CHAPTER 10 TREATING AND PROCESSING AGREEMENTS
| Jurisdiction | United States |
(Feb 2011)
TREATING AND PROCESSING AGREEMENTS
Managing Attorney, Gathering and Processing
ONEOK Partners 1
Tulsa, Oklahoma
MICHAEL L. PATE received his A.B. in Economics (with Distinction) from the University of Michigan in 1975. Mike then earned his J.D. cum laude and M.B.A. (Finance) from Indiana University (Bloomington) in 1978. Mike began his career with the late Getty Oil Company in Houston, Texas. In 1985 he joined Occidental Petroleum in Tulsa where he handled gas marketing and regulatory matters for Oxy's exploration and production unit. In 1997 he moved to Manila to become Legal Manager, Occidental Philippines and eventually moved back to Tulsa and Houston to become Vice President and Senior Counsel, Occidental Energy Marketing. He joined the Tulsa law firm of GableGotwals in Tulsa in 2001 and assumed his present position in late 2006. In more than three decades in the oil and gas business, Mike has worked in almost every area of the natural gas industry, from exploration and production to gathering and processing, FERC pipeline regulation and gas marketing and distribution. Mike has been an occasional speaker over the years on various natural gas related issues, having made presentations on matters such federal wellhead price controls and wellhead price deregulation, spin-off of pipeline-owned gathering systems, gathering and processing, federal take-in-kind royalty program and gas quality.
There are four basic guidelines for drafting a good contract:
1. Understanding the business context in which the agreement functions.
2. Understanding the agreement of the parties.
3. Understanding the ramifications of unintended events (what if?) unique to the agreement.
4. Understanding the provisions necessary to any commercial contract (the "boiler plate").
With these understandings, any lawyer can draft a good solid contract memorializing the agreement of the parties. The purpose of this paper is to address the first three points, with guidance as to how to address the items in 2 and 3 in the context of item 1. This paper will not linger over the items found in item 4 (e.g., Choice of Law, Counterpart Execution, Execution by Both Parties, Arbitration, etc.) as beyond the focus of this discussion.
I. Treating and Processing - What is it?
Treating and processing constitute two of possibly four separate services the producer may require in order to get its gas from the wellhead and into the downstream "fungible" product market, the other two being gathering and compression which are addressed elsewhere in the program. Figure 1 shows the flow of commerce, if you will, from wellhead to the first stage in marketing. It is the portion of market
Figure 1 - Natural Gas Commercial Flow
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Treating and processing are two sides of the same coin. The natural gas we consume in our homes consists primarily of methane (CH4). "Natural" gas as it comes from the well is rarely so pure. Rather, most gas contains any number of constituents that need to be removed prior to delivery into the gas pipeline grid.2 In addition to methane, natural gas from the well can contain everything from non-hydrocarbons substances such as carbon dioxide (CO2), nitrogen (N2), hydrogen sulfide (H2S) and helium (He) to other hydrocarbons such as ethane (C2H6), propane (C3H8), butane (C4H10) and heavier (where "heavier" denotes hydrocarbons with higher carbon chains - C5, C6, etc.). Helium (obviously a non-hydrocarbon) and the heavier hydrocarbon constituents traditionally have a value greater than methane, while others are deleterious substances that have no value but nonetheless need to be removed. The removal of the deleterious substances is often referred to as "treating", while the removal of the more valuable materials is referred to as "processing."
Heavier hydrocarbons, because they are entrained in vapor form in natural gas from the well, and are produced as liquids through processing, are generally referred to as "natural gas liquids" or "NGLs".
While treating and processing are separate and independent processes, in areas where both services are called for, the facilities for are often located together. Gas from the field enters the plant grounds, the heaviest hydrocarbons settle out through a non-refrigerated oil/gas separator, carbon dioxide and hydrogen sulfide (if any) is removed (usually through amine treatment) and the heavier hydrocarbons are removed through some kind of processing, either lean oil absorption, or a cryogenic (low temperature) process.3
Figure 2 below illustrates the major components associated with treating and processing a hypothetical gas flow stream. Initially, the gas goes through a separator to remove water and condensate ("condensate" usually refers to a combination of hydrocarbons found in the gas stream in a liquid form, and often includes things like compressor oil from upstream compressors). The gas is then compressed and filtered again and treated to remove water vapor (dehydration) and so-called "acid gas", being primarily carbon dioxide and in some cases, hydrogen sulfide.
