CHAPTER 5 GAS MARKETING OPTIONS AND STRATEGIES
| Jurisdiction | United States |
(Sep 1991)
GAS MARKETING OPTIONS AND STRATEGIES
Jackson & Walker
Houston, Texas
TABLE OF CONTENTS
I. Introduction—the Past is NOT Prologue
II. What Has Changed in the Gas Market in the Last Few Years?
A. Changes in the Legal Framework In Which The Industry Operates
1. Order 436-500-500H Has Been Affirmed And Is Now Final
2. Order No. 451 Has Been Affirmed and is Now Final
3. The Wellhead Decontrol Act of 1989
B. Changes in Market Conditions
III. Contracting to Sell Gas to an "Aggregator"
A. Introduction
B. The "Mega NOPR" Issued July 31, 1991, in Docket No.
1. New Blanket Certificates Will Be Issued for Unbundled Sales and Transportation
2. Restructuring Proceedings Ordered for All Pipelines
3. Delivery Point for Pipeline Gas Moved to Supply End of Pipeline
4. Release and Repurchase of Pipeline Capacity
5. Pipeline System-Supply Storage Made Open Access
6. Pipeline Contracted-Capacity on Other Pipelines Made Open Access
7. Curtailment
8. Pipeline Rate Design Changed from MFV to SFV
9. Pipeline Unbundled Sales Treated Like Pipeline Affiliate Sales
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10. Transition Costs
11. Pipeline Gathering Costs
12. Remaining Pipeline "Bundled" Sales
C. Who Are the New Aggregators?
1. The Interstate Pipelines
2. Pipeline Marketing Companies
3. Gas Distribution Companies
a. Term of the Contract
b. Price
c. Quantity Provisions
d. Transportation
4. Gas Marketers
a. Marketers as Supply Aggregators
5. Gas Processors
6. Electric Utilities, Independent Power Producers, and Co-generators
IV. Designing Contracts to Fit the Needs of the Parties
A. Introduction
B. Seller's Objectives
C. Buyer's Objectives
D. Risk Considerations
1. Price Risk (the risk that the contract price will be higher or lower than the current market price for comparable contracts)
a. Price Ceilings
b. Price Floors
c. Price Renegotiation Provisions
2. Supply Risk
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3. The Risk of Variations in Demand
4. Transportation Risk
5. Taxation Risk
6. Risks Related to the Producer's Oil and Gas Lease
7. Regulatory Risk
V. Conclusion
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I. Introduction — the Past is NOT Prologue
The generic deficiency in speakers on natural gas problems, including yours truly, is that they tend to emphasize, and repeat endlessly, the events which have occurred in the dynamic gas market in the United States over the last 5 to 20 years. It is a fascinating story, and one without parallel in any major industry in the country or the world. So like the crab, the speakers tend to tiptoe backwards, not caring where they are going, but intensely interested in where they have been. This is an easy way to write a speech, and may be of interest to the one or two in the room who have not heard it before.
But what most of us are interested in is, what is going to happen NEXT? It is this area with which this paper attempts to deal.
II. What Has Changed in the Gas Market in the Last Few Years?
As the gas market is constantly changing, in a number of different dimensions, it is difficult to mark off time periods which are distinguishable from each other. Therefore, I will ask the question differently — What is different about the gas market than when this seminar was held last year? Although the time frame obviously does not fit the pigeonhole, here are some differences:
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A. Changes in the Legal Framework In Which The Industry Operates
A number of major events have occurred in roughly the last year which directly bear on sales of natural gas by producers and marketers, and its transportation by interstate pipelines. In rough order of their importance, which may vary with your view-point, these are:
1. Order 436-500-500H Has Been Affirmed And Is Now Final.
Since early 1985 the FERC and the industry have been debating, arguing, changing and modifying the "open access" program for interstate pipelines, and the "take-or-pay" problems related thereto. I will not attempt to re-hash this here, but will simply state conclusions:
1. The FERC has the uncontested right to require interstate pipelines to transport gas belonging to others, upon terms and conditions comparable to transporting the pipelines' own gas.
2. The FERC will not utilize Section 5 of the Natural Gas Act (NGA) to modify or abrogate contracts between producers and pipelines.
3. The FERC will not utilize its conditioning power under Section 7 of the NGA to condition access to transportation over (interstate or intrastate) pipelines, except for the expired crediting mechanism of Order 500.
