterparties.
We believe these changes generally have improved our access to markets while,
at the same time, substantially increasing competition in the natural gas marketplace.
It remains to be seen, however, what effect the FERC’s other activities will have
on access to markets, the fostering of competition and the cost of doing business.
We cannot predict what new or different regulations the FERC and other regulatory
agencies may adopt, or what effect subsequent regulations may have on our activities.
In the past, Congress has been very active in
the area of natural gas regulation. However, the more recent trend has been in
favor of deregulation or “lighter handed” regulation and the promotion of competition
in the gas industry. In light of this increased reliance on competition under
the provisions of the Energy Policy Act of 2005, the NGA has been amended to prohibit
any forms of market manipulation in connection with the transportation, purchase
or sale of natural gas. In addition to the regulations implementing these prohibitions,
the FERC has been directed to establish new regulations that are intended to increase
natural gas pricing transparency through, among other things, expanded dissemination
of information about the availability and prices of gas sold. The Energy Policy
Act of 2005 also significantly increases the penalties for violations of the NGA
to up to $1 million per day for each violation. There regularly are other legislative
proposals pending in the federal and state legislatures which, if enacted, would
significantly affect the petroleum industry. At the present time, it is impossible
to predict what proposals, if any, might actually be enacted by Congress or the
various state legislatures and what effect, if any, such proposals might have
on us. Similarly, and despite the trend toward federal deregulation of the natural
gas industry, whether or to what extent that trend will continue, or what the
ultimate effect will be on our sales of gas, cannot be predicted. Oil
Price Controls and Transportation Rates Our sales
of oil, condensate and natural gas liquids are not currently regulated and are
made at market prices. The price we receive from the sale of these products may
be affected by the cost of transporting the products to market. Much of that transportation
is through interstate common carrier pipelines. Effective as of January 1, 1995,
the FERC implemented regulations generally grandfathering all previously approved
interstate transportation rates and establishing an indexing system for those
rates by which adjustments are made annually based on the rate of inflation, subject
to specified conditions and limitations. These regulations may tend to increase
the cost of transporting natural gas and oil liquids by interstate pipeline, although
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