The high-pressure gas is then run through a facility (in this example a cryogenic expander) to drastically lower the temperature of the gas, causing the heavier hydrocarbons to condense and fall out
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as liquids.4 The remaining residue gas (primarily methane) moves on for delivery into the natural gas market, and the combined liquids stream is sold into its own market.
FIGURE 2 - Gas Treating and Processing Flow
In some areas of the country (think coal-bed methane such as in the Powder River area in Wyoming) the predominant source of gas is low in heavier hydrocarbons but high in CO2. In such areas carbon dioxide removal is offered as a separate service, as the lack of available heavier hydrocarbons makes processing uneconomic.5
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Tips on the lingo:
"Heating value" or "BTU content" generally describes the how rich the gas is in terms of its content of heavier hydrocarbons and/or its content of non-hydrocarbons, usually expressed in terms of BTU/ft3. Because heavier hydrocarbons (C3, C4, etc.) have higher BTU content per cubic foot than lighter hydrocarbons (i.e., methane) and inerts (CO2, N2, etc.) have no BTU content, gas entrained with relatively larger proportions of heavier hydrocarbons is often referred to as "rich" while gas less endowed (and/or containing higher concentrations of inerts) can be described as "lean".
"GPM" is an acronym for Gallons per Mcf. Because most of the heavier hydrocarbons will, through processing, be reduced to a liquid state, GPM refers to the number of gallons of NGLs contained in a Mcf of unprocessed gas. Not surprisingly, high GPM gas is also "rich".
"Residue Gas" generally refers to pipeline quality gas that remains after gas processing.
"Shrink" or "Shrinkage" refers to the BTUs removed from the gas stream from the NGLs produced. The overall BTU content of gas stream is reduced or "shrinks" as hydrocarbon liquids are removed.
"Fractionation" is where the stream of liquids (NGLs) that have been separated from the gas stream are in turn separated or "fractionated" from each other. Most processing plants are equipped only to separate NGLs from gas, not to separate the various NGLs from each other. This un-separated product is often referred to as "y-grade" and is collected, either by pipeline, rail tank car or truck and often taken to a pipeline terminal (if picked up by truck or rail) or an end-user - often a refiner. NGLs are also used as various chemical feedstock and some (e.g. propane) are widely used for domestic purposes.
"Ethane Rejection". Ethane (C2H4) is the lightest hydrocarbon removed from natural gas via processing. There are times when economic conditions value natural gas (i.e., methane) higher than ethane. In such circumstances, it makes little economic sense to extract the BTUs associated with ethane from the natural gas stream - it makes more sense to sell those BTUs as natural gas. At such times a plant is said to be in "ethane rejection" - that is, the processor (or producer, if it has that right by contract) has elected, to the extent it is capable of doing so, to reject the removal of ethane from the gas stream and sell it as residue gas.
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To recap: the natural gas producer produces gas in its natural state, such gas containing both deleterious substances to be removed by treating and more valuable substances (primarily NGLs) to be removed via processing. The agreement(s) by which the owner of the treating and processing facility(ies) provides these services to the producer6 is/are the treating and processing agreement(s).
II. Treating and Processing - The Fundamentals of the Agreement
At base, treating and processing are services, and the agreements covering such are service agreements - effectively a fee-for-service.
A. Describing the Service - What is Processing?
As noted above, processing and/or treating are just two aspects of up to four services a producer may require if its aim is to market its own production. For processors that also own associated gathering facilities, it is important to delineate what services are being provided under which agreement. Defining "processing" is important both for what it does and doesn't include.
"Processing" shall mean the extraction of NGLs from Gas through equipment specifically intended to extract NGLs and/or Plant Products from the Gas such as turboexpander (cryogenic), refrigeration, refrigerated lean oil absorption, ambient oil absorption, Joule Thompson or similar processes.
And where is this service being performed:
"Plant(s)"...
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