4. The crediting mechanism of Order 500 expired on December 31, 1990, or when the transporting pipeline accepted a gas inventory charge in its tariff, whichever occurred first. In any event, the crediting mechanism is over, both as to new offers of credit and use of credits already earned, as of December 31, 1990. No further attention need be paid to Order 500
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credits, whether in selling properties, selling gas, or transporting gas.1
5. The FERC has the undisputed power to authorize a pipeline to build into the market area of another pipeline or distribution company, even if this involves "by-pass" of the distributor.2
6. The FERC has the undisputed jurisdiction to order pregranted abandonment of firm transportation at the end of the transportation contract, even as to firm transportation obtained by conversion from firm pipeline sales, but must (at some point) justify its policy of doing so to the D. C. Circuit.3
7. Block Billing is dead, dead, DEAD.
8. A take-or-pay payment is not a "payment for gas," and need not be added to the price provision of the contract in comparing it with the ceiling rate.4 Nor is a take-or-pay prepayment "payment for gas" requiring payment of royalty on it.5
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9. Pipelines have received (in some cases) or are still seeking (in others) FERC approval for a method of flow-through of take-or-pay buyout (resolution of past liabilities) or buydown (cost of restructuring contracts to reduce price and takes) costs to their customers which does not violate the "filed rate" doctrine by retroactively increasing the customer's rate without fair warning.6
10. The details of a "gas inventory charge" are being worked out on a pipeline-by-pipeline basis.
2. Order No. 451 Has Been Affirmed and is Now Final.
On January 8, 1991, the U.S. Supreme Court reversed the Fifth Circuit's decision vacating Order No. 451, and sustained it in its entirety.7 The Supreme Court specifically sustained: (1) the Commission's power to raise the ceiling prices of § 104 and § 106 gas to replacement cost levels, and to collapse the different ceiling prices in these categories into one ceiling price; (2) the Commission's power to authorize pregranted abandonment on a generic basis through rulemaking without a hearing, and (3) the Commission's power to consider take-or-pay issues in another case.
As to any producers who have not waived the Good Faith Negotiation Procedure in Order No. 451 directly or indirectly, it is still available for use without any could of judicial appeal.
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3. The Wellhead Decontrol Act of 1989. 8
Where the contract has terminated, the Wellhead Decontrol Act of 1989 removes FERC jurisdiction on the date of termination or July 27, 1989, whichever occurred last. No notice is required to be given to FERC when gas is decontrolled under the Wellhead Decontrol Act. Gas which is temporarily released from a contract is decontrolled during the period of the release.9 Where the parties to a contract so agree in writing at any time (after July 26, 1989), the gas is deregulated. Deregulation of price under the Wellhead Decontrol Act also removes the Commission's certificate and abandonment jurisdiction over the gas. Effective May 15, 1991, all wells (even § 104 wells in pre-NGPA contracts) drilled after July 26, 1989 are deregulated.
With a few exceptions which are becoming rarer every day (and cease entirely on January 1, 1993), new gas sales are not subject to FERC jurisdiction over the sale, but may be directly affected by FERC jurisdiction over the transportation, as we shall see.
B. Changes in Market Conditions
The tightening of gas supplies with a closer balance between supply and demand has been eagerly awaited by producers for so long that many have given up hope. Like the man in West Texas
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who bet it would never rain again, many of those who predicted there would never be another gas shortage have collected their bets. Still, gas reserves in the lower 48 states are finite, and increasingly costly and difficult to find. Seventeen trillion cubic feet or more of gas are burned up, or consumed, each year. Imported gas and LNG has other problems, such as national security, trade balances, etc. Gas is the favored fuel from an environmental standpoint, and demand may be expected to increase, as it did in the 1960s. On the assumption that supply security will remain at least a cloud on the Buyer's horizon, let us turn to the meat of this article, the gas sales contract of the future.
III. Contracting to Sell Gas to an "Aggregator"
A. Introduction
In the traditional gas market before 1982, the pipeline served as an aggregator of gas supplies, purchasing from many different producers, and many different reservoirs, from many different "vintages" of wells with different ceiling prices, and reselling these supplies at a single rolled-in price, based on the weighted average cost of the various supplies to the pipeline. The pipeline also served as an aggregator of gas volumes, designing its system to meet the peak demands of its markets on peak days, with the ability to "swing" or reduce takes somewhat within the variances permitted by each contract, and obtaining additional...
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